Written by Misha Kumar, The author is a law student pursuing the BA.LLB from Lloyd Law College Greater Noida
Introduction
The Securities and Exchange Board of India (SEBI), was established with the provision, “to protect the interests of investors in securities and also to regulate the securities market for the matters connected therewith or incidental thereto”. SEBI’s concern for the interest of investors can be understood from the SEBI’s response to the rapidly changing circumstances. To achieve this interest, SEBI regularly updates and tightens its laws. The current amendment regulations 2023 are the result of the recent circumstances within the listed space. It follows the significant happening (namely the Adani-Hindenburg and the Amazon-Future Group sagas) and an expanding need to certify market uniformity to safeguard the interests of all investors. It is likely that India will move toward higher standards of corporate governance over the coming years due to a combination of investors who have become more outspoken and are not afraid to object to shareholder resolutions and regulators who have actively been developing stewardship codes to facilitate such shareholder participation.
The LODR (Listing Obligations and Disclosure Requirements) amendment is largely a follow-up to the LODR consultation papers that SEBI released earlier in February 2023 with regard to “streamlining disclosures by listed entities and strengthening compliance with LODR” (CP on Disclosures) and “strengthening corporate governance at listed entities by empowering shareholders” (CP on Corporate Governance), as well as the consultation paper issued in November 2022.
In regard to this, we’ll look at the significant modifications to the LODR introduced through the Amendment Regulations 2023.
Disclosures for specific types of contracts with listed firms
Regulation 30A was added to the LODR by the Amendment Regulations 2023. It requires the listed companies to identify and disclose agreements falling under Regulation 30A. They must also assess if they have any agreements that require disclosure. Stakeholders must exercise caution when determining clauses or features that require express disclosure. Those impacted by disclosures should determine whether to continue in agreements or novate them to prevent disclosure. It is crucial for these individuals to make an informed decision in light of the potential long-term repercussions that may develop due to SEBI’s unbridled powers under the SEBI Act.
The threshold for material disclosures
The new criterion for determining materiality is objective in nature. Objective criteria here means that the listed entities now have to disclose the information if they exceed the given quantitative values.
Any item that is included in Para B of Part A of Schedule III must be disclosed by the listed firm with a value or expected impact on value that exceeds the lower of following:
2% of the total revenue, as reported in the listed company’s most recent consolidated audited financial statements;
Two percent of the listed company’s net worth, as reported in its most recent audited consolidated financial accounts, unless the arithmetic value of the net worth is negative; or
5% of the average absolute value of profit or loss after tax, according to the listed company’s most recent three audited consolidated financial statements.
The listed companies now cannot make excuses for the pendency of any litigations or disputes. Since the quantitative thresholds have taken effect, all litigation that exceeds them must now be informed mandatorily.
Listed firms confirming market rumors
Prior to amendment, if there is any leak of information through media, the listed company may confirm the information, however, there is no obligation on them. The Amendment Regulations 2023 now induced the provisions of mandatory confirmation, denial, or clarification on any report or information circulated in mainstream media (definition is given in amendment regulations 2023) about the specific material event or information. If the rumors indicate that the specific information have an impounding effect on the investing public, then disclosure must be done within 24 hours from the reporting of information.
This provision is applicable only to the top 100 and top 250 listed companies. The proviso makes it clear that the rank of listed firms will be chosen based on market capitalization as of the end of the previous financial year.
Permanent membership of a director on the board of a listed firm (Regulation 17(1D))
The amendment will impact listed companies from March 31, 2024, requiring them to review the terms of directors and ensure no director is considered permanent or liable to rotation. Companies must provide detailed reasons for director appointments subject to shareholder approval, including the work undertaken.
Granting shareholders special privileges
The Amendment Regulations 2023 added Regulation 31B (1) to require that any special rights granted to any group of shareholders of a listed company be approved by a special resolution of the shareholders once every five years (starting from the date on which such special right has been granted). The Amendment Regulations 2023 require listed companies to identify special rights granted to shareholders before listing. To ensure compliance, listed companies should review their agreements, and articles of association, and consult the consultation paper. Entities considering an IPO must also follow a similar exercise to avoid violating the amendment.
Schedules for disclosure
Prior to the Amendment Regulations 2023, disclosure was to take place as soon as practically possible, but no later than twenty-four (24) hours after the event or information had occurred. Additionally, the listed firm was required to give justifications for any delays in disclosure that exceeded twenty-four hours. A more specific and divided period for disclosure based on the kind of event or information is now provided by the Amendment Regulations 2023, which is as follows:
If an event or piece of information results from a board meeting of a listed firm, or if a decision is made in relation to the event or information at a listed company board meeting - 30 Minutes from closure of the meeting of the board of directors.
In the case where the event or information came out from the listed company. - 12 hrs from the occurrence of the event or information.
In case the event or information does not come from within the listed company. - 24 hrs from the occurrence of event or information.
Extension of timelines on the applicability of the Amendment Regulations to high-value listed debt entities (“HVDLEs”)
The 2021 amendments to the LODR had made the obligations under Chapter IV applicable to HVDLEs. However, HVDLEs had time until March 31, 2023, to ensure compliance on a ‘comply or explain’ basis. However, Regulation 15(1A) has been amended to extend the timeline for applicability of the obligations under Chapter IV of the LODR, in respect of HVDLEs, to a “comply or explain” basis until March 31, 2024 (as opposed to March 31, 2023). This extends the current framework of “comply or explain” for another year, after which HVDLEs must mandatorily comply with Chapter IV.
Additional disclosure requirements under Schedule III of the LODR
Disclosures regarding agreements between stakeholders affecting a listed company’s management, control, or imposing restrictions or liabilities. Disclosure of key managerial personnel’s resignations, including letter and reason, within seven days of their effective date. Disclosure of the managing director or CEO’s indispensability or unavailability for over 45 days in 90 days, along with reasons, must be made for listed company events. Disclosure of material announcements or communication by directors, promoters, or senior management on social media or mainstream media regarding unpublicized events or information. Disclosure of actions initiated or orders passed by regulatory bodies against a listed company, including search, seizure, account reopening, and investigation under the Companies Act, 2013.
Conclusion
In light of SEBI’s increased activism through the release of amendments to numerous regulations and consultation papers analyzing the current framework, the Amendment Regulations 2023 have resulted in a flurry of significant changes to the current LODR regime in terms of the disclosures and obligations of all stakeholders involved with the operations of listed companies. With the overall goal of ensuring holistic progress within the listed space, the amendments aim to ensure that multiple, frequently conflicting stakeholder interests, such as transparency and accountability, fair market practices, economic growth, and corporate development, are balanced and maintained at the same time. It would be interesting to watch how these changes, SEBI’s proposals, and their overall effects play out for listed firms in India Inc.
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