The Securities and Exchange Board of India (SEBI) made significant revisions to the governance framework applicable to listed companies through an amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).
These changes, which came into effect on July 14 2023, were preceded by several consultation papers issued by SEBI in the past 6-9 months. The amendments aim to elevate disclosure and governance standards for listed entities and bring about substantive modifications to key provisions of the LODR Regulations. Some of the key changes include:
Disclosure Framework: The amendments introduce objective criteria for determining material events/information, reduce the timeline for making disclosures, and mandate additional disclosures. This encompasses information related to agreements binding listed entities and addressing market rumors.
Special Rights Granted to Shareholders: There are revised disclosure and approval requirements concerning special rights granted to shareholders.
Business Transfer Agreements: Approval requirements have been modified for business transfer agreements undertaken outside the scheme of arrangement route.
Permanent Board Seats and Directorship Timelines: Changes affect the validity of permanent board seats and set timelines for filling vacancies of directors and Key Managerial Personnel (KMPs).
These amendments collectively reinforce SEBI's commitment to fostering transparency and accountability in the functioning of listed entities. It is imperative for companies to be cognizant of these regulatory updates and ensure compliance with the revised LODR Regulations.
Enhanced Materiality Criteria for Disclosures
In an effort to address perceived deficiencies in disclosure practices among listed entities, SEBI has amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. These revisions, effective since July 14, 2023, bring about a more stringent and objective framework for determining the materiality of events or information that listed entities must disclose. The new criteria are based on specific thresholds related to turnover, net worth, and profit or loss after tax, signaling a commitment to ensuring accurate, timely, and comprehensive disclosures.
Mandatory Disclosure of Continuing Events
Under the amended Regulation 30(4), events or information that may have escaped disclosure under subjective criteria are now subject to mandatory disclosure if they meet the new objective criteria and remain ongoing. This necessitates a comprehensive review of undisclosed matters by listed entities and their compliance officers to determine whether these now meet the revised materiality standards. SEBI's circular from September 9, 2015, providing guidance on when information becomes disclosable, may serve as a useful reference in this process.
Materiality Policy and Employee Reporting Obligations
Listed entities are now mandated, under Regulation 30(4), to ensure that their materiality policy aligns with the LODR Regulations and includes provisions facilitating employee identification and reporting of disclosable information. This broader obligation may enhance the responsibility of entities to identify and report potential material information to their management.
Revised Timelines for Material Event Disclosures
Regulation 30(6) introduces more stringent timelines for the disclosure of material events or information. Listed entities are now required to make disclosures within 30 minutes of board meeting closure, 12 hours of event occurrence (if internal), and 24 hours (if external). This amendment equalizes the treatment of mandatory and subjective disclosures, emphasizing the need for robust internal reporting mechanisms for timely compliance.
Disclosure of Agreements Impacting Listed Entities
Regulation 30A, read with Paragraph 5A of Part A of Schedule III, expands the scope of disclosed agreements to include those impacting management or control of listed entities. This move aims to address information disparity, enhance transparency, and ensure that listed entities are aware of obligations imposed by such agreements. The disclosure obligation applies irrespective of the listed entity's direct involvement, with specific requirements for parties involved and potential exceptions for agreements executed in the normal course of business.
Verification of Rumors by Top-Listed Entities
Regulation 30(11) imposes a new obligation on the top 100 and top 250 listed entities to confirm, deny, or clarify rumors of specific material events circulating in mainstream media. This obligation aims to enhance transparency and responsiveness in the face of potentially market-moving information.
Additional Disclosures Mandated
Paragraphs A and B of Part A of Schedule III introduce various additional disclosure requirements, including material announcements through social media, frauds, defaults, arrests involving key personnel, regulatory or statutory actions, detailed disclosures in case of Key Managerial Personnel (KMP) resignations, and voluntary revision of financial statements or the board's report.
Shareholders' Approval for Special Rights
Regulation 31B mandates shareholder approval by special resolution once every 5 years for any special rights granted to shareholders, excluding certain exceptions. This requirement applies prospectively, and even existing special rights granted to promoters or investors may require periodic shareholder approval.
Public Shareholder Approval for Business Transfer Agreements
Regulation 37A now requires public shareholder approval by special resolution for business transfer agreements undertaken outside a scheme of arrangement. Specific disclosure requirements have been strengthened to provide greater transparency on the object, commercial rationale, and use of proceeds arising from the sale.
Director Permanency and Vacancy Filling
Regulation 17(1D) introduces a shareholders' approval requirement for a director's continuation on the board once every 5 years from their appointment. This aims to prevent non-performing non-executive directors from holding permanent board seats. Additionally, Regulation 17(1E), Regulation 26A, and Regulation 6(1A) impose a strict 3-month timeline for filling vacancies in key positions, with implications for MDs, whole-time directors, CEOs, CFOs, and compliance officers. This deadline is more stringent than the Companies Act's stipulated 6-month period for filling vacancies in the office of whole-time KMPs.