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Constructive Rehauling of SEBI’s Disclosure Requirements - A Desideratum

The author is Niyati Prabhu, a second year student at National University of Advanced Legal Studies, Kochi.


Introduction


The Securities and Exchange Board of India (SEBI) has incorporated and augmented an ongoing disclosure mandate for its listed companies in India in Regulation 30 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the “LODR Regulations”). The ongoing disclosure framework for listed firms in India has been established and improved over time by SEBI, the apex regulatory body for the securities and commodity market in India. It is currently codified in Regulation 30 of the LODR. The LODR is one of the most crucial regulations authorised by SEBI to facilitate transparency, accountability and fair disclosures by listed entities in India. These disclosures were required of listed companies to inform the public and shareholders about the company’s status and prevent the emergence of a fictitious market for its securities. A listed company is essentially any company having any of its securities listed on a recognised stock exchange as per the Companies Act, 2013. Companies not classified as listed companies have been stated in Rule 2A of the Companies (Specification of definitions details) Second Amendment Rules, 2021.


In furtherance of this, SEBI has issued a Consultation Paper on the Review of Disclosure Requirements for Material Events or Information under the LODR Regulations soliciting public comments until November 27, 2022, in an attempt to revise the LODR Regulations and improve the present framework. This is supposedly based on feedback from companies and investors given to SEBI concerning the shortcomings of the present system. These amendments might severely influence how listed entities are obligated to disclose material events and their Materiality Policies if implemented.


Review of the Disclosure Requirements pertaining to Material Events or Information under the LODR Regulations


Previously, investors have raised complaints regarding the unbalanced information disclosure requirements, while companies have commented about the absence of standard guidelines on their Materiality Policies. These are some of the factors that SEBI has cited for reviewing the current framework.


The primary objective of the Consultation Paper issued by SEBI is to amalgamate the disclosure exigencies for material events or information as per Regulation 30 of the LODR. This aims to gain ground in the changing market dynamics and ensure that the listed entities adopt technology-based solutions for ease of compliance. These material disclosures, which are to be made under Regulation 30 of the LODR by listed entities, are crucial for investors since they enable them to make informed decisions concerning their investments. A vigorous disclosure regime is sacrosanct in retaining an effective capital market structure.


Material Disclosures


The applicable disclosure requirements have been classified into two segments, with Para A of Part A of Schedule III containing material events and Para B of Part A under Schedule III enlisting the items to be disclosed in accordance with the Materiality Policies of the entities. The specific details to be disclosed for the material events listed in Para A (Mandatory Disclosures) and Para B (Discretionary Disclosures) have been stated in Annexure I to SEBI Circular Number CIR/CFD/CMD/4/2015 notified on September 09, 2015, entitled as ‘Continuous Disclosure Requirements for Listed Entities’.


Essentially, the events which are stated in Para A are categorised as ‘material events’, and they can be disclosed without adhering to any particular ‘Materiality Policy’ i.e., the listed entities are allowed to disclose the ‘material events’ without a mandatory adherence to any particular materiality guidelines. These include events related to capital governance, mergers and acquisitions, capital restructuring, demergers, insolvency etc.


Key Revisions with respect to Material Events specified under Para B of the LODR


A crucial element of the proposed revisions pertains to material information or events to be disclosed as per Para B of the LODR. Earlier, the Materiality Policy of a listed entity was to be considered as per the discretion of the entities regarding the interpretation of the term ‘material’ since the LODR only provided standard guidelines on the contents of the Materiality Policy. This, however, led to a dearth of disclosures under Para B because of the excessive discretionary access available to listed entities, as companies could have chosen not to disclose certain events by claiming that they were not deemed material as per their Materiality Policies. Therefore, the inception of a materiality threshold for items under Para B as per the proposed revisions is crucial.


Listed entities will be required to frame the ‘Materiality Policy’ (the application of the guidelines to be framed) based on the material events itemised in Para B. The criteria is specified in Regulation 30(4). These events are tested on the basis of the application of the guidelines to be framed. The imposition of quantitative criteria will thwart the discretionary prerogative of a company and ensure that the Materiality Policies are less arbitrary.


Simply speaking, a ‘material event’ will be considered as ‘material disclosure’ if it is anticipated to have an effect on at least 2% of a company’s net worth, 2% of its turnover, or 5% of its three-year average profit or loss after tax.


Additionally, the revisions stipulate that the Materiality Policy be framed to suit the ground-level employees and assist them in readily identifying potential material information or event. This would enable them to easily present it to the managerial personnel in charge for subsequent disclosure by the listed entity.


Corroboration of Market Rumours


As per Clause 3.4.4 of the section entitled ‘Verification of Market Rumours’, stated in the Consultation Paper, SEBI has proposed to include a proviso to Regulation 30(11), thereby mandating a confirmation or denial of such rumours for the top 250 listed entities (ascertained as per the market capitalisation at the culmination of the preceding financial year) as stated: -


“Provided that top 250 listed entities shall necessarily confirm or deny any event or information reported in the mainstream media, whether in print or digital mode, which may have material effect on the listed entity under this regulation.”


The foremost 250 listed companies will, therefore, be required to actively search for claims about the company in all mainstream media outlets and corroborate or contradict the same if they anticipate a material impact on the listed entity.


Cyber Security Instances


There is a requirement for the disclosure of cyber security instances, mislaying of documents or even infringements by the listed companies in the CG Report (also known as the quarterly Compliance Report on Corporate Governance) as per Regulation 27 of the LODR Regulations according to the prescribed format given in Annexure I of the SEBI Circular Number SEBI/HO/CFD/CMD-2/P/CIR/2021/567 notified on May 31, 2021. According to this, the disclosures are to be made pertaining to ‘cyber security breach’, ‘cyber security incident’ or ‘loss of documents/data of the listed entity’. This could be important for investors who want to be aware of the associated risks and impacts.


Qualms with the Proposed Revisions


Firstly, the disclosure requirements for listed entities have been deemed arduous due to the substantial decline in the suggested timeline for disclosing these material events or information, as mentioned in Part A. The timeline for disclosing this material information or event which proceeds from the listed company is stipulated to be truncated to 12 hours from 24 hours, while disclosures pertaining to material information arising from a decision appraised in a conference involving the Board of Directors of the listed entity are to be given within a mere span of 30 minutes from the conclusion of the meeting. Therefore, these stricter disclosure requirements of SEBI may be challenging for businesses in India.


Secondly, a multitude of regulations, recommendations, discussion papers, consultation papers etc., have been issued by SEBI, which can be detrimental to the companies’ core business activities. Keeping track of the numerous ongoing developments in the various committees set up by SEBI can be a mind-numbing task. This also does not facilitate the ease of business in India, despite being a good initiative. A company would subsequently be required to alter its organisational structure to comply with the changed disclosure mechanisms since penalties or liability can be imposed in instances of failure to respond within the stipulated time frame.


Thirdly, the mandate to verify market rumours was done to prevent listed entities from disclosing an event at the eleventh hour. By that time, the public circulation of information regarding the event would have already occurred. However, this measure could be tricky because most businesses often undertake pursuits that may have yet to develop into a disclosure obligation, thereby rendering any affirmation or denial precipitous.


Conclusion


SEBI’s revision of the existing LODR Regulations will have a conspicuous influence on the continuing disclosure requirements in the Indian regime. Various modifications have been made to Para A and Para B events, and new items have been added to Para B of Schedule III. While the proposals are likely to reduce certain ambiguities concerning the Materiality Policies of the companies, the timeline for certain disclosures having been substantially reduced is likely to make it difficult for businesses to comply with the proposed regime. Listed entities will, therefore, have to alter their organisational structures depending on the eventual form of the revised proposals in order to comply with SEBI’s disclosure requirements effectively.



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