India: SEBI Tightens Governance Norms For Listed Entities

INTRODUCTION

On June 14, 2023, the Securities and Exchange Board of India (the "SEBI") tightened governance requirements for listed entities under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the "LODR Regulations") by notifying the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (the "LODR Amendment"). The changes effected through the LODR Amendment stem from the SEBI's proposals contained in its consultation papers dated November 15, 2022, February 20, 2023 and February 21, 2023 aimed at streamlining disclosure requirements and empowering shareholders of listed entities.

This note highlights the changes made pursuant to the LODR Amendment to the disclosure regime under Regulation 30 of the LODR Regulations. Most of the changes highlighted below will become effective on July 14, 2023. The changes made pursuant to the LODR Amendment in relation to disclosure requirements for agreements binding listed entities and shareholder approval requirements for special rights are discussed in our note available here.

Changes to the disclosure regime under Regulation 30

Quantitative Threshold for Determining Materiality

Under Regulation 30(1) of the LODR Regulations, a listed entity is required to make disclosure of events which are considered material by its Board of Directors. Unlike the events set out in Paragraph A of Part A of Schedule III to the LODR Regulations ("Para A"), which are deemed to be material and are mandatorily required to be disclosed, the events identified in Paragraph B of Part A of Schedule III ("Para B") are required to be disclosed only if they fulfil the criteria for materiality specified under Regulation 30(4)(i) of the LODR Regulations. Each listed entity is required to frame a policy for determination of materiality based on such materiality criteria.

In its consultation paper dated November 15, 2022, the SEBI noted that most of the listed entities were following a generic materiality policy, applying a subjective materiality test and not disclosing Para B events on the ground that these were not material under their materiality policy.

The LODR Amendment has now specified a two-pronged requirement for the materiality policy to be framed by listed entities: (i) such policy should not dilute the requirements specified under Regulation 30 of the LODR Regulations, and (ii) such policy should assist the relevant employees of listed entities to identify any potential material event or information in order to report such event or information to the authorized key managerial personnel responsible for determining the materiality of such event or information and making the necessary disclosures to the stock exchanges.

Further, with the aim of making disclosures more objective and non-discretionary, and bringing uniformity in the materiality policy across listed entities, the LODR Regulations have been amended to require mandatory disclosure of Para B events whose value or expected impact in value terms exceeds the lower of: (i) 2% of turnover (revenue) of the listed entity as per its last audited consolidated financial statements; (ii) 2% of net worth of the listed entity as per its last audited consolidated financial statements (except where the arithmetic value of the net worth is negative); and (iii) 5% of the average absolute value of profit or loss after tax of the listed entity as per its last three audited consolidated financial statements ("Materiality Threshold").

The LODR Amendment also requires that if any continuing Para B event or information becomes material based on the abovementioned Materiality Threshold, disclosure of such event will be required to be made to the stock exchanges within 30 days from the date of coming into effect of the LODR Amendment.

Action Item

· Listed entities will be required to update their materiality policy to incorporate the Materiality Threshold, and ensure that their materiality policy meets the abovementioned two-pronged requirement.

· Listed entities will be required to identify all existing Para B events or information and check if any disclosure is required based on the Materiality Threshold. Consequently, if any disclosure is triggered, listed entities will need to make the necessary disclosures within 30-days of the effective date of the LODR Amendment.

Material Events

With the objective of fostering greater transparency and availability of information to investors, certain disclosure items have been added or modified in Para A and Para B.

Para A Events

The following events, among others, have been added or modified under Para A pursuant to the LODR Amendment:

1. sale of stake in an associate company or sale of the whole or substantially the whole of the undertaking of the listed entity;

2. acquisition or sale of stake such that the cost of acquisition or the sale consideration exceeds the Materiality Threshold;

3. agreements (including any rescission or amendment of such agreements) entered into by the shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel, employees of the listed entity or of its holding, subsidiary or associate company which, either directly or indirectly or potentially or whose purpose and effect is to, impact the management or control of the listed entity or impose any restrictions or create any liability upon the listed entity, whether or not the listed entity is party to such agreements;

4. frauds or defaults by director, senior management or subsidiary or arrest of director or senior management of the listed entity (the pre-amendment requirement only covered listed entity, its promoter and key managerial personnel);

5. changes in senior management;

6. letter of resignation along with detailed reasons for resignation as given by the key managerial personnel, senior management, compliance officer or director (the pre-amendment requirement was applicable only to auditors and independent directors);

7. unavailability or indisposition of the managing director or chief executive officer to discharge their responsibilities in a regular manner for more than 45 days in any rolling 90-day period, along with reasons; and

8. actions taken or orders passed by regulatory, statutory, enforcement and judicial authorities against the listed entity, or its directors, key managerial personnel, senior management, promoter or subsidiary, in relation to the listed entity, involving suspension, imposition of fine or penalty, debarment, disqualification or other similar actions.

Para B Events

The following events, among others, have been added or modified under Para B pursuant to the LODR Amendment:

1. arrangements for strategic, technical, manufacturing, or marketing tie-up;

2. adoption of new line(s) of business;

3. closure of operation of any unit, division or subsidiary (in entirety or piecemeal);

4. pendency of any litigation or dispute whose outcome might impact the listed entity; and

5. delay or default in the payment of fines, penalties or dues to any regulatory, statutory, enforcement or judicial authority.

Action Item

The secretarial/compliance teams of the listed entities and those employees that have been identified in the listed entities' materiality policy should familiarize themselves of the changes to the list of Para A and Para B events pursuant to the LODR Amendment, and track, on an ongoing basis, whether any disclosures are triggered based on such new/modified list of material events.

Verification of Market Rumors

Under Regulation 30(11) of the existing LODR Regulations, a listed entity may voluntarily confirm or deny any reported event or information to the stock exchanges. Further, under Regulation 30(10), listed entities are required to provide specific and adequate replies to all queries raised by stock exchanges with respect to any event or information as soon as reasonably practicable.

Recognizing the growing influence of print, television, and digital media, and the need to avoid creation of false market sentiment, the SEBI has now made it mandatory for the top 100 listed entities (effective from October 1, 2023), and thereafter the top 250 listed entities (effective from April 1, 2024), to confirm, deny, or clarify (as the case may be), within 24 hours, any event or information reported in "mainstream media", which is not general in nature and which indicates that there are rumors regarding an impending specific material event or information circulating among the investing public. If the listed entity confirms the reported event or information, it will also need to disclose the status of such event or information.

The LODR Amendment defines "mainstream media" to include the following, in any print or electronic mode: (i) newspapers registered with the Registrar of Newspapers for India; (ii) news channels permitted by Ministry of Information and Broadcasting, Government of India; (iii) content published by "the publisher of news and current affairs content" (defined under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 to mean online paper, news portal, news aggregator, news agency, and functionally similar entities, but does not include newspapers, replica e-papers of the newspaper, and any individual or user who is not transmitting content in the course of systematic business, professional or commercial activity); and (iv) newspapers or news channels or news and current affairs content which are similarly regulated in jurisdictions outside India.

Action Item

Listed entities will need to determine, based on their market capitalization (as at the end of the immediately preceding financial year), whether they are among the top 100/250 listed entities. If so, they will need to implement effective mechanisms for collating information from Indian and international mainstream media, and develop a strategy for responding to market rumors regarding impending material developments.

Timelines for Disclosure of Material Events

Regulation 30(6) specifies a general timeline for disclosure of material events. Prior to the LODR Amendment, the regulation prescribed an outer timeline of 24 hours for disclosure of all material events, subject to disclosure of certain events within 30 minutes of the closure of the Board meeting held to consider such events. The LODR Amendment now requires listed entities to disclose a material event not later than: (i) 12 hours of the occurrence of such event if it emanates from within the listed entity; (ii) 24 hours of the occurrence of such event if it does not emanate from within the listed entity; and (iii) 30 minutes of the closure of the Board meeting where any decision is taken relating to such event. These timelines remain subject to the timelines separately specified in Para A for specific material events.

Action Item

The shortened disclosure timeline of 12 hours will need to be implemented from July 14, 2023 onwards. Listed entities should confirm their internal processes and apprise their satellite/branch/regional offices of the need to provide material information on a real-time basis so that such information may be collated in a timely manner for dissemination to the stock exchanges.

Implications

Further Push Towards a Mandatory Disclosure Regime

Pursuant to the LODR Amendment, the mandatory disclosure obligation of listed entities under Regulation 30 has become more stringent with new disclosure events added to Para A and Para B, and Para B events that meet the Materiality Threshold treated at par with Para A events. The introduction of an objective quantitative test for materiality for Para B events has curtailed the discretion earlier available to listed entities with respect to disclosure of Para B events. Additionally, certain items such as regulatory action, and fraud by directors have been moved from Para B to Para A and are therefore now presumed to be material and subject to mandatory disclosure without the application of guidelines for materiality.

Shortened Disclosure Timelines

Shortened timelines for disclosure of material events from 24 to 12 hours will mitigate the risk of leakage of critical information through unofficial channels and any consequent price manipulation.

Market Rumors

By requiring rumor verification, the LODR Amendment seeks to reduce market speculation over unconfirmed events. However, listed entities may find it practically challenging to implement this new amendment. The top 100/250 listed entities will now be required to monitor, on a continuous basis, print and digital mainstream media, in India as well as overseas, for market rumors relating to any impending material event.

Further, such listed entities will need to provide a specific confirmation, denial, or clarification of such market rumors; a "no comment" statement would fall foul of the new regulation. If rumors are in fact false or inaccurate, they will need to be denied or clarified. If rumors are correct or there are developments which are the subject of such rumors, a statement to the public confirming such developments and/or the state of negotiations or of developments will need to be made.

In an ongoing sale or purchase transaction which is at a preliminary and confidential stage, any such premature statements by the listed entity could impede negotiations, influence share price, and jeopardise the transaction. Such verification also has the potential for being inaccurately appraised by the market.

Compliance Framework

Listed entities should, on an immediate basis, review and strengthen their disclosure controls and procedures to enable them to comply with the enhanced disclosure requirements (including stricter disclosure timelines) under the LODR Amendment.

This insight/article is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.