India: Corporate Disclosure vs. Arbitral Confidentiality: Striking The Right Balance

Introduction

All listed companies in India need to make periodic disclosures to inform the stock exchange, its shareholders and the market about operations and activities undertaken by it. A recent amendment to the Listing Obligation Disclosure Regulations, 2023 (LODR Regulations) mandates a listed company to make disclosures concerning outstanding litigations, arbitrations and disputes. However, this requirement under the LODR Regulations seems to be in conflict with the Arbitration and Conciliation Act, 1996 (Arbitration Act) which mandates confidentiality of arbitral proceedings.

SEBI by way of an informal guidance¹ published on 04 October 2023 has attempted to provide clarity on the potential conflict between the LODR Regulations and the Arbitration Act.

Applicable Regulation and Circular

GAIL (India) Limited (GAIL) sought informal guidance from SEBI pertaining to the nature of disclosure that must be made regarding outstanding litigations/disputes as mandated by the LODR Regulations² and raised concerns pertaining to potential violation of provisions of the Arbitration Act. The Arbitration Act³ mandates that arbitration proceedings be kept confidential, except when disclosing the award is necessary for enforcement. However, the LODR Regulations mandates that in case the amount involved in ongoing litigations or disputes with an opposing party become material on a "cumulative basis", then the same shall also be required to be disclosed to the stock exchange.

Additionally, SEBI published a circular dated 13 July 2023 which imposes an obligation on listed companies to notify the stock exchange of any legal disputes or when a new litigation is initiated. This disclosure includes details of parties involved, financial implications, claims, ongoing updates, settlement terms and financial impact.

Issues and Analysis

SEBI, by way of this informal guidance addressed 2 primary questions that were posed by GAIL:

1. Whether disclosure of information pertaining to arbitral proceedings as required under LODR Regulations would be a violation of the relevant provision of the Arbitration Act.

SEBI opined that while the Arbitration Act generally emphasizes the confidentiality of such proceedings, it allows disclosure if necessary for enforcing an arbitral award. In the informal guidance, SEBI attempted to reconcile these aspects by specifying that disclosures to stock exchanges should align with the permissibility outlined in the Arbitration Act. These disclosures would normally encompass the facts related to initiation of arbitration, the amount in dispute, and details of the arbitral award, among others permissible under the Arbitration Act.

2. What is the meaning of "cumulative basis" in the context of ongoing disputes taking place against an opposing party?

SEBI clarified that the cumulative figure should be determined by aggregating claims involving the same party across all ongoing litigations or disputes. However, it is essential to note that any claim by the listed entity and any counterclaim against the listed entity within a single litigation or case should not be combined or offset when calculating the cumulative figure.

Our Thoughts

SEBI has in this informal guidance gone beyond the letter of the law and provided a practical solution to the compliance problem faced by GAIL. By applying the principle of harmonious interpretation of statutes, SEBI has attempted to reconcile differences of seemingly conflicting provisions of the LODR Regulations and Arbitration Act. However, the legal reasoning provided by SEBI in the present informal guidance falls short of the expected standards of legal scrutiny. The guidance could potentially cause further violations of the confidentiality requirement as prescribed in the Arbitration Act.

In contrast to litigation, arbitration inherently prioritizes the confidentiality of proceedings, a key factor driving parties to choose this method for dispute resolution. Ideally, an amendment would be required to be made in the Arbitration Act permitting parties to make disclosures in accordance with applicable law, which would have the effect of reconciling the conflicting provisions of the LODR Regulations and the Arbitration Act.

Footnotes

1. To read the informal guidance, please click read here

2. point 8 of Paragraph B of Part A of Schedule III ofthe Listing Obligation Disclosure Regulations, 2023

3. Section 42-A of the Arbitration and Conciliation Act, 1996

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