SEBI Reforms – Part 3: From Listing Agreement to Listing Regulations

In most
jurisdictions, several aspects of corporate governance and disclosures for
listed companies are regulated through stock exchange listing requirements.
These apply only to listed companies, and they are enforced by the stock
exchanges. Operating as conditions to continuous listing, one of the
enforcement mechanisms used is the threat (sometimes carried out) of delisting
the securities. While this operates as a disincentive against companies as well
as their directors and managers from flouting the listing requirements, the
consequences are faced by the minority shareholders who are deprived of the
liquidity in the stock. Although it operates as a blunt tool of enforcement, it
has been used effectively in several jurisdictions.
India has had a
chequered history in terms of using listing requirements as measures of
governance, disclosures and other conditions of continued listing. Listing
requirements have been enshrined in the listing agreement that is entered into
between the issuer company and the stock exchanges on which the issuer’s
securities are listed. In that sense, the basic framework of listing
requirements is contractual in nature, although the genesis for such a contract
is found in the Securities Contracts (Regulation) Act, 1956 (SCRA) and the
Securities Contracts (Regulation) Rules, 1957 (SCRR). Given the somewhat
contractual nature of the requirement in India, the enforcement of the listing
agreement has always been fraught with difficulty. In the past, the
consequences of flouting the requirements were woefully unclear, with several
companies utilising the legal loophole to breach the requirements with
impunity.
It was only in
2004 that Section 23E was introduced into the SCRA that imposed large penalties
of Rs. 25 crores (Rs. 250 million) for non-compliance with the listing agreement.
Under this framework, while the listing agreement itself is contractual in
nature, any breach thereof would result in penal consequences. Empirical
evidence
suggests that the market was positive about the more stringent
consequences of the breach of the listing agreement. Despite the regulatory
sanctions accompanying the listing agreement, the actual experience regarding
its use as a measure for enforcement is not entirely satisfactory. While SEBI
has indeed initiated several cases for ensuring compliance with the listing
agreement, its success has been mixed.
In order to
obviate any confusion regarding the enforceability of the listing requirements,
and also to streamline the disclosures and corporate governance norms, SEBI has
decided
to convert the listing agreement into the SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2014 – or the LODR Regulations, to
introduce a new regulatory acronym. The LODR Regulations are intended “to
consolidate and streamline the provisions of existing listing agreements
thereby ensuring better enforceability”. The LODR Regulations apply to all
types of securities, including shares, convertibles, Indian depository
receipts, mutual fund units, securitised debt instruments, and the like.
The LODR Regulations
provide much emphasis on disclosure and transparency. For instance, companies
are subject to a mandatory filing requirement on the stock exchanges through
the electronic platform. Other information mechanisms such as annual
information memorandum are addressed. There is also a great deal of emphasis on
investor redressal. The LODR Regulations also incorporate several other
procedural matters that have hitherto been addressed in the listing agreement.
One of the key
components of the listing agreement is clause 49 thereof, which encapsulates
the corporate governance norms for listing agreement. It has also been
substantially modified in the wake of the Companies Act, 2013, with the new
version taking effect on October 1, 2013. The SEBI press release is, however,
silent as to the treatment for clause 49, although logically that too should
find a place in the new LODR Regulations to be announced.
While this is a
useful reform in consolidating and streamlining the listing requirements and in
clarifying their legal nature so as to obviate any issues as to their
enforceability, there does not appear to be any substantial changes to the
approach or to the substantive legal provisions. In that sense, this effort is
largely procedural in nature – in other words, a regulatory “clean-up”
exercise.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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