Materiality and Disclosure Under Clause 36 of the Listing Agreement

[The following guest post is contributed by Supreme Waskar, who is a corporate
lawyer]
By an order passed earlier this month, an
adjudicating officer of SEBI imposed a fine of Rs. 2 crores on New Delhi Television Ltd. (“NDTV”) for failure to promptly disclose material information to
stock exchanges under clause 36 of the listing agreement.
Facts of the case
On February 21,
2014, NDTV had received a tax demand of Rs. 450 crores from the income tax
department for the assessment year 2009-10 (“Information” or “Event”).
However, NDTV informed the stock exchanges (“SEs”) more than three months later i.e. May 26 & 29, 2014 pursuant to clarification sought by the
SE. SEBI held that not disclosing the Information promptly to the SEs was a
failure on the part of NDTV to comply with clause 36 of the listing agreement
(“Clause 36”).
Principal
issues 
– Whether the Information was material in nature which required prompt
disclosure under Clause 36?
– Whether the non-disclosure of Information violated the provisions of
Clause 36?
– Whether the violation, if any, attracts monetary penalty under Section
23A and 23E of SCRA?
NDTV’s submissions
Materiality

(i) The
disclosure requirements under Clause 36 are restricted to those
litigation/disputes which will have a material impact on operations,
profitability or financials of the company. Since the alleged tax demand was
based on mere non-application of mind and bore no merit in law and relying on
professional advice and on the basis of b
onafide and reasonable belief
it took the view that Information was not material in nature;
 (ii) NDTV gave reference of SEBI order in the matter of IPO of Onelife Capital
Advisors Lt
d. wherein it was held: “The words
“material” and “materiality’ have not been defined in the ICDR Regulations.
However, as understood in the market parlance and also defined in explanation
to regulation 5 of the SEBI (Issue and Listing of Debt Securities) Regulations,
2008 in the same context, “material” means anything which is likely to impact
an investors’ investment decision.
” Further since there was no adverse
impact on the price of shares even after the Information was made available on
the SEs, the Information was not material in nature.

On imposition of penalty

– NDTV placed
reliance on the order of the  Supreme
Court in the matter of Hindustan
Steel Ltd. v. State of Orissa
(1969) 2 SCC 627 wherein
it was held: “Even if a minimum penalty is prescribed, the authority competent
to impose the penalty will be justified in refusing to impose penalty, when
there is a technical or venial breach of the provisions of the Act or where the
breach flows from a bona fide belief that the offender is not liable to act in
the manner prescribed by the statute.”

SEBI’s case
– The Information disclosed on
May 29, 2014, also contained the fact that stay has been granted for the
operation of the tax demand which was a subsequent development not existing at
the time when the disclosure obligation arose. Hence no inference can be drawn
that this information was not material as it did not contribute in any way to
the investors’ decision to invest or exit the Company;

– Materiality – SEBI noted that the amount
involved in the income tax demand was larger than the revenue of the company
and significantly larger than its net profit i.e. net loss in the recent
financial year as also greater than its net worth. Although it is the
prerogative of companies to decide on materiality, in this case, the amount is
material particularly considering the financials of the Company and information
ought to have been disclosed;

– On imposition of penalty –
SEBI referred to the decision of (i) Hindustan
Steel Ltd. v. State of Orissa
, however NDTV had failed to furnish the
evidence in support of the existence of legal advice at the time when the
disclosure obligation arose as also the decision making regarding the
materiality of the information which would have formed the basis of the honest
and genuine belief of the company that it was acting in compliance of clause
36; and (ii)
Supreme Court in the matter of SEBI
v. Shri Ram Mutual Fund
wherein it was held that “intention of the parties committing such violation becomes wholly
irrelevant …..”
SEBI’s Order
SEBI by its order dated June 4, 2015 held that the
Information was material in nature which required prompt disclosure under
Clause 36, and the failure on the part of NDTV violated Clause 36 which
attracted penalty under the provisions of section 23A and 23E of SCRA and
thereby imposed penalty of Rs 2 crores on NDTV.
Conclusion
Clause
36 specifies an indicative list of certain ‘material events’ and it leaves to
the discretion of the listed company to determine whether a particular event
would have a material bearing on the performance of such listed company or
whether particular information is price sensitive, thereby, making requirements
of Clause 36 voluntary in nature. Clause 36 gives flexibility to the listed company
to determine events/information, which in its opinion is material/price
sensitive.
However pursuant to analysis of
Clause 36 and Bombay Stock Exchanges
guidance
note for disclosures made under clause 36 of the listing agreement,[1]
material information would mean any
information/event which is likely to impact an investors’ decision to buy, sell
or hold shares of a listed company. Irrespective of materiality threshold being
prescribed in Clause 36, in the present case since
amount
involved in the income tax demand was larger than the revenue of the company
and significantly larger than its net profit SEBI held that information was
material in nature, which required prompt disclosure under Clause 36.
– Supreme Waskar



[1] Circular no. DCS/COMP/11/2014-15
d
ated September 30,
2014
.   

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.

1 comment

  • Personal Reaction:
    “Further since there was no adverse impact on the price of shares EVEN AFTER THE INFORMATION WAS MADE AVAILABLE ON THE SES, the Information was not material in nature.”
    Perhaps, as may be imagined, having regard to the admitted facts , in the statutory audit report , applying the same test of ‘materiality’ , an appropriate disclosure would have been called for, and so been made. And the Report would also probably have been accordingly qualified. On that premise, what transpired later- was there no adverse impact on the shares transaction price even there after, calls for further probe. In all probability the dispute would have been taken up; and if so, the mentioned and other related points are likely to be raised and gone into.
    Be that as it may, by no sane reasoning or sound logic, the term ‘material’ , conventionally used for several such purposes though, is highly subjective and judgmental, cannot therefore be said to be not dubious; hence, always amenable to a long drawn debate, the outcome being as ever inconclusive.
    In short, levy of penalty may be sustained or dropped, depending on the final finding whether or not the admitted failure to ‘promptly report ‘ is merely a technical or venial breach, with no significant economic consequence whatsoever.
    Till then, the academic debate will, as expected,go on and on!

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