It’s the “Material” Things That Matter: Disclosures under the New SEBI Regulations

[The
following guest post is contributed by Yogesh
Chande
, Partner and Malek-ul-Ashtar
Shipchandler
, Associate, at Shardul Amarchand Mangaldas. Views expressed
herein are personal and solely that of the authors.
A related
post by Somasekhar Sundaresan is available here.]
Background
The Securities and Exchange Board
of India (“SEBI”) notified the SEBI
(Listing Obligations and Disclosure Requirements), 2015
(“Listing Regulations”) on September 2,
2015 which are to be implemented on the expiration of 90 days from the
notification date.[1] The
Listing Regulations apply to equity shares and convertible securities listed on
the main board or small medium enterprise (SME) exchange or institutional
trading platforms, Indian depository receipts, securitised debt instruments,
mutual fund units such other securities as may be specified by SEBI. The
Listing Regulations were preceded by an approach paper (for public comments) on
the draft SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2014 with a view to draft “an all encompassing umbrella Listing Regulations
providing listing conditions and disclosure requirements for various categories
of securities”.
This post endeavours to focus on
the provisions relating to material disclosures under regulation 30 of the
Listing Regulations (i.e. clause 36 of the equity listing agreement) which need
to be made by every listed entity[2]
to the stock exchange(s).
Regulation 30(2) read with Para A
of Part A of Schedule III of the Listing Regulations enumerates certain
events/information which are deemed to be material. These include an
acquisition (including an agreement to acquire), issuance or forfeiture of
shares and revision in rating.
Further, outcomes of a board
meeting such as (a) recommendation
or declaration of dividend/bonuses or the cancellation of dividend; (b) decision to buyback securities; (c) issue of bonus shares or reissue of
forfeited shares; (d)
entering/terminating/amending agreements which impact the management and
control of the listed entity; (e)
becoming aware of frauds/defaults by promoters/key managerial personnel (“KMP”) or the listed entity, or of an
arrest of a promoter or KMP, must be disclosed to the stock exchange(s) within
30 minutes of the closure of the meeting.[3]
Under regulation 30(4)(i) read
with Para B of Part A of Schedule III of the Listing Regulations, events such
as (a) commencement or postponement
of any commercial production/operation of any unit/division; (b) change in the general
character/nature of business brought about for various reasons; and (c) awarding, bagging/receiving,
amendment or termination of orders/contracts not in the normal course of
business, require disclosure if the materiality thresholds under regulation
30(4)(i) are met.
Under point 6 of Para A of Part A
and point 9 of Para B of Part A of Schedule III of the Listing Regulations read
with point 6.1 and 9.1 of Annexure I of the SEBI circular (CIR/CFD/CMD/4/2015)
dated September 9, 2015, a listed entity has to make disclosures pertaining to
fraud/default/arrest of promoters, KMP or directors, with “estimated” details
at the time of unearthing the fraud or occurrence of the default/arrest.
Further, under point 6.2 and 9.2 of Annexure I of the SEBI circular
(CIR/CFD/CMD/4/2015) dated September 9, 2015, a subsequent intimation to the
stock exchange(s) is required to be made with “actual” details such as actual
amount involved in the fraud/default, actual impact of such fraud/default on
the listed entity and its financials, and corrective measures taken by the
listed entity on account of such fraud/default.
The aforesaid disclosure will be
required even if such fraud/default/arrest is not committed in relation to the
listed entity. For e.g. if a director of a listed entity is arrested for
siphoning off funds from a partnership firm in which he is a partner/employee,
such fact must be disclosed by the listed entity to the stock exchange(s).
Under regulation 30(7), a listed
entity is required to make disclosures on a regular basis encapsulating
material developments of the disclosures already made under regulation 30 till
such time the event is resolved. The Listing Regulations however do not define
what “material developments” connote and as such the determination of whether
any development is “material” is subjective.
Under regulation 30(9), a listed
entity is required to disclose all events/information with respect to its
subsidiaries that is material for the listed entity.[4]
While there is no test prescribed under the Listing Regulations to determine
what event/information pertaining to a subsidiary is material,
reliance/assistance may be sought from the events/information stated at Para A
and B of Part A of Schedule III of the Listing Regulations as well as the
determining factors mentioned under regulation 30(4)(i) of the Listing
Regulations.
SEBI, by way of regulation
30(4)(i) of the Listing Regulations has enumerated certain conditions for
determining the materiality of information contemplated under regulation 30(3)
read with Para B of Para A of Schedule III of the Listing Regulations, viz.,
(a) The omission of information
which is likely to result in discontinuity or alteration of event or
information already available publicly;
(b) The omission of information
which is likely to result in significant market reaction if the said omission
came to light at a later date.
While the Listing Regulations
appear to style the determination of materiality as more objective compared to
clause 36 of the equity listing agreement, the ultimate decision (and the onus
to prove, should SEBI take a contrary view) to determine whether there will be
a “significant market reaction” (the determination of which itself is
subjective) and classify certain information as material is that of the board
of directors under regulation 30(1), 30(4)(ii) and point D of Para B of
Schedule III of the Listing Regulations.
Under regulation 30(4)(ii) of the
Listing Regulations, the board of directors are required to approve a policy
framed by the listed entity for determination of materiality based on the
criteria specified in regulation 30(4)(i) of the Listing Regulations.
The determination by the board of directors
of what is a “material” disclosure is crucial in complying with the Listing
Regulations. SEBI may not necessarily agree with the determination of the board
directors as is clear from a recent case wherein
SEBI fined New Delhi Television (“NDTV”) Rs. 20 million for not
disclosing to the stock exchanges that the Income Tax Department had raised a
tax demand of Rs. 4.5 billion on NDTV.
Since the
amount involved in the income tax demand was larger than the revenue of NDTV
and significantly larger than its net profit, SEBI held that information was
material in nature, which required prompt disclosure under Clause 36 of the
listing agreement.
Under point 2 of Annexure II of
the SEBI circular (CIR/CFD/CMD/4/2015) dated September 9, 2015, certain
guidelines have been prescribed by SEBI with respect to determining if/when an
event/information has occurred at two instances:
(a) At the stage of discussion, negotiation or approval:
“events/information can be said to have occurred upon receipt of approval of
Board of Directors…However, considering the price sensitivity involved for
certain events e.g. decision on declaration of dividends etc., disclosure shall
be made on receipt of approval of the event by the Board of Directors, pending
Shareholder’s approval”.
(b) Where there is no discussion, negotiation or approval required:
“events/information can be said to have occurred when a listed entity becomes
aware of the events/information, or as soon as, an officer of the entity has,
or ought to have reasonably come into possession of the information in the
course of performance of his duties”.
It may be noted that the above
instances only prescribe guidelines to determine “occurrence” and not
“materiality”. Therefore, it can be concluded that making disclosures is a two
prong process i.e. (a) check whether
an event/information has occurred and (b)
whether the event/information occurred is (i)
deemed to be material under regulation 30(2) read with Para A of Part A of
Schedule III of the Listing Regulations or (ii)
is an event specified in Para B of Part A of Schedule III of the Listing
Regulations after applying the materiality threshold under regulation 30(4)(i)
of the Listing Regulations.
Regulations 30(1), 30(4)(ii) and
point D of Para B of Schedule III of the Listing Regulations cast the responsibility
on the board of directors to determine whether an event/information is material.
Interestingly, regulation 31(5)
of the Listing Regulations states that the duty to determine materiality is
that of the KMP(s) appointed by the board of directors for this purpose. To
this extent, there appears to be a disconnect between regulation 30(1) and
30(5); however, interpreting regulations 31(1), 30(4) and point D of Para B of
Schedule III of the Listing Regulations purposively, a view can safely be taken
that the primary responsibility of determining the materiality of an
event/information is that of the board of directors which may (and not “shall”
as per regulation 30(5) of the Listing Regulations) delegate this duty to the
KMPs.
All disclosures required to be
made under Para A of Schedule III of the Listing Regulations (except those
stated at point 4 of Para A of Part A of Schedule III of the Listing
Regulations) are required to be made within 24 hours from the occurrence of the
event or receipt of information. In case there is a delay in filing such
disclosures, an explanation for the delay along with the disclosure is required
to be submitted to the stock exchange.
All disclosures under point 4 of
Para A of Part A of Schedule III of the Listing Regulations are required to be
made within 30 minutes from the closure of the board meeting. Therefore, the
company secretary/compliance officer (and ultimately the board of directors)
must ensure that the draft of the disclosure is kept ready to ensure that the
material outcome of/information from the board meeting is disseminated to the
stock exchange(s) within 30 minutes. The Listing Regulations do not provide for
any leeway for submitting these disclosures belatedly with an explanation,
thereby emphasizing the importance of immediately making disclosures after the
closure of a board meeting.

Conclusion

The Listing Regulations and particularly
regulation 30 of the Listing Regulations seek to address the issue of
proliferating non-compliance by listed entities. It may be noted that in an
event of contravention of the Listing Regulations by a listed entity, it is the
concerned stock exchange(s) that are primarily empowered to (a) impose fines,
(b) suspend trading and (c) freeze the securities of the promoter/promoter
group under regulation 98 of the Listing Regulations. This is “in addition to
liability for action in terms of the securities law”. Therefore, while
regulation 30 mandates the board of directors to determine whether an
event/information is “material”, the onus under Regulation 98 to ensure that
the disclosure is actually made (and the consequence(s) of failing to do so) is
on the listed entity and promoter/promoter group.
The shift from listing agreements to a regulation
shows SEBI’s intent to substitute contractual obligations of listed entities
with statutory obligations.
Yogesh Chande &
Malek-ul-Ashtar Shipchandler


[1]
Two provisions under the Listing
Regulations are applicable with immediate effect i.e. from September 2, 2015;
these pertain to (i) passing of ordinary
resolution instead of special resolution in case of all material related party
transactions subject to related parties abstaining from voting on such
resolutions, in line with the provisions of the Companies Act, 2013 and (ii)
re-classification of promoters as public shareholders under various
circumstances.
[2]
Regulation 2(1)(p) of the Listing Regulations defines a “listed entity” as an
entity which has listed on a recognized stock exchange(s), the designated
securities issued by it or designated securities issued under scheme managed by
it, in accordance with the listing agreement entered into between the entity
and the recognized stock exchange(s).
[3]
Refer to point 4 of Para A of Part A of
Schedule III of the Listing Regulations (pages 71 and 72) for the entire list
of outcomes, the disclosures of which should be made to the stock exchange
within 30 minutes from the closure of the board meeting.
[4]
Refer to regulation 24 of the
Listing Regulations for provisions relating to corporate governance requirements
with respect to a subsidiary of a listed entity.

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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