SEBI Circular on COVID-19 Disclosures

That the impact of the COVID-19 pandemic on a company’s business, operations and finances is “material” is undisputed. A question, however, arises whether listed companies ought to make clear and full disclosures of such impact and, if so, under what regime. One option would be to rely on existing securities regulation that requires listed companies to make episodic as well as periodic disclosures of events that materially affect their business and finances. The other option would be to recognize up front that COVID-19 is an unprecedented event that is incapable of treatment under existing regulations, and to devise a tailor-made disclosure regime for listed companies to disseminate specific information. Jurisdictions around the world have been adopting a diversity of approaches to impose COVID-19 related disclosure requirements on listed companies.

The importance of COVID-19 disclosures is evident in a public statement issued by two senior officials of the US Securities and Exchange Commission, who noted:

“Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in:  (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress.  Historical information may be relatively less significant.”

The statement goes on to add that such disclosures are challenging, given that companies are in the relatively early stages of dealing with the pandemic, whose circumstances and effects are likely to change over time.

The Securities and Exchange Board of India (SEBI) too responded quickly to the pandemic, but a large part has thus far been to grant dispensations from various reporting and filing requirements. When it came to disclosures, SEBI relied upon the general disclosure regime under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and did not focus squarely on the implications of COVID-19. As I had noted in an earlier post: “While SEBI is yet to mandate specific COVID-19 disclosures, companies would be well-advised to make them regardless in the spirit of disclosures pertaining to material events. Board oversight to ensure the accuracy of these disclosure is ever more critical in these circumstances.” 

In a tacit recognition of the inadequacy of the existing general disclosure regime to tackle the unique problems posed the pandemic and its resulting economic impact of mammoth proportions, SEBI yesterday issued a circular to stipulate specific disclosures. The circular begins by identifying the impact of the business disruptions in creating distortions in the stock market due to the information gap. This requires company managements to make timely and adequate disclosures to investors to minimise the information asymmetry. The failure of the current regime is writ large in SEBI’s lament:

It  is  observed  that  many  listed  entities  have  made  disclosures  under LODR  Regulations, primarily intimating  shutdown of operations owing to the pandemic  and resultant  lockdowns. Some  listed  entities  have  provided  information  relating  to actions  taken towards  sanitation, safety etc.; the number of entities that have disclosed the financial impact, however, is small.” [emphasis added]

Hence, by way of the circular, SEBI now requires listed companies to report very specific aspects of the impact that COVID-19 has had on their businesses and finances. Matters to be disclosed include the impact on: “capital and financial resources; profitability; liquidity position; ability to service debt and other financing arrangements; assets; internal financial reporting and control; supply chain; demand for its products/services”. Understandably, SEBI has clarified that this list is only illustrative and not exhaustive. Such disclosure requirements extend to the submission of financial statements of companies as well. SEBI has also cautioned companies against making selective disclosures.

This is an important and welcome step in increasing transparency and market integrity. The COVID-19 situation is not only exceptional, but there is considerably uncertainty surrounding the duration for which it is likely to last. These disclosure requirements might very well stay for a while, although their importance could diminish as and when the markets incorporate the information into the investment decision-making. As SEBI has already signalled, the disclosure requirements may very well undergo course correction along the way once more information regarding the epidemiological as well as economic effects of the pandemic become clear at the global, regional and local levels.

Companies too are bound to face challenges in making the required disclosures. As the public statement by the US SEC (extracted earlier) highlights, disclosing merely historical information would be woefully inadequate. Markets would seek information about the strategy and approach that the companies are adopting, as well as the manner in which they are to implement them. Given the many imponderables surrounding the situation, it would be foolhardy for the markets to expect a great deal of clarity, and the information dissemination might be more of an iterative process. As this development indicates, companies, the markets and regulators are treading on unchartered territory.

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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