[Gaurav Pingle is a practising company secretary]
True, fair, adequate and timely disclosures form one of the basic tenets of governance in listed companies and are essential for maintaining the integrity of the securities market. Timely disclosures of material events are of significant importance. They also bring about transparency and enable the investors to take an informed investment or disinvestment decision. The failure to disclose material information clearly defeats the purpose of investor protection and protection of integrity of the securities markets.
As the Securities Appellate Tribunal (SAT) noted in Coimbatore Flavors & Fragrances Ltd. v SEBI:
“The purpose of these disclosures is to bring about more transparency in the affairs of the companies. True and timely disclosures by a company or its promoters are very essential from two angles. Firstly; investors can take a more informed decision to invest or not to invest in a particular scrip secondly; the Regulator can properly monitor the transactions in the capital market to effectively regulate the same.”
Chapter II, Regulation 4 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the ‘Listing Regulations’) prescribe the ‘Principles Governing Disclosures and Obligations of Listed Entity’. According to the provisions, a listed entity shall provide adequate and timely information to recognized stock exchanges and investors. The regulations provide that a listed entity shall refrain from misrepresentation and ensure that the information provided to recognized stock exchanges and investors is not misleading. A listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders. The listed entity is also under an obligation to abide by all the provisions of the applicable laws, including the securities laws and such other guidelines as the Securities and Exchange Board of India (SEBI) and the recognised stock exchanges may issue from time to time, as may be applicable.
In August this year, the disclosure requirements under the Listing Regulations were tested before the SAT in National Highway Authority of India vs SEBI. The purpose of this post is to analyse the SAT order.
Facts of the Case
National Highway Authority of India (NHAI) is an autonomous body set up by the Parliament under National Highway Authority of India Act, 1988 for the purpose of development, maintenance and management of national highways. The NHAI is not a ‘company’ as defined under the Companies Act. It is listed on BSE and NSE in pursuance of a Listing Agreement for Debt Securities and, therefore, is subject to the provisions of the Listing Regulations. According to the requirements of regulation 52(1), a listed entity is to file the unaudited half yearly financial results within 45 days from the end of the half financial year.
Since the NHAI was unable to file the unaudited financial results ending September 30, 2018 and March 31, 2019 within the stipulated period on account of circumstances which could not be foreseen, it made a request by letters (under regulation 102 of Listing Regulations) dated May 31, 2019 and June 24, 2019 for extension of the relevant period. Based on the request, SEBI sought certain clarifications about board structure and approval process.
The board of NHAI consists of five full time members and five part time Members appointed by the Government of India. The part time members includes CEO of Niti Aayog, Secretary (Expenditure), Ministry of Finance, Secretary of Road Transport and Highways and D G (RD)/SS, Ministry of Road Transport and Highways. Considering the board composition, the NHAI stated that, at times, it is difficult to ensure that all the members are present to approve the financial results.
The NHAI also clarified that it has more than 200 accounting units spread across the country and that the consolidation of accounts requires considerable co-ordination and, at times, due to unavoidable reasons the accounts could not be placed in the meeting. According to the NHAI (Transaction of Business) Regulations, 1997, a decision taken at the meeting of the board of directors could be considered legal and valid only if it is approved by two-third of the members.
Summary of SEBI’s Observations
SEBI’s adjudicating officer noted that there was repeated failure on the part of the NHAI in not filing the returns on seven occasions from financial year 2015-2016 to financial year 2018-2019. The adjudicating officer held that the NHAI’s contention of procedural delay cannot be taken as a mitigating factor for relaxation of the period for filing the unaudited financial results. The adjudicating officer also observed that there is no provision for providing relaxation under regulation 52 of the Listing Regulations. The adjudicating officer held that if an act is required to be carried out in a particular manner and within a particular period, then the same should be done in that particular manner and within the stipulated time and that there cannot be any deviation. SEBI imposed a penalty of Rs. 7 lacs on the NHAI for violating regulation 52(1) of Listing Regulations.
Summary of SAT’s Observations
On appeal, the SAT noted that the SEBI adjudicating officer has taken into consideration the factors mentioned under section 15J of SEBI Act while imposing the penalty of Rs. 7 lacs. SAT referred to Supreme Court’s judgment in Adjudicating Officer, SEBI v. Bhavesh Pabari, wherein it was held that the provisions of section 15J of the SEBI Act may not apply in adjudication proceedings involving penalty under section 15A of the SEBI Act while determining the quantum of penalty. However, SAT observed that there is an exemption to the rule and that exemption can be granted by extending the time to comply with the provisions of the Act, Rules and Regulations. SAT stated that regulation 102 of Listing Regulations confers power on SEBI to relax the strict enforcement of the Listing Regulations.
SAT noted that NHAI is governed by a plethora of statutory rules over and above the rigor of the SEBI regime, including the Listing Regulations, and is consequently heavily burdened with compliance requirements under the SEBI Act and said regulations. Taking into consideration the board composition of NHAI, SAT observed that “it becomes slightly tedious and cumbersome to ensure that all the members of the board meeting come together under one roof and get the audited or unaudited financial results approved before the stipulated period. At times, it is beyond the control of the Officers of the Appellant to enforce strict compliance of the Act, Rules and Regulations of SEBI.” SAT stated that it was essential for SEBI to consider this aspect of the matter while considering the application for extension of time under regulation 102 of SEBI Listing Regulations.
Reference to Regulation 102 of the Listing Regulations
The said regulation relates to power of SEBI to relax strict enforcement of the Listing Regulations. According to the provision, SEBI may, in interest of investors and securities market and for the development of securities market, relax the strict enforcement of any requirement of the Listing Regulations, if SEBI is satisfied that: (i) any provision of the legislation, rules or regulations under which the listed entity is established or is governed by, is required to be given precedence to; (b) the requirement may cause undue hardship to investors; (c) the disclosure requirement is not relevant for a particular industry or class of listed entities; (d) the requirement is technical in nature; or (e) non-compliance is caused due to factors affecting a class of entities but being beyond the control of the entities.
Since the NHAI is incorporated under the NHAI Act and is regulated by the regulations made thereunder, the first condition is satisfied under regulation 102. Also, it can be noted that non-compliance under regulation 52 of the Listing Regulations is caused due to factors affecting a class of entities but being beyond the control of the entities.
SAT opined that the adjudicating officer has failed to take into consideration the mitigating circumstances as a factor under section 15J of SEBI Act while considering the imposition of penalty. SAT stated that regulation 52 of the Listing Regulations has been violated. However, considering the peculiar facts and circumstances of the present case, which should not be treated as a precedent for other matters, SAT stated that the imposition of penalty was harsh and excessive. SAT substituted the penalty with a warning that in the event NHAI violates regulation 52 of the Listing Regulations in the future, it will be open to SEBI to initiate proceedings under relevant provisions.
Analysis & Impact of the SAT Order
The SAT order has taken into consideration the mitigating factors involved. But, considering the unique circumstances, it has replaced penalty with a warning. In my view, this undermines the regulation 4 of the Listing Regulations, which states that the ‘listed entity shall provide adequate and timely information to recognised stock exchange(s) and investors’. Although regulation 102 has been taken into consideration, the basic principle governing disclosures and transparency is directly affected. If the order of SEBI’s adjudicating order were upheld by SAT, then it would have signalled a strict message for proper compliance of the Listing Regulations by public sector undertaking (PSUs) or listed entities (incorporated under specific law). Now that SAT has taken into consideration regulation 102 of the Listing Regulations and substituted the penalty with a warning, some PSUs or listed body corporates would take said recourse to this measure. Taking the NHAI’s case into consideration along with some listed PSU or listed body corporates, it is the right time for SEBI to provide for clarity on the governance practice, reporting standards, compliance of the Listing Regulations in comparison with specific statutes under which they are incorporated or governed. This will introduce greater transparency and also boost investor confidence. Such provisions can be introduced without diluting the relevant provisions of regulation 4 relating to ‘Principles Governing Disclosures and Obligations of Listed Entity’, so that listed PSUs and private sector companies would have same corporate governance norms, both in letter as well as in spirit.
– Gaurav Pingle