[Bharat Vasani is Senior Advisor – Corporate laws and Ayush Lahoti and Maharshi Shah are Associates at the Mumbai office of Cyril Amarchand Mangaldas. An earlier version of this post was published on the Cyril Amarchand Mangaldas Blog]
The enactment of the SEBI Act in 1992 (“SEBI Act”), followed by the amendment of section 21 of the Securities Contracts (Regulation) Act, 1956 (“SCRA”), empowered the Securities and Exchange Board of India (“SEBI”) to regulate the process of listing of securities by public companies. The insertion of section 11A to the SEBI Act in 1995 enhanced the SEBI’s powers to make regulations related to the listing of public companies and the disclosure requirements to be undertaken by such listed companies. Section 21 of the SCRA was further amended to ensure that listed companies entered into a listing agreement with the stock exchanges. The listing agreement was a bilateral arrangement between the listed company and the stock exchanges, which prescribed corporate governance and other requirements that listed companies must comply with. This listing agreement could be unilaterally amended by the stock exchanges after due consultation with SEBI, thereby obligating the listed companies to adhere to the modified agreement.
SEBI felt that matters relating to listing obligations and disclosures of listed entities would be better enforced through regulations envisaged under section 11A(2) of the SEBI Act rather than through the listing agreements. Therefore, by virtue of a consultation paper dated May 5, 2014, SEBI came up with a proposal on the Listing Obligations and Disclosure Requirements (“LODR / Listing Regulations”). This matter came up before the SEBI Board at its meeting dated November 19, 2014, wherein all proposals for converting the listing agreement to Listing Regulations were approved. Finally, through a notification dated September 2, 2015, SEBI promulgated the LODR and noted that it will be a “principles-based” regulation, which was well articulated in regulation 4 titled “Principles governing Disclosures and Obligations”. Even today, regulation 4(3) categorically provides that in case of any ambiguity or incongruity between the principles and the relevant regulations, the principles shall prevail. On the tenth anniversary of the LODR, we present a compelling argument through this post for a comprehensive review of some key provisions of the LODR.
Wide Canvas of the LODR
The LODR, which has been amended 49 times since its introduction, has with each amendment expanded its scope by including various new activities of listed companies, which SEBI has sought to regulate. This has led to a significant overlap between the Companies Act, 2013 (“CA 2013”) and the LODR, with the latter being more stringent and at times restrictive, as it takes away statutory rights (for example, the right of majority shareholders to vote on related party transactions (“RPTs”)). Such overlap raises a debate as to whether a delegated legislation, viz., LODR issued by SEBI can prevail or restrict rights granted by a principal legislation passed by Parliament, viz., CA 2013. SEBI’s justification for this duality is the safeguarding of public money and the protection of the interests of minority shareholders. Hence, listed companies are required to comply with both the CA 2013 as well as the LODR.
The LODR deals with the composition of the board of directors of a listed company, maximum number of directorships, independent directors, audit committee, nomination and remuneration committee, and other corporate governance matters. It also regulates substantial governance issues such as related party transactions, oversight over subsidiaries, disclosure of material events or information, verification of market rumours, financial statements, approval of scheme of arrangement for corporate restructuring and even certain aspects of managerial remuneration. Despite section 24 of CA 2013 clearly mentioning the areas that must be specifically governed by SEBI and the Ministry of Corporate Affairs (“MCA”), respectively, there appears to be a jurisdictional battle between the MCA and SEBI on certain matters, thereby impacting ease of doing business, especially since there are clear demarcations between the provisions of the CA 2013 and the LODR on certain vital aspects such as RPTs and managerial remuneration.
Migration from “Principles-Based” to “Prescriptive Regulations”
The foundational objective of making “principles-based” regulations has long been forgotten. Over the past decade, the LODR provisions have become increasingly difficult to interpret due to drafting inadequacies, frequent amendments, patchwork revisions and efforts to regulate every possible aspect based on corporate governance failures identified in the past. The LODR has always been amended keeping in mind the lowest common denominator. Every amendment to the LODR can be traced to a past corporate scandal.
However, it is also India Inc’s defiance and lack of adherence to the principles laid down in the LODR that has forced SEBI to move towards a more prescriptive approach. The widening trust deficit between the regulator and regulated entities is quite evident.
India Inc’s approach towards implementation of continuing disclosure norms under regulation 30 is a classic example. Under the principles-based approach, companies were given the freedom to frame their own materiality policy based on broad principles issued by SEBI, and to decide if an event was material and needed to be disclosed. In its Consultation Paper on Review of disclosure requirements for material events or information under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 dated November 12, 2022, SEBI noted that many entities did not disclose events specified under Paragraph B of the LODR on the ground that they did not consider them material, as per their materiality policy based on regulation 30(4) of the LODR. It was observed that material events that are likely to have positive impact on share price were disclosed, but those which were likely to have material negative impact were withheld. Moreover, most entities followed a rather generic materiality policy, simply reproducing the regulatory provisions under the LODR, thereby affording themselves considerable discretion. This behaviour of India Inc. rendered the principles-based approach ineffective and compelled SEBI to adopt prescriptive criteria, introducing more objective, non-discretionary, and quantitative parameters prescribed in regulation 30(4) of the LODR, thereby taking away discretion from listed companies.
SEBI also observed gross violations of earlier RPT provisions, including transactions conducted at a subsidiary level to prevent regulatory scrutiny, insider trading rules violations, funds diversion, ineffective audit committee supervision, lack of board oversight over subsidiaries’ functioning and independent directors’ lack of courage in asking tough questions at the board and the audit committee levels. A working committee also observed in its report that “one commonality in major corporate wrongdoings was that they were allegedly carried out by persons with the ability to influence the decisions of the company.” They observed that shell and unrelated companies, whether controlled directly or indirectly, were used to siphon off large sums through innovative structures. They also diluted the requirements under their RPT policy by procuring approvals for continuous lending to group companies.
Corporate Governance has two facets – cognitive and behavioural. SEBI tried to fix the cognitive part by tighter and more prescriptive regulations, but could not address the behavioural part. Independent directors did not exercise enough independence inside boardrooms. Similarly, other gatekeepers of corporate governance failed in performing their oversight roles effectively.
Need for Simplification
SEBI now aims to establish optimal regulations, to create an environment of trust between the regulator and corporate India, to ensure the avoidance of micromanagement, and to simplify and clearly draft regulations to facilitate ease of doing business. It will do well by focussing on important areas which are creating hurdles in implementing legitimate business activities The three areas where SEBI’s immediate attention is required are:
- provisions related to RPTs covered in regulations 2(1)(zb), 2(1)(zc) and 23 of the LODR;
- disclosure of material events and information in regulations 30, 30A and 31B of the LODR; and
- verification of market rumours in regulation 30(11) of the LODR.
The key issues to be addressed in these three areas are highlighted below. First, the absolute materiality threshold of INR 1,000 crore in regulation 23(1) of the LODR propagates a “one-size fits all” approach. It is devoid of logic and continues to be susceptible to challenges of manifest arbitrariness as all listed entities are treated alike, irrespective of their turnover, scale of operations, and nature of business. This must be replaced with a lower percentage-based threshold of annual consolidated turnover or net assets, in case of investment companies.
Second, the “purpose and effect” test introduced in relation to RPTs with effect from April 1, 2023 brings within its ambit transactions where the counter party is not a related party of the listed company or its subsidiary. While it is borrowed from the UK Listing Rules, SEBI is yet to provide any regulatory guidance on implementing it in practice. Applying this test is extremely difficult for compliance officers and members of the audit committee and this is making RPTs unviable for most large companies. This test may be omitted.
Third, regarding regulation 30 of the LODR, while the Industry Standard Note issued through SEBI Circular dated February 25, 2025 provides for some much-anticipated clarifications on various issues, the objective materiality thresholds prescribed therein is fundamentally flawed. The data reveals that in case of “Nifty-50” companies, almost 95% of companies have average profit after tax as the lowest figure. Moreover, the criteria should be profit before tax, and not profit after tax, because such a yardstick must not be dependent on government policy on taxation.
Fourth, as discussed above, the behaviour of corporate India resulted in SEBI’s approach toward regulation 30 of the LODR shifting from “principles-based” to “prescriptive”. As it stands, there are 26 new entries and sub-entries added in Para A of Part A of Schedule III and 13 entries and sub-entries added in Para B of Part A of Schedule III that require disclosure based on materiality threshold under Regulation 30, thereby making it a case of overregulation.
Fifth, the provisions related to verification of market rumours under regulation 30(11) of the LODR were substantially amended by SEBI notification dated June 14, 2023, and have been implemented for top 250 entities by market capitalisation. These companies have been mandated to confirm, deny, or clarify market rumours that are not based on material development, but are linked to material price movement. Such rumours are required to be confirmed within 24 hours of material price movement, and promoters, directors, key managerial personnel, and senior management are obligated to reply to such rumours if the listed entity is a party to the rumoured events. The listed entity’s compliance officer is now required to look at regulation 30(11) of the LODR, in conjunction with the Industry Standard Note on Rumour Verification dated May 21, 2024, and the price protection circular issued by the SEBI, and material price movement circular by stock exchanges, to determine whether a particular market rumour requires confirmation, denial, or clarification.
Finally, the formula for calculation of price protection to notify the stock exchanges is also fairly complex. The use of material price movement as a criterion for rumour verification is also debatable, as price movement can result from a combination of factors and there may not be a relevant market rumour about the company at that time.
Concluding Thoughts
The LODR has significantly increased regulatory arbitrage between listed and unlisted companies, dissuading many potential companies from going ahead with listing, as it significantly increases the compliance burden.
While SEBI started its LODR journey ten years ago with the intent of laying down broad principles for corporate governance and disclosures for listed companies, it eventually ended up making LODR the most prescriptive piece of corporate regulation. However, it would be unwise to put the entire blame at the door of SEBI as a series of corporate governance scandals, which have been reported over the last few years, has compelled SEBI to adopt stricter regulations to safeguard the interests of minority shareholders, which is a prime responsibility of SEBI. The fact that 75% of Indian listed companies are family-owned has aggravated the conundrum. The LODR in its entirety needs a comprehensive relook to clarify, simplify, and tighten all the drafting anomalies and interpretative challenges and to simplify the RPT disclosure and market rumour regimes. Instead of amending regulations every time there is a corporate scandal on the basis of the lowest common denominator, and resultantly punishing good corporate citizens, it would be better if SEBI tightened its enforcement machinery and initiated prosecution against wrongdoers, which is permissible under the current regulatory framework. The urgent re-writing of the LODR is the need of the hour.
– Bharat Vasani, Ayush Lahoti & Maharshi Shah
