Tuesday, November 25, 2014

SEBI Reforms – Part 3: From Listing Agreement to Listing Regulations

In most jurisdictions, several aspects of corporate governance and disclosures for listed companies are regulated through stock exchange listing requirements. These apply only to listed companies, and they are enforced by the stock exchanges. Operating as conditions to continuous listing, one of the enforcement mechanisms used is the threat (sometimes carried out) of delisting the securities. While this operates as a disincentive against companies as well as their directors and managers from flouting the listing requirements, the consequences are faced by the minority shareholders who are deprived of the liquidity in the stock. Although it operates as a blunt tool of enforcement, it has been used effectively in several jurisdictions.

India has had a chequered history in terms of using listing requirements as measures of governance, disclosures and other conditions of continued listing. Listing requirements have been enshrined in the listing agreement that is entered into between the issuer company and the stock exchanges on which the issuer’s securities are listed. In that sense, the basic framework of listing requirements is contractual in nature, although the genesis for such a contract is found in the Securities Contracts (Regulation) Act, 1956 (SCRA) and the Securities Contracts (Regulation) Rules, 1957 (SCRR). Given the somewhat contractual nature of the requirement in India, the enforcement of the listing agreement has always been fraught with difficulty. In the past, the consequences of flouting the requirements were woefully unclear, with several companies utilising the legal loophole to breach the requirements with impunity.

It was only in 2004 that Section 23E was introduced into the SCRA that imposed large penalties of Rs. 25 crores (Rs. 250 million) for non-compliance with the listing agreement. Under this framework, while the listing agreement itself is contractual in nature, any breach thereof would result in penal consequences. Empirical evidence suggests that the market was positive about the more stringent consequences of the breach of the listing agreement. Despite the regulatory sanctions accompanying the listing agreement, the actual experience regarding its use as a measure for enforcement is not entirely satisfactory. While SEBI has indeed initiated several cases for ensuring compliance with the listing agreement, its success has been mixed.

In order to obviate any confusion regarding the enforceability of the listing requirements, and also to streamline the disclosures and corporate governance norms, SEBI has decided to convert the listing agreement into the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2014 – or the LODR Regulations, to introduce a new regulatory acronym. The LODR Regulations are intended “to consolidate and streamline the provisions of existing listing agreements thereby ensuring better enforceability”. The LODR Regulations apply to all types of securities, including shares, convertibles, Indian depository receipts, mutual fund units, securitised debt instruments, and the like.

The LODR Regulations provide much emphasis on disclosure and transparency. For instance, companies are subject to a mandatory filing requirement on the stock exchanges through the electronic platform. Other information mechanisms such as annual information memorandum are addressed. There is also a great deal of emphasis on investor redressal. The LODR Regulations also incorporate several other procedural matters that have hitherto been addressed in the listing agreement.

One of the key components of the listing agreement is clause 49 thereof, which encapsulates the corporate governance norms for listing agreement. It has also been substantially modified in the wake of the Companies Act, 2013, with the new version taking effect on October 1, 2013. The SEBI press release is, however, silent as to the treatment for clause 49, although logically that too should find a place in the new LODR Regulations to be announced.

While this is a useful reform in consolidating and streamlining the listing requirements and in clarifying their legal nature so as to obviate any issues as to their enforceability, there does not appear to be any substantial changes to the approach or to the substantive legal provisions. In that sense, this effort is largely procedural in nature – in other words, a regulatory “clean-up” exercise.

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