Thursday, June 18, 2015

Materiality and Disclosure Under Clause 36 of the Listing Agreement

[The following guest post is contributed by Supreme Waskar, who is a corporate lawyer]

By an order passed earlier this month, an adjudicating officer of SEBI imposed a fine of Rs. 2 crores on New Delhi Television Ltd. (“NDTV”) for failure to promptly disclose material information to stock exchanges under clause 36 of the listing agreement.

Facts of the case

On February 21, 2014, NDTV had received a tax demand of Rs. 450 crores from the income tax department for the assessment year 2009-10 (“Information” or “Event”). However, NDTV informed the stock exchanges (“SEs”) more than three months later i.e. May 26 & 29, 2014 pursuant to clarification sought by the SE. SEBI held that not disclosing the Information promptly to the SEs was a failure on the part of NDTV to comply with clause 36 of the listing agreement (“Clause 36”).

Principal issues 

- Whether the Information was material in nature which required prompt disclosure under Clause 36?

- Whether the non-disclosure of Information violated the provisions of Clause 36?

- Whether the violation, if any, attracts monetary penalty under Section 23A and 23E of SCRA?

NDTV’s submissions

Materiality

(i) The disclosure requirements under Clause 36 are restricted to those litigation/disputes which will have a material impact on operations, profitability or financials of the company. Since the alleged tax demand was based on mere non-application of mind and bore no merit in law and relying on professional advice and on the basis of bonafide and reasonable belief it took the view that Information was not material in nature;
 (ii) NDTV gave reference of SEBI order in the matter of IPO of Onelife Capital Advisors Ltd. wherein it was held: “The words “material” and “materiality’ have not been defined in the ICDR Regulations. However, as understood in the market parlance and also defined in explanation to regulation 5 of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 in the same context, “material” means anything which is likely to impact an investors’ investment decision.” Further since there was no adverse impact on the price of shares even after the Information was made available on the SEs, the Information was not material in nature.

On imposition of penalty

- NDTV placed reliance on the order of the  Supreme Court in the matter of Hindustan Steel Ltd. v. State of Orissa (1969) 2 SCC 627 wherein it was held: “Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.”

SEBI’s case

- The Information disclosed on May 29, 2014, also contained the fact that stay has been granted for the operation of the tax demand which was a subsequent development not existing at the time when the disclosure obligation arose. Hence no inference can be drawn that this information was not material as it did not contribute in any way to the investors’ decision to invest or exit the Company;

- Materiality - SEBI noted that the amount involved in the income tax demand was larger than the revenue of the company and significantly larger than its net profit i.e. net loss in the recent financial year as also greater than its net worth. Although it is the prerogative of companies to decide on materiality, in this case, the amount is material particularly considering the financials of the Company and information ought to have been disclosed;

- On imposition of penalty – SEBI referred to the decision of (i) Hindustan Steel Ltd. v. State of Orissa, however NDTV had failed to furnish the evidence in support of the existence of legal advice at the time when the disclosure obligation arose as also the decision making regarding the materiality of the information which would have formed the basis of the honest and genuine belief of the company that it was acting in compliance of clause 36; and (ii) Supreme Court in the matter of SEBI v. Shri Ram Mutual Fund wherein it was held that “intention of the parties committing such violation becomes wholly irrelevant .....”

SEBI’s Order

SEBI by its order dated June 4, 2015 held that the Information was material in nature which required prompt disclosure under Clause 36, and the failure on the part of NDTV violated Clause 36 which attracted penalty under the provisions of section 23A and 23E of SCRA and thereby imposed penalty of Rs 2 crores on NDTV.

Conclusion

Clause 36 specifies an indicative list of certain ‘material events’ and it leaves to the discretion of the listed company to determine whether a particular event would have a material bearing on the performance of such listed company or whether particular information is price sensitive, thereby, making requirements of Clause 36 voluntary in nature. Clause 36 gives flexibility to the listed company to determine events/information, which in its opinion is material/price sensitive. However pursuant to analysis of Clause 36 and Bombay Stock Exchanges guidance note for disclosures made under clause 36 of the listing agreement,[1] material information would mean any information/event which is likely to impact an investors’ decision to buy, sell or hold shares of a listed company. Irrespective of materiality threshold being prescribed in Clause 36, in the present case since amount involved in the income tax demand was larger than the revenue of the company and significantly larger than its net profit SEBI held that information was material in nature, which required prompt disclosure under Clause 36.

- Supreme Waskar




[1] Circular no. DCS/COMP/11/2014-15 dated September 30, 2014.   

1 comment:

vswami said...


Personal Reaction:
“Further since there was no adverse impact on the price of shares EVEN AFTER THE INFORMATION WAS MADE AVAILABLE ON THE SES, the Information was not material in nature.”
Perhaps, as may be imagined, having regard to the admitted facts , in the statutory audit report , applying the same test of ‘materiality’ , an appropriate disclosure would have been called for, and so been made. And the Report would also probably have been accordingly qualified. On that premise, what transpired later- was there no adverse impact on the shares transaction price even there after, calls for further probe. In all probability the dispute would have been taken up; and if so, the mentioned and other related points are likely to be raised and gone into.
Be that as it may, by no sane reasoning or sound logic, the term ‘material’ , conventionally used for several such purposes though, is highly subjective and judgmental, cannot therefore be said to be not dubious; hence, always amenable to a long drawn debate, the outcome being as ever inconclusive.
In short, levy of penalty may be sustained or dropped, depending on the final finding whether or not the admitted failure to ‘promptly report ‘ is merely a technical or venial breach, with no significant economic consequence whatsoever.
Till then, the academic debate will, as expected,go on and on!