Tuesday, September 22, 2015

It’s the “Material” Things That Matter: Disclosures under the New SEBI Regulations

[The following guest post is contributed by Yogesh Chande, Partner and Malek-ul-Ashtar Shipchandler, Associate, at Shardul Amarchand Mangaldas. Views expressed herein are personal and solely that of the authors.

A related post by Somasekhar Sundaresan is available here.]

Background

The Securities and Exchange Board of India (“SEBI”) notified the SEBI (Listing Obligations and Disclosure Requirements), 2015 (“Listing Regulations”) on September 2, 2015 which are to be implemented on the expiration of 90 days from the notification date.[1] The Listing Regulations apply to equity shares and convertible securities listed on the main board or small medium enterprise (SME) exchange or institutional trading platforms, Indian depository receipts, securitised debt instruments, mutual fund units such other securities as may be specified by SEBI. The Listing Regulations were preceded by an approach paper (for public comments) on the draft SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2014 with a view to draft “an all encompassing umbrella Listing Regulations providing listing conditions and disclosure requirements for various categories of securities”.

This post endeavours to focus on the provisions relating to material disclosures under regulation 30 of the Listing Regulations (i.e. clause 36 of the equity listing agreement) which need to be made by every listed entity[2] to the stock exchange(s).



Regulation 30(2) read with Para A of Part A of Schedule III of the Listing Regulations enumerates certain events/information which are deemed to be material. These include an acquisition (including an agreement to acquire), issuance or forfeiture of shares and revision in rating.

Further, outcomes of a board meeting such as (a) recommendation or declaration of dividend/bonuses or the cancellation of dividend; (b) decision to buyback securities; (c) issue of bonus shares or reissue of forfeited shares; (d) entering/terminating/amending agreements which impact the management and control of the listed entity; (e) becoming aware of frauds/defaults by promoters/key managerial personnel (“KMP”) or the listed entity, or of an arrest of a promoter or KMP, must be disclosed to the stock exchange(s) within 30 minutes of the closure of the meeting.[3]


Under regulation 30(4)(i) read with Para B of Part A of Schedule III of the Listing Regulations, events such as (a) commencement or postponement of any commercial production/operation of any unit/division; (b) change in the general character/nature of business brought about for various reasons; and (c) awarding, bagging/receiving, amendment or termination of orders/contracts not in the normal course of business, require disclosure if the materiality thresholds under regulation 30(4)(i) are met.

Under point 6 of Para A of Part A and point 9 of Para B of Part A of Schedule III of the Listing Regulations read with point 6.1 and 9.1 of Annexure I of the SEBI circular (CIR/CFD/CMD/4/2015) dated September 9, 2015, a listed entity has to make disclosures pertaining to fraud/default/arrest of promoters, KMP or directors, with “estimated” details at the time of unearthing the fraud or occurrence of the default/arrest. Further, under point 6.2 and 9.2 of Annexure I of the SEBI circular (CIR/CFD/CMD/4/2015) dated September 9, 2015, a subsequent intimation to the stock exchange(s) is required to be made with “actual” details such as actual amount involved in the fraud/default, actual impact of such fraud/default on the listed entity and its financials, and corrective measures taken by the listed entity on account of such fraud/default.

The aforesaid disclosure will be required even if such fraud/default/arrest is not committed in relation to the listed entity. For e.g. if a director of a listed entity is arrested for siphoning off funds from a partnership firm in which he is a partner/employee, such fact must be disclosed by the listed entity to the stock exchange(s).


Under regulation 30(7), a listed entity is required to make disclosures on a regular basis encapsulating material developments of the disclosures already made under regulation 30 till such time the event is resolved. The Listing Regulations however do not define what “material developments” connote and as such the determination of whether any development is “material” is subjective.

Under regulation 30(9), a listed entity is required to disclose all events/information with respect to its subsidiaries that is material for the listed entity.[4] While there is no test prescribed under the Listing Regulations to determine what event/information pertaining to a subsidiary is material, reliance/assistance may be sought from the events/information stated at Para A and B of Part A of Schedule III of the Listing Regulations as well as the determining factors mentioned under regulation 30(4)(i) of the Listing Regulations.


SEBI, by way of regulation 30(4)(i) of the Listing Regulations has enumerated certain conditions for determining the materiality of information contemplated under regulation 30(3) read with Para B of Para A of Schedule III of the Listing Regulations, viz.,

(a) The omission of information which is likely to result in discontinuity or alteration of event or information already available publicly;

(b) The omission of information which is likely to result in significant market reaction if the said omission came to light at a later date.

While the Listing Regulations appear to style the determination of materiality as more objective compared to clause 36 of the equity listing agreement, the ultimate decision (and the onus to prove, should SEBI take a contrary view) to determine whether there will be a “significant market reaction” (the determination of which itself is subjective) and classify certain information as material is that of the board of directors under regulation 30(1), 30(4)(ii) and point D of Para B of Schedule III of the Listing Regulations.

Under regulation 30(4)(ii) of the Listing Regulations, the board of directors are required to approve a policy framed by the listed entity for determination of materiality based on the criteria specified in regulation 30(4)(i) of the Listing Regulations.

The determination by the board of directors of what is a “material” disclosure is crucial in complying with the Listing Regulations. SEBI may not necessarily agree with the determination of the board directors as is clear from a recent case wherein SEBI fined New Delhi Television (“NDTV”) Rs. 20 million for not disclosing to the stock exchanges that the Income Tax Department had raised a tax demand of Rs. 4.5 billion on NDTV. Since the amount involved in the income tax demand was larger than the revenue of NDTV and significantly larger than its net profit, SEBI held that information was material in nature, which required prompt disclosure under Clause 36 of the listing agreement.


Under point 2 of Annexure II of the SEBI circular (CIR/CFD/CMD/4/2015) dated September 9, 2015, certain guidelines have been prescribed by SEBI with respect to determining if/when an event/information has occurred at two instances:

(a) At the stage of discussion, negotiation or approval: “events/information can be said to have occurred upon receipt of approval of Board of Directors…However, considering the price sensitivity involved for certain events e.g. decision on declaration of dividends etc., disclosure shall be made on receipt of approval of the event by the Board of Directors, pending Shareholder’s approval”.

(b) Where there is no discussion, negotiation or approval required: “events/information can be said to have occurred when a listed entity becomes aware of the events/information, or as soon as, an officer of the entity has, or ought to have reasonably come into possession of the information in the course of performance of his duties”.

It may be noted that the above instances only prescribe guidelines to determine “occurrence” and not “materiality”. Therefore, it can be concluded that making disclosures is a two prong process i.e. (a) check whether an event/information has occurred and (b) whether the event/information occurred is (i) deemed to be material under regulation 30(2) read with Para A of Part A of Schedule III of the Listing Regulations or (ii) is an event specified in Para B of Part A of Schedule III of the Listing Regulations after applying the materiality threshold under regulation 30(4)(i) of the Listing Regulations.


Regulations 30(1), 30(4)(ii) and point D of Para B of Schedule III of the Listing Regulations cast the responsibility on the board of directors to determine whether an event/information is material.

Interestingly, regulation 31(5) of the Listing Regulations states that the duty to determine materiality is that of the KMP(s) appointed by the board of directors for this purpose. To this extent, there appears to be a disconnect between regulation 30(1) and 30(5); however, interpreting regulations 31(1), 30(4) and point D of Para B of Schedule III of the Listing Regulations purposively, a view can safely be taken that the primary responsibility of determining the materiality of an event/information is that of the board of directors which may (and not “shall” as per regulation 30(5) of the Listing Regulations) delegate this duty to the KMPs.


All disclosures required to be made under Para A of Schedule III of the Listing Regulations (except those stated at point 4 of Para A of Part A of Schedule III of the Listing Regulations) are required to be made within 24 hours from the occurrence of the event or receipt of information. In case there is a delay in filing such disclosures, an explanation for the delay along with the disclosure is required to be submitted to the stock exchange.

All disclosures under point 4 of Para A of Part A of Schedule III of the Listing Regulations are required to be made within 30 minutes from the closure of the board meeting. Therefore, the company secretary/compliance officer (and ultimately the board of directors) must ensure that the draft of the disclosure is kept ready to ensure that the material outcome of/information from the board meeting is disseminated to the stock exchange(s) within 30 minutes. The Listing Regulations do not provide for any leeway for submitting these disclosures belatedly with an explanation, thereby emphasizing the importance of immediately making disclosures after the closure of a board meeting.

Conclusion


The Listing Regulations and particularly regulation 30 of the Listing Regulations seek to address the issue of proliferating non-compliance by listed entities. It may be noted that in an event of contravention of the Listing Regulations by a listed entity, it is the concerned stock exchange(s) that are primarily empowered to (a) impose fines, (b) suspend trading and (c) freeze the securities of the promoter/promoter group under regulation 98 of the Listing Regulations. This is “in addition to liability for action in terms of the securities law”. Therefore, while regulation 30 mandates the board of directors to determine whether an event/information is “material”, the onus under Regulation 98 to ensure that the disclosure is actually made (and the consequence(s) of failing to do so) is on the listed entity and promoter/promoter group.

The shift from listing agreements to a regulation shows SEBI’s intent to substitute contractual obligations of listed entities with statutory obligations.

- Yogesh Chande & Malek-ul-Ashtar Shipchandler



[1] Two provisions under the Listing Regulations are applicable with immediate effect i.e. from September 2, 2015; these pertain to (i) passing of ordinary resolution instead of special resolution in case of all material related party transactions subject to related parties abstaining from voting on such resolutions, in line with the provisions of the Companies Act, 2013 and (ii) re-classification of promoters as public shareholders under various circumstances.
[2] Regulation 2(1)(p) of the Listing Regulations defines a “listed entity” as an entity which has listed on a recognized stock exchange(s), the designated securities issued by it or designated securities issued under scheme managed by it, in accordance with the listing agreement entered into between the entity and the recognized stock exchange(s).
[3] Refer to point 4 of Para A of Part A of Schedule III of the Listing Regulations (pages 71 and 72) for the entire list of outcomes, the disclosures of which should be made to the stock exchange within 30 minutes from the closure of the board meeting.
[4] Refer to regulation 24 of the Listing Regulations for provisions relating to corporate governance requirements with respect to a subsidiary of a listed entity.

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