SEBI (Listing Obligations and Disclosure Requirements)Regulations, 2015 - Regulation 30 Examined

Introduction

In exercise of the powers conferred under the relevant provisions of the SEBI Act,1992 read with Section 31 of the Securities Contracts(Regulation)Act,1956,the above Regulations have been notified by SEBI on September 2, 2015 and shall become effective from December1,2015 i.e., ninety days from the date of the Notification, save and except ,for Regulation 23(4) relating to grant of approval to related party transactions by members through ordinary resolution instead of by special resolution and Regulation 31 A which deals with disclosure of class of shareholders and conditions for reclassification .Both the above Regulations have come into force from the date of the notification.

The above Regulations, represent ,in a sense, where Corporate Inc. is concerned, a continuum of the reform process which has been set in motion through the onset of the Companies Act,2013.The Act itself is a saga of missed opportunities with palliatives being churned out with consistent regularity by the MCA as a typical knee-jerk reaction to amole irate ,in particular ,the hardships caused to private companies.

The ramifications of the above Regulations are so wide that it is impossible to encapsulate them within the narrow confines of a discussion paper. Hence, as opposed to having a bird’s eye view of the implications of the changes, in this discussion we shall restrict ourselves to an in-depth analysis of Regulation 30 which deals with the disclosure of events or information to the Stock Exchange by a listed Entity.

Disclosure of events or information

At the outset, we would point out that the language used in Regulation 30(1) strikes a discordant note. It runs as under:

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“Every listed entity (emphasis supplied) shall make disclosures of any events or information which, in the opinion of the board of directors of the listed company (emphasis supplied), is material”

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It is pertinent to note that the above Regulations apply to a listed Entity which expression has been defined in Regulation 2(1) (p) as an Entity which has listed, on a recognised stock exchange(s), the designated securities issued by it or designated securities issued under schemes managed by it, in accordance with the listing agreement entered into between the entity and the recognised stock exchange(s). From the above it follows that a listed entity would also include a non-corporate entity such as a Mutual fund which has listed at the exchanges any of the securities issued by it.

Viewed against this perspective, whereas every listed entity is required by Regulation 30(1) to make disclosures of any events or information ,the disclosure should be of such information or event , which ,in the opinion of the Board of Directors of a listed company (!) is material - Surely not the happiest amalgam of words !.

Be that as it may, the said Regulation would apply to every listed Entity as is evident from a plain reading of the same. Regulation 30 corresponds to Clause 36 of the existing listing agreement in terms of which companies are obliged to keep the Exchange informed of material events which will have a bearing on the performance /operations of the company as well as information which is price sensitive in nature. The said clause contains an illustrative list of events which need to be reported in case the company construes that the event is material in nature and price sensitive .The major chink in clause 36 lies in the fact that it pretty much allows the listed company to take a call on whether an event is material and merits disclosure. Due to the subjectivity associated with the said clause, company could shy away from making disclosures of events which are disquieting or would evoke negative impulses in the market, under the pretext that it is not so material as to warrant disclosure.

Readers will recall that with a view to eliminate the element of subjectivity in the matter of disclosure of material events and to usher in a regime of transparent dissemination of information to the investors at large, SEBI had introduced a consultative paper in November 2014, to bring about reforms to clause 36. In many ways the proposed Regulation 30 is a mirror image of the said paper as it brings out the quintessence of the postulates envisioned in the said paper.

Regulation 30 brings in a certain degree of objectivity on the subject of reporting material events in that certain events laid down in para A of part A of Schedule III of the Regulations shall be always deemed to be material events and it will be obligatory on the part of the listed entity to report such events. In other words, it will be difficult once the Regulation comes into force for a listed company to “cherry pick” events to be reported to the Exchange.

In para B of Part A of Schedule III of the Regulations are listed events which are to be reported based on the application of the guidelines for determining materiality as provided in Regulation 30(4).The criteria to be followed by the Entity to determine the materiality of events/information has also been provided in Regulation 30(4) (i). With the above background, let us now focus our attention to part A in Schedule III which lists out the events which shall be disclosed without any application of the guidelines for materiality as specified in Regulation 30(4).

List of Events to be considered as material invariably without application of mind- Para A-Part A of Schedule III

The following events are covered:

i) Acquisition including an agreement to acquire, scheme of arrangement involving amalgamation, merger, demerger , restructuring or sale or disposal of any unit(s),division or subsidiary of the listed entity.

For the purposes of these Regulations, the term “acquisition” has been defined to mean:

a) acquiring control whether directly or indirectly or

b) acquiring or agreeing to acquire shares or voting rights in a company whether directly or indirectly such that the listed entity holds shares or voting rights aggregating to 5% or more of the shares or voting right in the said company ,or,

c) there has been a change in holding from the last disclosure made under subclause (a) of Clause(ii) of the Explanation to this sub- para and such change exceeds 2% of the total shareholding or voting rights in the said company.

Therefore acquisition for the purpose of this Regulation could also imply acquiring control , whether directly or indirectly over a company without necessarily involving acquisition of shares. It is pertinent to note that for the purposes of these Regulations, the term ”control” has not been defined .Therefore assuming management control over a company without exercise of voting powers through ownership of shares would also, we reckon, come within the purview of “acquisition” as contemplated by the Regulations.

The need to disclose would be triggered off even upon entering into an agreement to acquire shares. Hence signing an MOU for acquiring shares would also set in motion a disclosure requirement.

ii) Any issue ,splits, consolidation ,buy back proposals, forfeiture, reissue of forfeited shares ,redemption of securities etc.

iii) Revision in ratings.

iv) Outcome of meetings of the Board to consider the following:

a) dividends and /or cash bonuses recommended or declared ,decision to skip dividend, dates of payment/dispatch of warrants

b) cancellation of dividend with reasons there for.

c) decision on buyback

d) decision with regard to fund raising proposal to be undertaken.

What constitutes a “fund raising” exercise needs to be clarified. Also there are no indications as to threshold values.b It would have been appropriate if the above grey areas were clarified .Otherwise we may well witness, in future, a slew of announcements by listed companies as regards even routine working capital enhancements , by way of a precaution, lest
they should fall foul of failure to comply with this requirement.

e) Increase in capital through bonus issue with particulars of issue.

f) re-issue of forfeited securities ,issue of securities held in reserve for future issue or creation in any form or manner of new shares or securities or any other rights ,privileges or benefits to subscribe to.

There is an urgent need to clarify this point as most of the expressions used in this clause are generic. Our surmise is that issue of all instruments which have an underlying right to securities in future would also merit disclosure under this clause.

g) short particulars of any other alterations of capital including calls.

h) financial results

i)decision regarding voluntary delisting.

The disclosure under Clauses (a) to (i) above should be made by the company within 30 minutes from the conclusion of the Meeting of the Board.

v)Agreements .Under this clause the whole gamut of every conceivable agreement including shareholder agreements ,JVs, family settlements, agreements with media companies, agreements that are not in the ordinary course of business , revisions ,termination thereof are covered. Where it comes to family settlements, JVs etc disclosure would be called for only if they impact management and control of the company. As there are no benchmarks for determining materiality, the call on this will have to be taken by the company alone.

vi) Frauds/defaults by promoter or KMPs or by listed entity or arrest of KMP or promoter. The magnitude of the default ought to have been elaborated. Otherwise even an innocuous default such as in filing a Return or delay in payment of tax could well merit disclosure under this clause. Also , even the arrest of a KMP or promoter for non-company related issues and for personal aberrations would need intimation.

vii)Change in directors, KMPs ,Auditors and compliance officer.

viii)Appointment or discontinuation of share transfer agent

ix)corporate debt restructuring

x)One time settlement with a Bank.

xi)Reference to BIFR and winding up petition filed by any party/creditors.

xii)Issue of notices, call letters ,resolutions, circulars sent to members, debenture holders or creditors or advertised in the media by the company.

xiii)Proceedings of AGMs and Extra-ordinary Meetings of members.

xiv)Brief particulars of changes made to the Memorandum and Articles of Association.

xv)Schedule of Analyst or Institutional investor meet and presentations on financial results made by the company to analysts or institutional investor.

From the above clause it follows that each time the company is organizing a meet with the Investors or analysts , the Exchange should be informed in advance. Better still, it would be prudent to share with the Exchange ahead of time , the entire calendar of investor meets scheduled for a year.

It would also be advisable to share with the Exchange the presentation made to the Analysts on the financial results. Readers are aware that under the existing clause 36 in the listing agreement, it is incumbent upon a company to share with the Exchange information which is price sensitive in nature or which will have a bearing on the performance or operations of the company.

A comparison of the above disclosure requirements with Clause 36 reveals that a thread of commonality runs between the two in respect of most of the events to be disclosed. The only major areas of divergence lies in the fact that the events covered in clause 36 were only illustrative and secondly the onus of reporting from the standpoint of materiality was left with the company. It is no longer possible under the new regime to apply discretion.

Application of guidelines for determination of materiality- Regulation 30(4).

As stated above , the events covered in Para A of Part A of Schedule III are reportable to the Exchange without the application of materiality. Put differently, such events are material, notwithstanding the perception of the company. To enable the company to decide on materiality which will guide reporting of events in Para B of Part A of Schedule III , certain guidelines have been laid down in Regulation 30(4). The following criteria will have to be considered by the company for determination of materiality of events /information:

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

b) the omission of an event or information is likely to result in significant market reaction if the omission came to light at a later date

c) In cases where the criteria in (a) or (b) above are not applicable , any event or information shall be deemed to be material if the Board deems it as material. To summarize the above, any information or event will be considered as material if the Board of the company deems it to be so. Further if the non-disclosure of an event causes a significant upheaval in the market ,if the said omission comes to light at a later date, the said event will be held to be material.

Once the above guidelines are applied and if it is perceived that the event as material, the company will have to make appropriate disclosures.

The following events become reportable in such an eventually as stated in Para B of Part A in ScheduleIII :

a) commencement or postponement in the date of commercial production of any unit or division.

b) change in the general character or nature of business brought above by arrangements for strategic ,technical, manufacturing or marketing tie-up, adoption of new lines of business or closure of operations of any unit/division either entirely or piece meal.

d) Capacity addition or product launch

e) Awarding ,bagging /receiving ,amendment or termination of awarded /bagged orders/contracts not in the normal course of business.

It is pertinent to ponder over this requirement. From the above clause (d) it follows that if the company bags a major order in any activity with which it is already associated , no reporting would appear to be warranted as this would be in the normal course of business. If a substantial order has been bagged in a relatively new line of activity, reporting would become necessary.

f) Agreements such as loan agreements as a borrower or any other agreement which are binding and not in the normal course of business and revisions or amendments or termination thereof.

It is intriguing to note that the above clause contemplates reporting of loan agreements for borrowings which are not in the normal course of business. This gives rise to a pertinent question as to why a company would resort to borrowings for purposes which are not in the normal course of business.

g)Disruption of operations of any one or more units or divisions of the company due to natural calamities .force majeure or events such as strikes or lock outs.

h) Effects arising out of changes in the regulatory framework as applicable to the company.

i)Litigations/disputes/regulatory actions with impact.

j)Fraud/defaults by Directors other than KMPs or employees of the company. Here again the question that remains unanswered is whether the fraud/defaults should necessarily be in relation to the reporting company or whether any fraud/default which is personal in nature and has been committed by Directors(other than KMPs) and other employees need reporting.

k).Option to purchase securities including any ESOP/ESPS scheme.

l)Provision of guarantees or indemnity or becoming a surety for a third party.

From the above, it follows that if the Holding company which is a listed Entity extends a guarantee against the borrowing made by a Subsidiary would become a reportable event, subject to the test of materiality being satisfied.

m)Granting ,withdrawal ,surrender ,cancellation or suspension of key licences or regulatory approvals.

In addition to the above, it will be necessary to also report on any major developments such as the emergence of new technologies, expiry of patents ,any change in Accounting policy which has a significant impact on Accounts and any other information which is privy to the investors and which information is necessary to enable them to appraise the company’s position and to avoid the establishment of a false market in such securities.

The list of information to be reported under the foregoing paragraphs is expandable at the behest of SEBI as and when it ordains such disclosure.

Policy for determination of materiality

Based on the criteria described above, it will be necessary for the company to formulate a policy for determination of materiality which should be approved by the Board. All listed Companies have to formulate the above policy, with due
Board approval before the Regulations become applicable from December 1,2015.The policy shall also be disclosed on the company’s website.

Authority to make disclosures

The Board will have to authorize one or more KMPs who will be entrusted with the responsibility of determining materiality of events as also for making disclosures to the Exchanges. The contact details of such persons should be informed to the Exchange as also hosted on the company’s website.

Timelines for disclosure

Events/information covered in the foregoing will have to be disclosed to the Exchanges as soon as reasonably possible and in any event not later than 24 hours from the occurrence of the event.

If disclosure is made after the expiry of 24 hours ,the company ill have to provide an explanation for the delay.

The above timelines shall not apply in so far as reporting of events such as financial results, declaration of dividend, decision on buy back , increase in share capital, fund raising activity proposed etc which will have to reported within 30
minutes from the closure of the Meeting of the Board.

Conclusion

In the above discussion we have tried to capture the nuances of the disclosure requirements contemplated under the revised Regulations. The most conspicuous change that has been brought about in Regulation 30 as compared with Clause 36 in the existing listing agreement is that the application of discretion in the matter of deciding whether an event or information was ”material” to warrant disclosure has been neutralized substantially. Under the existing Regulations, Companies could. In a manner of speaking, hide their necks like ostriches in sand and get away by not disclosing information which was disquieting by using the subterfuge of “ lack of materiality”. While the revised Regulations will, on the one hand, pave the way for greater transparency and increase dissemination of information, on the other, in terms of volume, there will , we apprehend , be an “information overload” where the Exchanges are concerned, with companies having to report even on relatively innocuous events. The gamut of disclosures to be made under Regulation 30 will also increase exponentially. Again it is also necessary for SEBI to clear the cobwebs of doubt that have crept into Regulation 30 due to the ambiguity and vagueness associated with some of the disclosure requirements. It is imperative that a white paper is issued before long to clarify many of the contentious issues thrown up by the new Regulations.

Ramaswami Kalidas
November,19, 2015