REVIEW ON REGULATION 30 OF LODR
Consultation Paper on Review of disclosure requirements for material events or information under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
Review of disclosure requirements for Regulation 30 under SEBI (LODR) Regulations, 2015 – Sheshank Dubey
Consultation Paper on Review of disclosure requirements for material events or information under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
As per the requirements of Regulation 30 of SEBI ( Regulations, 2015 listed entities are required to disclose material information to the Stock Exchanges based on the occurrence of such events as specified in Schedule III (Para A of Part A) of SEBI LODR Regulations, 2015.
Why amendments is required?
SEBI observe the following reasons:
|Delayed Disclosure||Need Uniformity||Inadequate / Inaccurate misleading disclosure||Inadequate / Inaccurate misleading disclosurs|
|Frequently Non Compliance||Transparency requirements||To curbs Insider trading||Prudent decision of investors|
Proposals and Rational of amendments in regulation 30 of SEBI LODR Regulation, 2015:
|REFERENCE||EXISTING REGULATIONS||PROPOSED AMENDMENTS||RATIONALS/ REMARKS|
|1.||Clause (i) of sub- regulation 30(4) of LODR Regulations||Currently, the events provided in Para A of Schedule III of LODR Regulations are deemed to be material events which listed entities are required to disclose.
However, the events provided in Para B of Schedule III of LODR Regulations are required to be disclosed based on application of the guidelines for materiality, which the listed entities are required to frame based on the criteria specified in regulation 30 (4) of LODR Regulations, thereby it allows companies to decide on disclosure based on their respective materiality policies.
|Now SEBI proposed Quantitative value for determining the materiality of events to be disclosed under Para B of Schedule III of LODR is proposed by SEBI vide this consultation paper, which is lower of following:
a) Two percent of turnover, as per the last audited standalone financial statements of the listed entity;
b) Two percent of net worth, as per the last audited standalone financial statements of the listed entity;
c) Five percent of three- year average of absolute value of profit/loss after tax, as per the last three audited standalone financial statements of the listed entity
d) In case where the criteria specified in sub-clauses (a), (b) and (c) are not applicable, an event/information may be treated as being material if in the opinion of the board of directors of listed entity, the event / information is considered material.
|Quantitative criteria for Determining the materiality threshold limits for disclosures to be made for events of Para B of Schedule III of LODR Regulations, will bring uniformity in Materiality Policies across listed companies and will result in more accurate disclosures as currently many listed companies either had no defined quantitative threshold in their materiality policies or pegged the limit quite high, at 10 per cent of turnover or profits.
Further, SEBI should also prescribe that disclosures should be elaborate, containing details relevant for investment decisions by investors.
However, the proposed thresholds are extremely low. The amendment
considers the quantitative criteria based on standalone turnover and net worth of listed entity. It may be possible that based on the corporate structure and business, standalone figures of listed entity may be less in comparison to the consolidated figures. This would require the companies to provide certain disclosures which may not be relevant or material when considered in light of its consolidated figures.
Further it may also create problems for loss making companies accordingly SEBI should define “absolute value”
|2||Clause (ii) of sub-regulation 30(4) of LODR Regulations||The listed entity shall frame a policy for determination of materiality, based on criteria specified in this sub-regulation, duly approved by its board of directors, which shall be disclosed on its website||It is proposed that Materiality Policy of the listed entity:
a) Shall not dilute any requirements specified under this Regulation.
b) Shall be framed in a manner to assist employees in identifying potential material event or information which shall be escalated and reported to the relevant Key Managerial Personnel for determining materiality of the event or information and for making disclosure to stock exchange(s).
|There may be instances where the authorised KMPs may not have immediate access to the material event/ information but at the same time few employees might have those information. Therefore Listed entity should framed a mechanism to specify the level of employees for identifying potential material event or information and such mechanism should be in a manner so that provisions of PIT regulations shall not be violated.
Further SEBI should specify the meaning of Employees who will be covered for identifying potential material event or information.
|3||Sub-regulation 30(6) of LODR Regulations||It is proposed to amend the timelines for disclosure, as at the present the timeline for disclosure of events or information is within twenty four hours from the occurrence of the event or information
In the present age of digital communication and widespread usage of social media, information permeates very fast Hence, there is a need for ensuring quicker disclosure of material events or information by listed entities. Thereby, SEBI proposes to introduce 3 time frames within which information is required to be disclosed The suggested time frames are as follows:
1. 24 hours: if the event which has occurred does not emanate from the listed company.
2. 12 hours: if the event emanates from listed company.
3. 30 minutes: from board meeting if the event is due to a decision of the board of directors.
In case the disclosure is made after timelines specified under this regulation, the listed entity shall, along with such disclosures provide explanation for delay. However disclosure with respect to events specified in Part A of Schedule III delay shall not be consider.
|The disclosures are made at the last hour, prior to which the information already gets circulated publicly through media or only when the queries were raised by the stock exchanges.
Now SEBI should come with the definitions of ‘hours’ whether it is working hour or what? Practical difficulty could be arise if there is different time Zone. Further, The terms “do not emanate from within the listed entity” and “emanate from within the listed entity” is not properly explained / defined by the SEBI. An explanation or guidance should be released which would help Companies to understand these terms better and ensure proper compliance.
|Sub-regulation 30(11) of LODR Regulations||The listed entity may on its own initiative also, confirm or deny any reported event or information to stock exchange(s).||SEBI vide this consultation paper mandates Top 250 listed entities to necessarily confirm or deny any event or information reported in the mainstream media, whether in print or digital mode, which may have material effect on the listed entity under this regulation.
Explanation – The top 250 listed entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year
|The proposal is interesting, but at the same time listed entity is only need to confirm or deny the rumours and not giving proper reasons and impact on business.
Requirement for such disclosure by listed entity may create confusion amongst investors, since market rumours consists of speculations and thereby the same cannot be either confirmed or denied at times by the listed companies.
Due to digital communication and widespread usage of social media rumours may be spreading anywhere, and it is practically impossible for a listed entity to respond. Hence SEBI should come up with a guideline and also define what kind of market rumours and social media are covered.
|Insertion of new sub-regulation 30(13) in LODR Regulations||Although disclosure of “regulatory action(s) with impact” is covered under sub-para 8 of para B, the Circular does not explicitly specify regulatory action(s) that need to be disclosed. Mandating such disclosures under Para A will provide necessary information to the investors. Accordingly, disclosure of the following is proposed to be added in Para A:
Thereby, SEBI proposes that the “Action(s) taken or initiated by any regulatory, statutory, enforcement or judicial authority against the listed entity or its directors or key managerial personnel or senior management or promoter or subsidiary, in relation to the listed entity, towards the following:
suspension; imposition of fine/penalty; settlement of proceedings; debarment; disqualification; closure of operations; sanctions imposed; warning or caution; search or seizure; inspection; investigation into affairs of the entity; and re-opening of accounts under section 130 of the Companies Act, 2013.”
|This is a welcome change however without application of materiality test and including said disclosures under Para A of Schedule III of LODR Regulations, would not be in the beneficial interest of investors, since many a times fine or penalty imposed by regulator on companies, after investigation or submission of information by listed companies are withdrawn In such cases, it would lead to a flood of disclosures confusing investors.
Further, some of these communications may contain confidential information or may have regulatory restriction on disclosure and hence, it may pose a challenge for some companies to make upfront disclosure of such communications.
|Sub-para 3 of Para A of Annexure I to the Circular||The listed entity shall notify the stock exchange(s), the details of any new rating or revision in rating assigned from a credit rating agency to any debt instrument of the listed entity or to any fixed deposit programme or to any scheme or proposal of the listed entity involving mobilization of funds whether in India or abroad. In case of a downward revision in ratings, the listed entity shall also intimate the reasons provided by the rating agency for such downward revision.||Now SEBI added that the New Ratings or revision of ratings to be disclosed even when the listed company has not requested for such revision or where such request has been withdrawn.||Since there are around 7 credit rating agencies in India accordingly SEBI imposes a responsibility to Listed for commenting on the ratings given by third party even if it has not been approached by listed company.
SEBI should come up with a guideline for the same.
|Sub-para 6 of Para A||Fraud/defaults by promoter or key managerial personnel or by listed entity or arrest of key managerial personnel or promoter.||Fraud/defaults by listed entity or its promoter or director or key managerial personnel or senior management or subsidiary, or arrest of key managerial personnel or senior management or promoter or director.||Disclosure to stock exchanges of defaults made is not a deemed to be material event unless it affect market and comes under the ambit of material threshold.|
|Sub-para 7 of Para A||Change in directors, key managerial personnel (Managing Director, Chief Executive Officer, Chief Financial Officer , Company Secretary etc.), Auditor and Compliance Officer.||Change in directors, key managerial personnel (Managing Director, Chief Executive Officer, Chief Financial Officer, Company Secretary etc.), senior management, Auditor and Compliance Officer.||SEBI should define change in senior management.|
|Insertion of new sub-para 7C in Para A||In case of resignation of a key managerial personnel or a senior management or a director other than independent director, the letter of resignation along with detailed reasons for the resignation as given by the key managerial personnel or the senior management or the director shall be disclosed to the stock exchanges by the listed entities within seven days from the date of resignation.||It is interesting change however, SEBI should prescribe a format for detailed reasons in which disclosure is required to be given to stock exchange
It may also be noted that it should not violate the provisions of laws of privacy.
|Insertion of new sub-para 7D in Para A||The Managing Director or the Chief Executive Officer of the listed entity is indisposed or unavailable to fulfil requirements of his/her role in a regular and consistent manner for more than one month.||It is a welcome change however, SEBI should define indisposed or unavailable period (inclusion and exclusion/ leaves etc.).|
|Sub-para 11 of Para A||Reference to BIFR and winding up petition filed by any party / creditors||Winding up petition filed by any party / creditors||Since the BIFR is no longer in existence. Disclosure in relation to CIRP has already been specified under sub para 16 of Para A.|
|Clause (a) of sub-para 15 of Para A||Schedule of analysts or institutional investors meet and presentations made by the listed entity to analysts or institutional investors.||Schedule of analysts or institutional investors meet, at least two working days in advance (excluding the date of the intimation and the date of the meet), and presentations made by the listed entity to analysts or institutional investors.||At present, no timeline has been specified for making such disclosures which creates ambiguity and also does not provide enough time to the investors to register or attend such meets. Hence, it is proposed to specify timeline. Further, There is no provisions for calls which are scheduled on urgent basis.|
|Insertion of new sub-para 18 in Para A||Announcement or communication to any form of mass communication media by directors or promoters or key managerial personnel or senior management of a listed entity, in relation to the listed entity, which is not already made available in the public domain by the listed entity.||SEBI should define mass communication and it is also suggested that listed entity should only be disclosed to stock exchanges which are Material in nature.|
|Insertion of new Sub-para 20 in Para A||Voluntary revision of financial statements or the report of the board of directors of the listed entity under section 131 of the Companies Act, 2013.|
|Insertion of new table in the quarterly CG Report||Disclosures in relation to “cyber security incident” or “cyber security breaches” or loss of data / documents of the listed entity in the quarterly CG Report in the format specified in Table I above.||In era of digitization, the said disclosure would be in the beneficial interest of investors.|
|Meaning of ‘acquisition’ in Sub-para 1 of para A||At present, listed entity acquiring control, or five percent or more of the shares or voting rights in a company is required to be disclosed under sub-para 1 of Para A. However, there may be a situation where a listed entity acquires shares in a company without effecting any change in its shareholding in the company. This may occur due to equal investment in the company by all the shareholders of the company. Such an acquisition may however need to be treated as material event if the cost of acquisition exceeds the materiality threshold.
Further, it may be clarified that acquisition can be in an existing company or in a newly incorporated company as well.
|sale of stake in an associate company and sale or disposal of the whole or substantially the whole of an undertaking(s) in sub-para 1 of Para A.||At present, sub-para 1 of Para A requires disclosure of sale of disposal of any unit(s), division(s) or subsidiary of a listed entity. Since sale of stake in an associate company or sale or disposal of an undertaking of the listed entity are also material information for the investors.
Hence, it is proposed to add disclosure of sale of stake in an associate company and sale or disposal of the whole or substantially the whole of an undertaking(s) of the listed entity by modifying subpara 1 of Para A.
Further, any additional two percent acquisition of shares or voting rights in any company requires disclosure under sub-para 1 of Para A, the same threshold is proposed for selling of shares or voting rights of the subsidiary or associate company.
|Any disclosures w. r. t. Scheme of Amalgamation, sale of units, the whole or substantially the whole of the undertaking(s), or subsidiary, or sale of stake in associate company to be included.|
|ADDITIONS / MODIFICATIONS FOR DISCOSURES UNDER PARA A & B OF LODR REGULATIONS||REMARKS|
|1.||Delay or default in payment of fines, penalties, dues, etc. to any regulatory, statutory, enforcement or judicial authority.||Delay or default in payment of fines, penalties, dues, etc., if material, may impact operations and/or performance of the entity.|
|2||Giving of guarantees or indemnity or becoming a surety, by whatever name called for any third party.|
|3||Disclosure of any of the following events pertaining to listed company: a) arrangements for strategic, technical, manufacturing, or marketing tie up or b) adoption of new line(s) of business or c) closure of operation of any unit/division/subsidiary (entirety or piecemeal)||Sometime events may be material even if they don’t change the general character or nature of business. Additionally, closure of operation of any subsidiary of the listed entity having material impact on the operations or performance of the entity is also significant event requiring disclosure.|
|4||Disclosure of loan agreements where the listed entity is a lender shall also be included.||The rationale of this disclosure is to inform investors about the material financial obligations on the listed entity for any third party. SEBI should come up with ESOP loan agreements.|
|5||Disclosure of information pertaining to material litigations or disputes shall now include subsidiary or director of the listed entity||Information pertaining to material litigations or disputes where the subsidiary or director of the listed entity becomes a party is also material information for investors.|
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