Analysis of SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 i.e. SEBI (LODR) Regulations, 2015

Introduction

LODR is one of the most important regulation mandated by Securities and Exchange Board of India to enable transparency and fair disclosures by all listed entities in India.

Under regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR Regulations’) a listed entity shall disclose to stock exchange(s) all events or information, which are material, as soon as reasonably possible and not later than twenty four hours from the occurrence of event or information.

Amongst many regulation’s on various topics have been incorporated in this LODR Compliance requirements, one of them which has quite a substantial impact is Regulation 30 relating to Disclosure of events or information. The clauses covered under the same are as follows:

30.(1) Every listed entity shall make disclosures of any events or information which, in the opinion of the board of directors of the listed company, is material.

Disclosures which are considered as material can be understood with the help of few circulars issued by SEBI/ NSE. Few of them are as follows-

1. Disclosures by listed entities of defaults on payment of interest/ repayment of principal amount on loans from banks / financial institutions and unlisted debt securities vide its Circular dated 21.11.2019.

Observation

Since any default by listed entities on payment of either interest/ repayment does lead to increase in NPA’s being reported by banks / financial institutions and also question the sustainability of the entity, hence this disclosure will provide investors about the update on the repayment capabilities of the entity under consideration and accordingly decide on their investment. It should be highlighted here that there is no limit which has been prescribed for default purpose. So any immaterial amount as may be the case, the same needs to be disclosed.

Such disclosure shall be made promptly, but not later than 24 hours from the 30th day of such default in the prescribed format provided by SEBI.

2. Disclosure of divergence in the asset classification and provisioning by banks dated 31.10.2019.

In consultation with RBI, SEBI has stated that all the listed banks shall make disclosures of divergences and provisioning beyond specified threshold, as mentioned in aforesaid RBI notifications, as soon as reasonably possible and not later than 24 hours upon receipt of the Reserve Bank’s Final Risk Assessment Report (‘RAR’), rather than waiting to publish them as part of annual financial statements. The disclosures are to be made in either or both of the following cases:

a. the additional provisioning for NPAs assessed by RBI exceeds 10 per cent of the reported profit before provisions and contingencies for the reference period, and

b. the additional gross NPAs identified by RBI exceed 15 per cent of the published incremental Gross NPAs for the reference period.

Observation

Since divergence and provisioning does have direct impact on the profitability and thereby the Price/ Earnings ratio, any such circumstance would have an impact on the share price and therefore mandated to be disclosed to provide investors the updated health of the financial statements.

3. Disclosure of Default / Inter Creditor Agreement (ICA) vide the NSE Circular dated 24.09.2019.

Listed entities shall promptly disclose to the Exchange regarding the ‘material’ developments pertaining to default and/or Inter Creditor Agreement (ICA), in terms of Regulation 30(1) and 30(2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 and all amendments and circulars issued thereunder. Inter Creditor Agreement (ICA) is an agreement entered by various lenders of a single entity to decide on the resolution plan in respect of borrowers with credit facilities from more than one lender.

Observation

Any development on the default in repayment of dues or ICA being executed does indicate that the company is headed either towards restructuring/ insolvency, since the entity is not able to meet its dues on time. Hence a relevant factor for investors/ analysts.

4. NSE Circular regarding filing of information on electronic platform via NEAPS dated 22.03.2019.

For the benefit of investors and market, the announcement filed on subjects like Corporate insolvency resolution process, preferential issue, etc shall also be disseminated directly on NEAPS without Exchange intervention.

Observation

NEAPS i.e.  NSE Electronic Application has been in place by NSE which does help in getting relevant information from the listed entities. This is a fantastic move since the dissemination of information is fast and can be accessed by investors to make their information decision.

5. NSE Circular regarding Misuse of Exchange Platform provided for Corporate Announcements vide Circular dated 19.12.2018.

Observation

The platform of NEAPS by NSE is only meant to provide information which is required as per Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, i.e.,  every listed entity is required to make disclosures of any events or information which in the opinion of the board of directors of the listed company, is material. However was noted that the entities started using the platform to publish immaterial or general matters as well. Hence this circular addresses the issue.

6. NSE Circular dated 06.06.2018 regarding Compliance and Disclosure requirements for listed companies undergoing Corporate Insolvency Resolution Process (CIRP)

SEBI has advised, all listed companies are required to promptly inform the Stock Exchanges, regarding the events pertaining to the IRP process (where companies are involved) as laid down under the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 and all amendments made from time to time and the IBC including all the necessary material disclosures promptly to the exchanges as required under the said regulations.

Observation

Investors at any point of time should know whether any CIRP is running for any company whom they would be interested in investing. Hence this disclosure would help in making informed decisions.

 (2)   Events specified in Part A of Schedule III. are deemed to be material events and listed entity shall make disclosure of such events.

LODR – SCHEDULE III Part A

PART A: DISCLOSURES OF EVENTS OR INFORMATION: SPECIFIED SECURITIES
[See Regulation 30]

The following shall be events/information, upon occurrence of which listed entity shall make disclosure to stock exchange(s):

A. Events which shall be disclosed without any application of the guidelines for materiality as specified in sub-regulation (4) of regulation (30):

1. Acquisition(s) (including agreement to acquire), Scheme of Arrangement (amalgamation/ merger/ demerger/restructuring), or sale or disposal of any unit(s), division(s) or subsidiary of the listed entity or any other restructuring. Explanation.- For the purpose of this sub-para, the word ‘acquisition’ shall mean,-

(i) acquiring control, whether directly or indirectly; or,

(ii) acquiring or agreeing to acquire shares or voting rights in, a company, whether directly or indirectly, such that –

(a) the listed entity holds shares or voting rights aggregating to five per cent or more of the shares or voting rights in the said company, or;

(b) there has been a change in holding from the last disclosure made under sub-clause (a) of clause (ii) of the Explanation to this sub-para and such change exceeds two per cent of the total shareholding or voting rights in the said company.

2. Issuance or forfeiture of securities, split or consolidation of shares, buyback of securities, any restriction on transferability of securities or alteration in terms or structure of existing securities including forfeiture, reissue of forfeited securities, alteration of calls, redemption of securities etc.

3. Revision in Rating(s).

4. Outcome of Meetings of the board of directors: The listed entity shall disclose to the Exchange(s), within 30 minutes of the closure of the meeting, held to consider the following:

(a) dividends and/or cash bonuses recommended or declared or the decision to pass any dividend and the date on which dividend shall be paid/dispatched;

(b) any cancellation of dividend with reasons thereof;

(c) the decision on buyback of securities;

(d) the decision with respect to fund raising proposed to be undertaken

(e) increase in capital by issue of bonus shares through capitalization including the date on which such bonus shares shall be credited/dispatched;

(f) reissue of forfeited shares or securities, or the issue of shares or securities held in reserve for future issue or the creation in any form or manner of new shares or securities or any other rights, privileges or benefits to subscribe to;

(g) short particulars of any other alterations of capital, including calls;

(h) financial results;

(i) decision on voluntary delisting by the listed entity from stock exchange(s).

5. Agreements (viz. shareholder agreement(s), joint venture agreement(s), family settlement agreement(s) (to the extent that it impacts management and control of the listed entity), agreement(s)/treaty(ies)/contract(s) with media companies) which are binding and not in normal course of business, revision(s) or amendment(s) and termination(s) thereof.

6. Fraud/defaults by promoter or key managerial personnel or by listed entity or arrest of key managerial personnel or promoter.

7. Change in directors, key managerial personnel (Managing Director, Chief Executive Officer, Chief Financial Officer , Company Secretary etc.), Auditor and Compliance Officer.

(7A) In case of resignation of the auditor of the listed entity, detailed reasons for resignation of auditor, as given by the said auditor, shall be disclosed by the listed entities to the stock exchanges as soon as possible but not later than twenty four hours of receipt of such reasons from the auditor.

SEBI Circular on Resignation of statutory auditors from listed entities and their material subsidiaries dated 18.10.2019 can be referred for detailed information. This Circular does provide a guidance on how and when the disclosure is to be made.

(7B) Resignation of auditor including reasons for resignation: In case of resignation of an independent director of the listed entity, within seven days from the date of resignation, the following disclosures shall be made to the stock exchanges by the listed entities:

i. Detailed reasons for the resignation of independent directors as given by the said director shall be disclosed by the listed entities to the stock exchanges.

ii. The independent director shall, along with the detailed reasons, also provide a confirmation that there is no other material reasons other than those provided.

iii. The confirmation as provided by the independent director above shall also be disclosed by the listed entities to the stock exchanges along with the detailed reasons as specified in sub-clause (i) above.

8. Appointment or discontinuation of share transfer agent.

9. Corporate debt restructuring.

10. One time settlement with a bank.

11. Reference to BIFR and winding-up petition filed by any party / creditors.

12. Issuance of Notices, call letters, resolutions and circulars sent to shareholders, debenture holders or creditors or any class of them or advertised in the media by the listed entity.

13. Proceedings of Annual and extraordinary general meetings of the listed entity.

14. Amendments to memorandum and articles of association of listed entity, in brief.

15. Schedule of Analyst or institutional investor meet and presentations on financial results made by the listed entity to analysts or institutional investors;

16. The following events in relation to the corporate insolvency resolution process (CIRP) of a listed corporate debtor under the Insolvency Code:

a) Filing of application by the corporate applicant for initiation of CIRP, also specifying the amount of default;

b) Filing of application by financial creditors for initiation of CIRP against the corporate debtor, also specifying the amount of default;

c) Admission of application by the Tribunal, along with amount of default or rejection or withdrawal, as applicable ;

d) Public announcement made pursuant to order passed by the Tribunal under section 13 of Insolvency Code;

e) List of creditors as required to be displayed by the corporate debtor under  regulation 13(2)(c) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016;

f) Appointment/ Replacement of the Resolution Professional;

g) Prior or post-facto intimation of the meetings of Committee of Creditors;

h) Brief particulars of invitation of resolution plans under section 25(2)(h) of Insolvency Code in the Form specified under regulation 36A(5) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016;

i) Number of resolution plans received by Resolution Professional;

j) Filing of resolution plan with the Tribunal;

m) Approval of resolution plan by the Tribunal or rejection, if applicable;

k) Salient features, not involving commercial secrets, of the resolution plan approved by the Tribunal, in such form as may be specified;

l) Any other material information not involving commercial secrets.

B. Events which shall be disclosed upon application of the guidelines for materiality referred sub-regulation (4) of regulation (30):

1. Commencement or any postponement in the date of commencement of commercial production or commercial operations of any unit/division.

2. Change in the general character or nature of business brought about by arrangements for strategic, technical, manufacturing, or marketing tie-up, adoption of new lines of business or closure of operations of any unit/division (entirety or piecemeal).

3. Capacity addition or product launch.

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

5. Agreements (viz. loan agreement(s) (as a borrower) or any other agreement(s) which are binding and not in normal course of business) and revision(s) or amendment(s) or termination(s) thereof.

6. Disruption of operations of any one or more units or division of the listed entity due to natural calamity (earthquake, flood, fire etc.), force majeure or events such as strikes, lockouts etc.

7. Effect(s) arising out of change in the regulatory framework applicable to the listed entity

8. Litigation(s) / dispute(s) / regulatory action(s) with impact.

9. Fraud/defaults etc. by directors (other than key managerial personnel) or employees of listed entity.

10. Options to purchase securities including any ESOP/ESPS Scheme.

11. Giving of guarantees or indemnity or becoming a surety for any third party.

12. Granting, withdrawal , surrender , cancellation or suspension of key licenses or regulatory approvals.

13. Any other information/event viz. major development that is likely to affect business, e.g. emergence of new technologies, expiry of patents, any change of accounting policy that may have a significant impact on the accounts, etc. and brief details thereof and any other information which is exclusively known to the listed entity which may be necessary to enable the holders of securities of the listed entity to appraise its position and to avoid the establishment of a false market in such securities.

14. Without prejudice to the generality of para (A), (B) and (C) above, the listed entity may make disclosures of event/information as specified by the Board from time to time.

Observation

The schedule does incorporates to a great extent all the major factors which are crucial in understanding the current operations as well as future outlook of the company, both of which is must for any investor community.  Understanding of all these matters are essential on the part of both the KMP entrusted with dissemination of information to the exchange as well as investors to make their decisions.

(3)   The listed entity shall make disclosure of events specified in Para B of Part A of Schedule III, based on application of the guidelines for materiality, as specified in sub-regulation (4).

Advisory on disclosure of material impact of COVID-19 pandemic on listed entities under SEBI LODR Regulations, 2015 issued on 20.05.2020 does provide detailed guidelines on the impact which this pandemic had on the operations and outlook of the company.

The major highlights of the advisory are as follows-

1. SEBI has granted several relaxations to the listed entities in terms of timelines for filing of various reports/ disclosures under this regulation.

2. Clause 6 of Para B of Part A of Schedule III of LODR specifies events such as “Disruption of operations of any one or more units or division of the listed entity due to natural calamity (earthquake, flood, fire etc.), force majeure or events such as strikes, lockouts etc.” that shall be disclosed upon application of the guidelines for materiality referred in Regulation 30(4).

3. Illustrative list of information that entities may consider disclosing are-

– Impact of the pandemic on the business;

– Ability to maintain operations including the factories/units/office spaces functioning and closed down;

– Schedule, if any, for restarting the operations;

– Steps taken to ensure smooth functioning of operations;

– Estimation of the future impact of CoVID19 on its operations;

– Details of impact of CoVID19 on listed entity’s in terms of capital and financial resources, profitability, liquidity position, ability to service debt and other financing arrangements, assets, IFC reporting, supply chain, demand for its products/services;

– Existing contracts/agreements where non fulfilment of the obligations by any party will have significant impact on the listed entity’s business;

– Other relevant material updates.

4. Selective disclosures are discouraged. Depending on circumstances peculiar to a entity and on account of passage of time, the entity shall revisit, refresh or update its previous disclosures.

Observation

Advisory issued by SEBI will help entities in appropriate disclosures since the impact is going to be material and should be in the public domain.

(4)(i) The listed entity shall consider the following criteria for determination of materiality of events/ information:

(a)the omission of an 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 said omission came to light at a later date;

(c)In case where the criteria specified in sub-clauses (a) and (b) 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.

(ii)  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.

Observation

This clause provides 3 criteria’s in total which would need to tested to arrive at the conclusion of whether the information or event is material or not. The formation of the policy duly approved by the BOD is mandatory for determination of materiality by the listed entities in order to comply with this clause of the regulation. The policy will differ from entity to entity based on the applicability of the criteria to their respective organization. There does not seems to be an exhaustive list of the event/ information which should be considered material.

(5)  The board of directors of the listed entity shall authorize one or more Key Managerial Personnel for the purpose of determining materiality of an event or information and for the purpose of making disclosures to stock exchange(s) under this regulation and the contact details of such personnel shall be also disclosed to the stock exchange(s) and as well as on the listed entity’s website.

Observation

This clause mandates the details of KMP be provided to exchange who are entrusted with the responsibility to determine the materiality of an event or information for the purpose of publication/ dissemination of the same to the exchange as they would be first point of contact in case of any clarifications required.

 (6) The listed entity shall first disclose to stock exchange(s) of all events, as specified in Part A of Schedule III, or information as soon as reasonably possible and not later than twenty four hours from the occurrence of event or information:

Provided that in case the disclosure is made after twenty four hours of occurrence of the event or information, the listed entity shall, along with such disclosures provide explanation for delay:

Provided further that disclosure with respect to events specified in sub-para 4 of Para A of Part A of Schedule III shall be made within thirty minutes of the conclusion of the board meeting.

Observation

This clause underlines the importance of the timelines within which the material information should be disseminated to the exchange i.e. 24 hours. Appropriate explanation is required in case the timelines are not met.

Further there are always very sensitive information which will have an immediate impact on the share price and hence needs to be disclosed within 30 minutes of the conclusion of the BM. All such matters have been provided in sub-para 4 of Para A of Part A of Schedule III. The list provided seems to be exhaustive. The outcome of such matters in the BM are strong enough that in case the same is not disclosed within a short frame of time, the same be informed to exchange via other means/ methods which may not be proper/conducive/favourable to the company or investors at large.

(7) The listed entity shall, with respect to disclosures referred to in this regulation, make disclosures updating material developments on a regular basis, till such time the event is resolved/closed, with relevant explanations.

Observation

There may be material developments which takes time to fructify and hence each major stage of the development under consideration needs to be disclosed to the exchange. For example, whistle blower complain against Infosys in the recent past would be an ideal candidate to understand this clause.

(8) The listed entity shall disclose on its website all such events or information which has been disclosed to stock exchange(s) under this regulation , and such disclosures shall be hosted on the website of the listed entity for a minimum period of five years and thereafter as per the archival policy of the listed entity, as disclosed on its website.

Observation

This clause is very important since it mandates the minimum duration (5 years) for which the happenings/ information disclosed to stock exchange shall be hosted on the website of the entity. It may be understood that the period of 5 years shall begin from the date of disclosure to the exchange.

(9) The listed entity shall disclose all events or information with respect to subsidiaries which are material for the listed entity.

Observation

This clause mandates information on the subsidiaries which are material for the listed entity. However, there is no threshold prescribed for a subsidiary to be considered as material.

(10) The listed entity shall provide specific and adequate reply to all queries raised by stock exchange(s) with respect to any events or information:

Provided that the stock exchange(s) shall disseminate information and clarification as soon as reasonably practicable.

Observation

This clause mandates entities to provide adequate reply to any query raised by the exchange with respect to any happening or information. There is no timeline provided within which the query needs to be resolved. It may be understood that the same should be done within a reasonable period of time.

 (11) The listed entity may on its own initiative also, confirm or deny any reported event or information to stock exchange(s).

Observation

In case any information is provided to the exchange before the disclosure is done by the entity under consideration, may wish to confirm or deny the information provided by other than the entity to the exchange. This is not mandatory and is just an advisory.

 (12) In case where an event occurs or an information is available with the listed entity, which has not been indicated in Para A or B of Part A of Schedule III, but which may have material effect on it, the listed entity is required to make adequate disclosures in regard thereof.

Observation

This clause does cover any material point which has been missed to be covered by this Regulation but which the entity may considered material enough and need to report accordingly.

Conclusion

This regulation is extremely important since the matters discussed above does provide guidance to the investors at large who put their hard earned money for appreciation of their Capital. Hence to maintain transparency and fair play, this regulation does provide the shield to the public at large. It’s the responsibility of all the listed entities not to just have the disclosures done but the same to be done on a timely basis to maintain the spirit of the law. Since there is no exhaustive list of disclosures, it is advised that even in doubt on whether a particular event/ information is material or not, the best way forward is to DISCLOSE. A entity which discloses appropriately and on timely basis is well accepted.

Disclaimer – SEBI and NSE website has been referred while preparing this article. This article is meant for understanding purposes only and in no way be deemed to be an advice or solicit any marketing whatsoever. Any decisions based on this article would not held me liable for any action whatsoever. Please get in touch with your legal consultant to understand the impact on your industry. Thanks!

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