SEBI issued circular on 22nd January, 2020 and revised the existing Standard Operating Procedure (SoP) to incorporate the amendments to Listing Regulations and streamline the SoP for dealing with non-compliance. Further, the circular says that listed entities are required to inform their promoters about this circular. Read- SEBI SOP for suspension & revocation of trading of specified securities

Role of Stock Exchange Role

Every recognized stock exchange is required to issue notices within 30 days from the due date of submission of information to the non-compliant entities. Non-compliant listed entities should ensure compliance and pay fine within 15 days from the date of such notice. Otherwise, the concerned stock exchange is required to issue a notice to the promoters of such entities to ensure compliance and they need to pay fine within 10 days from such notice. If the promoters fail to do so, the depository shall freeze the entire shareholding of them.

Responsibility of listed entities: one step ahead

Now the question arises, when promoters will come to know that there is some violation in the company? It might be possible that promoters are not on the Board of the company or not having a majority on Board.  Some officers of the company have been made default or some interpretation issue maybe there. The board/officer has interpreted the listing regulation with liberty, which might not be acceptable by regulators. It might be possible that non-compliant entities are having a poor Board process or poor decision mechanism or not in a condition to pay fines or make default good in the prescribed time.

It is not necessary that all promoters are dominating their company, its Board and officers. Promoters and Listed companies’ relationships vary for each listed entity. A listed company may be a not a promoter-driven company. Promoters will suffer for this by way of freezing their entire holding.

Listed entities are circulating the provisions of this circular to their promoters. It is the right time for promoters as well to ask the compliance status of the company regularly. Although it has not mentioned in the SEBI circular, it can be interpreted that promoters are having a right to ask the company’s Board and its officers the compliance status of the company and action taken process of the company when non-compliance occurred/found.

Further, if the promoters of the company do not ask this question whether their rights will defeat? The answer is no, in fact, it is the duty of every listed company to inform the promoters regarding compliance status regularly.

Listed Entities indemnify the Promoters

Board of Listed Company is liable for promoters under SoP. It is expected that the Board should have regular meeting with the promoters and provide the compliance status report regularly to them.  Listed Company may constitute a task action force for any non-compliance of listing regulations who can work immediately when any non-compliance occurred or found. Listed Company should cover this in Risk Management policy and take care of the implementation of such policy and inform to promoters about the various checks and balances. The Board should indemnify the promoters in all possible ways. If Listed Company fail to indemnify the promoters, our regulators would come out with some new regulation in the future on the rights of the promoters for safeguarding their interest and relationship between promoters and listed entities.

A journey towards implied law to expressed law

The listing regulations talk about the general obligation of compliance. It says a listed entity should ensure that promoters comply with responsibilities or obligations assigned to them under these regulations. But, it is silent about the rights of promoters and operational mechanisms on the relationship between listed entities and promoters.

Listing regulations are based on principles and defined in Chapter II. If promoters have a responsibility towards listing entity and the compliances as stated in Regulation 5 of Listing Regulations, then they must have right as well.  Therefore, it is expected from listed entities to establish an operational mechanism for the relationship with promoters. It is a non-regulated area. If listed entities fail to govern this area then our regulator would come out with more regulations. That time we could not say that we are going from poor governance to excess governance. It would become one step towards expressed law.

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Qualification: CS
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Location: Maharashtra, IN
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March 2021