Background
Regulation 30(1) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), Regulations, 2015 [‘LODR Regulations’] requires listed entities to disclose material information. Regulation 30(4) states that listed entities shall determine what would be considered as material information. Determination of materiality threshold was left to the listed companies. There was no specified threshold provided for considering information or event as material. Listed Companies were guided by provisions of Clause (i) of sub-regulation 30 (4) of LODR Regulations for determining what was considered as material information. Clause (i) of sub-regulation 30 (4) provided 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 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 into 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.
In November 2022, SEBI issued a Consultation Paper for bringing transparency, objectivity and uniformity while disclosing material events or information specified under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”).
The Consultation Paper underlined the issue(s) observed by SEBI while disclosing the events specified in Para B of Schedule III upon applying guidelines of materiality. It underlined the fact that many Listed entities do not disclose events specified under Para B on the ground that they are not considered as material as per their Materiality Policy framed in terms of the criteria prescribed in regulation 30(4) of LODR Regulations.
Therefore, to bring uniformity in the Materiality Policy of Listed entities, SEBI proposed to introduce a quantitative criterion of minimum threshold for disclosure of events specified under Para B based on the value or the expected quantitative impact of the event.
The proposal was accepted and incorporated in LODR Regulations by way SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (“the Amendment”). This Amendment shall be effective from July 14, 2023.
Introduction
Now pursuant to amended Reg. 30(4) of LODR Regulations Listed Companies would not have discretion to determine material event or information. SEBI has now prescribed thresholds as to what would be considered as material information. Pursuant to Reg. 30(4) of LODR Regulations listed companies 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 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 into light at a later date
(c) omission of an event or information, whose threshold value or the expected impact in terms of value exceeds the lower of the following:
1. two percent of turnover, as per the last audited Consolidated financial statements of the listed entity;
2. two percent of net worth, as per the last audited Consolidated financial statements of the listed entity, except in case the arithmetic value of the net worth is negative;
3. five percent of three-year average of absolute value of profit/loss after tax, as per the last three audited Consolidated financial statements of the listed entity.
(d) In case where the criteria specified in sub-clauses (a), and (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.
Thus, an additional criterion for classifying any event/information as material is introduced in Regulation 30 (4). Listed Entities shall consider any event or information specified under Para B as material, if omission of an event or information, whose threshold value or the expected impact in terms of value exceeds the specified limits of turnover, net worth and profit/loss after tax on consolidated basis and not on standalone basis.
Materiality thresholds would now change every year. Accordingly, magnitude of events or information to be disclosed to stock exchange would also change every year. Audited Financials would be ready by May end every year. So, whether it would mean that till that date disclosure would be made on the basis of last year financials. Further every year these thresholds would have to be disseminated to the relevant employees in order to help them identify material events.
Materiality Policy
Listed Companies are required to have a policy for determination of materiality as per Reg. 30(4)(ii) of LODR Regulations based on criteria specified in Reg. 30(4), duly approved by its board of directors and then disclosed on its website. LODR further states that such policy for determination of materiality shall not dilute any requirements specified under this Regulation 30(4) of LODR Regulation. Now as Reg. 30(4) is amended materiality policy needs to be amended and updated on website on or before July 14, 2023.
LODR Regulations have now stated that materiality policy for determination of materiality shall be framed in a manner to assist relevant 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). Now SEBI has mandated to make it a part of policy to help employees identify what is material and what is not? This would require percolating materiality thresholds in the organization. This would require extensive and continuous dialogue with employees.
Changes in the Materiality Policy:
- The Listed Entities shall now incorporate materiality thresholds as provided under Reg. 30(4) of LODR Regulations provide additional quantitative thresholds for determining materiality of events in their Materiality Policies.
- The Listed entities have to modify the existing Materiality Policy adopted by the company and include such factors and guidelines which shall assist relevant employees in identifying potential material event or information and thereafter, reporting the same to the Key Managerial Personnel responsible for determining the materiality of the events. Listed Companies will have to identify relevant employees who would be able to assist key managerial personnel of listed companies in identifying material information or event.
- Listed companies will have to review events or information that is meeting these materiality thresholds. This would be required to be disclosed to stock exchange on or before August 14, 2023.
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Disclaimer :This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement
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