Introduction

Corporate Governance is one of the important pillars for managing a corporate entity. It ensures transparency and ethical behavior in dealing with laws, procedures and practices while making informed managerial decisions for the benefit of all the stakeholders. Corporate governance in India has evolved over the years starting from 1991 when globalization, economic liberalization and privatization led India to initiate reforms to keep pace with the developments all over the world. In terms of corporate governance for listed entities in India, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Regulations/LODR’), is the most fundamental document ensuring the management of these companies in a fair manner keeping in view the expectations of the investors.

The Regulations introduced in 2015 underwent many changes to keep up with the best practices of corporate governance. Apart from the Regulations, the Companies Act, 2013 (the ‘Act’) also prescribes certain norms to ensure corporates adhere to best practices of governance in conducting their business. Due to the multi-law structure of administration in the country, there arise instances where inconsistencies crop up between two laws and such scenarios also lead to enhanced compliance burden on companies. To address such issues and to harmonize the Regulations with the Act, SEBI, on September 11, 2020[1], issued a consultation paper for public comments.

SEBI has categorized the proposed amendments in three parts viz,

I. Amendments to strengthen corporate governance practices and disclosure requirements (Annexure A)

II. Amendments to ease the compliance burden on listed entities (Annexure B)

III. Other amendments inter-alia to maintain consistency within the Regulations, harmonize the Regulations with the Act. (Annexure C)

This article tries to analyze the proposed amendments and the impact it will have on the compliances by listed entities.

Annexure A

Sub- regulation/ Clause / Schedule Current Provision in the Regulations Proposed changes Comments
3 Currently, the Regulations apply to an entity that has any of the designated securities listed on the recognized stock exchange. It is proposed that the Regulations which become applicable to listed entities based on market capitalization criteria shall continue to apply even if they fall below such thresholds.

 

The proposed amendment is a welcome move towards strengthening corporate governance.

Emphasis has been made on the continued application of best governance practices.

2nd proviso to regulation 15(2)(a) The said regulation deals with the applicability of corporate governance provisions to listed entities satisfying certain threshold criteria. The change is in alignment with regulation 3 and is a measure towards strengthening corporate governance.
24(5) At present, the provision gets triggered only if the listed entity dilutes its holding in the subsidiary company to less than 50% or ceases to exercise control over the said subsidiary. The proposed amendment is aimed at giving clarity to prevent misuse of the provision by inserting the words “less than or equal to 50%”. This is a good move towards strengthening corporate governance. With this proposed amendment, without special resolution passed at the General Meeting, the listed entity will not be able to reduce its shareholding in a material subsidiary below or equal to fifty percent.

Given the current LODR provisions, the listed entities may reduce their shareholding upto 50% resulting in such subsidiary ceasing to be material by passing an ordinary resolution.

30(6)

 

 

 

 

 

 

 

 

This Regulation prescribes that disclosure of information must be made to stock exchange promptly.

There are certain events prescribed under Schedule III which require disclosure to be made within 24 hours and some which mandate disclosure within 30 minutes of conclusion of the Board meeting.

It is proposed that disclosure of approval of financial results be made to the stock exchange within 30 minutes of approval of the Board. This is a step in the right direction to enhance corporate governance.

This will minimize the chance of leakage of financial results before the same is disclosed to the stock exchanges.

However, this may result in administrative inconvenience.

43A (1)

 

Presently top 500 listed entities based on market capitalization are required to formulate and disclose the dividend distribution policy on their website and in the annual report. It is proposed to extend this requirement to top 1000 listed entities based on market capitalization. This is a step towards better corporate governance norms as it brings an element of predictability for the investors as to what they can expect.
Schedule III

 

 

Currently, it deals with the disclosures about any scheme of corporate debt restructuring The Corporate Debt Restructuring scheme was withdrawn by RBI and replaced with the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019. This disclosure is accordingly aligned with the above changes made by the RBI. The disclosure is for aligning with the current provisions notified by the RBI. The same needs to be disclosed without applicability of materiality thresholds.

Annexure B

Sub- regulation/ Clause / Schedule Current Provision in the LODR Proposed changes Comments
7 (3)

 

Currently, the listed entity is required to submit a compliance certificate with regards to the share transfer activity duly signed by the compliance officer of the listed entity and the authorized representative of the share transfer agent within 1 month of each half of the financial year. It is proposed that the listed entity would be required to submit such compliance certificate within 30 days of the end of the financial year. As rightly pointed out by SEBI, it is not frequently that a listed entity changes its RTA. In light of the same, it is a step towards reducing compliance burden on listed entities.
Proviso to regulation 12 The regulation prescribes that where it is not possible to use electronic mode of payment, ‘payable-at-par’ warrants/ cheques may be used.

It also states that where the amount payable as dividends exceeds ₹1500, the ‘payable-at-par’ warrants or cheques shall be sent by speed post.

It is proposed that the mandatory requirement of sending ‘payable-at-par’ warrants or cheques by speed post be removed to facilitate payment by other possible modes too. A welcome move for easing compliance burden on listed entities while paying out dividends, interest, redemption, or repayment proceeds. The Companies may use other modes of dispatching such warrants/ cheques.
39(3) The listed entity is required to submit information regarding loss of share certificates and issue of the duplicate certificates, to the stock exchange within two days of its getting information. It is proposed to make the disclosure of the loss of share certificate to the stock exchange quarterly compliance and to align with the submission of investor grievance as prescribed under regulation 13(3). Considering that there is no trading or transfer of physical shares on the floor of the stock exchanges, the proposed amendment will ease compliance burden on listed entities.
40(9) Presently, the regulation prescribes that the listed entity shall ensure that the share transfer agent and/or the in-house share transfer facility, produce a certificate from PCS within 1 month of the end of each half of the financial year, certifying that all certificates have been issued within 30 days of the date of lodgement for transfer, subdivision, consolidation, renewal, exchange or endorsement of calls/allotment monies. In line with regulation 7(3), it is proposed to make this disclosure annual compliance because the number of shareholders holding shares in physical form is negligible. The rationale provided by SEBI for carrying out the proposed amendment seems to be in sync with current scenario. Accordingly, this will ease compliance burden on listed entities.
45 (3)

 

Presently, a listed entity intending to change its name is required to submit a certificate from PCA certifying compliance with the provisions of regulation 45. It is proposed that such a compliance certificate may now be obtained from PCA or PCS and the same be annexed to the explanatory statement thereby doing away with separate approval from the stock exchanges. The proposed amendment does away with the prior approval to be taken from stock exchanges for change of name. However, the listed entities still need to procure a certification regarding compliance with regulation 45(1) which will form part of the explanatory statement in the notice seeking approval from the shareholders. Further, it also proposes to widen the scope of work for PCS.
47(1)(a) & (c)

 

Currently, a newspaper advertisement is required to be published for Board meetings where financial results or any statement of deviation under regulation 32 will be discussed/ placed. The said requirement is proposed to be deleted. This will not only reduce compliance burden but also reduce costs.

Further, it may be noted that the dispensation is only with regards to publishing Board meeting notice and the listed entities will have to continue to publish financial results in newspapers as specified in regulation 47(1)(b).

Annexure C

Sub- regulation/ Clause / Schedule Current Provision in the LODR Proposed changes Comments
2(1)(ib)

 

 

No provision ‘firm’ shall have the same meaning as assigned to it under the Partnership Act, 1932, and LLP Act, 2008. The proposed insertion defines the term referred to in the Regulation and provides clarity
2(1) (zn)

 

 

No provision ‘working days’ means working days of the stock exchange where the securities of the entity are listed. The proposed insertion defines the term referred to in the Regulation and provides clarity.
16

 

 

The current provision reads as follows:

“none of whose relatives has or had pecuniary relationship or transaction with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two percent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed from time to time, whichever is lower, during the two immediately preceding financial years or during the current financial year”

The amendment has been proposed to align the definition of Independent Director with that of the definition as provided under the Act. The proposed amendment is consistent with the provisions of Act. However, the proposed amendment retains the lower threshold prescribed at present for pecuniary relationship of relatives.

 

 

16(1) (vi) (vi) who, neither himself, nor whose relative(s) —

(A) holds or has held the position of a key managerial personnel or is or has been an employee of the listed entity or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

The proposed amendment is consistent with the provisions of the Act.
24A

 

 

Presently, every listed entity and its material subsidiary is required to annex secretarial audit report in its annual report. It is proposed that along with the secretarial audit report, the annual secretarial compliance report shall also be annexed in the annual report.

The timeline as prescribed in the SEBI Circular dated February 8, 2019, is also proposed to be included in the Regulations.

The proposed amendment is a welcome move and will cause ease of reference for the listed entities.
26 (4)

 

 

Currently, Non-executive directors are required to disclose their shareholding, held either by them or on beneficial basis for any other persons in the listed entity in which they are proposed to be appointed as directors, in the notice to the general meeting called for appointment of such director. Proposed to be deleted Overlapping provision with regulation 36(3)(e) and accordingly proposed to be deleted by SEBI.
36(3)

 

 

This regulation prescribes disclosures to be made in case of appointment/ re-appointment of a director

…..

(b) nature of his expertise in specific functional areas;

…..

(e) shareholding of non-executive directors.

It is proposed to include the shareholding of non-executive directors in the listed entity, including as a beneficial owner to be disclosed.

The term ‘his’ to be deleted.

The proposed amendment provides better clarity.

The term ‘his’ being superfluous is proposed to be deleted and is consistent with maintaining gender neutrality.

27(2)(a) The listed entity shall submit a quarterly compliance report on corporate governance in the format as specified within 15 days from close of the quarter. It is proposed to enhance the time limit for filing the said report from 15 days to 21 days. The proposed amendment will ensure uniformity in submission of periodic disclosures by listed entities
29(1)(f)

 

 

Currently, the listed entity is required to give prior intimation to stock exchange about the meeting of the board of directors in which the proposal for declaration of bonus securities is going to be discussed where such proposal is communicated to the board of directors as part of the agenda. It is proposed that prior intimation would now require to be given even if the said proposal does not form part of the agenda. The proposed amendment is in line with the intent provided in the Report issued by Kotak Committee. Accordingly, whether bonus issue forms part of the Board agenda or not, advance intimation to stock exchanges needs to be given.
44 (3)

 

 

Currently, the voting results are to be submitted with the stock exchanges within 48 hours from the conclusion of general meeting. It is proposed to extend the timeline from 48 hours to 2 working days. This will reduce practical difficulties faced by the listed entities while disclosing the voting results of general meeting.
46(2) (s)

 

 

Currently, the regulation prescribes that separate audited financial statements of each subsidiary of the listed entity in respect of a relevant financial year, be uploaded at least 21 days before the date of the annual general meeting which has been called to inter alia consider accounts of that financial year. It is proposed that

(a) where a foreign subsidiary of the listed entity is statutorily required to prepare consolidated financial statement under any law of the country of its incorporation, it will be sufficient compliance if consolidated financial statement of such foreign subsidiary is placed on the website of the listed entity;

(b) where a foreign subsidiary of the listed entity is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the holding Indian listed entity may place such unaudited financial statement on its website. A translated copy of the financials also needs to be placed on the website in case if the same is not in English language.

The said amendment has been proposed to align the provision with section 136 of the Act and also to give effect to the informal guidance issued by SEBI on May 30, 2019, in the matter of HCL Technologies Ltd.
46 (2)

 

 

Disclosure of information by the listed entity under a separate section on its website. It is proposed that the annual return as prescribed under section 92 of the Act and disclosures under regulation 30(8) shall also be displayed on the website. The requirement to upload annual return is consistent with requirements under the Act. Further, for consistency, disclosures filed under regulation 30(8) is specifically proposed to be included.
Schedule V Schedule V Part C of the Regulations prescribe the contents of the Corporate Governance Report The proposed amendment seeks to rearrange clause 5 on remuneration to directors and clause 6 on stakeholders’ grievance committee to bring together disclosure of details related to various committees in the Corporate Governance Report.

Further, a new clause 5A has been inserted which requires the listed companies to provide certain details related to the risk management committee (RMC).

The listed entities will have to include details related to RMC and also specify recommendations and action to be taken to address risk related issues, its implementation and deviations, if any.

[1] https://taxguru.in/sebi/review-sebi-listing-obligations-disclosure-requirements-regulations-2015.html

(The Article has been co-authored by Ms. Dipali Sheth, Chief Manager – Secretarial, HDFC Asset Management Company Ltd. She can be contacted at dipali.sheth@gmail.com)

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