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Introduction

Securities and Exchange Board of India (‘SEBI’) vide its amendment notification dt: June 14, 2023, effective from July 15, 2023, introduced regulation 30(13) in SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 [‘SEBI LODR’]. Regulation 30(13) reads as follows, “In case an event or information is required to be disclosed by the listed entity in terms of the provisions of this regulation, pursuant to the receipt of a communication from any regulatory, statutory, enforcement or judicial authority, the listed entity shall disclose such communication, along with the event or information, unless disclosure of such communication is prohibited by such authority.” Regulation 30(13) directs listed entities making disclosure under these regulations pursuant to any communication received from any regulatory, statutory, enforcement or judicial authority shall also disclose such communication while making disclosure. Pursuant to regulation 30(13) listed entities have been disclosing caution letters / warning letters received from SEBI to stock exchanges. In this write up we shall analyse these warning letters / caution letters to understand its relevance and implications it may have on listed entities.

Analysis of warnings and caution notices by regulator

Warning letters are disclosed to stock exchange under point 20, para-A, Part A of schedule III. Warnings letters are issued by SEBI mainly for cautioning against the violation done by listed entities pertaining to any SEBI regulations, inadequate disclosures under various SEBI regulations, delayed disclosures under various SEBI regulations or circulars thereof. Warnings are also issued by SEBI to listed entities for violation of laws that are applicable to the business of the company. Viz. Violation of depositories and participants regulations, stock brokers regulation, merchant bankers regulations, etc. SEBI issues warnings with directions to the company and its board of directors. Warnings issued by SEBI are of various nature:

1. Requiring disclosure to stock exchange: SEBI asks listed entities to disclose the warning letter to the stock exchange. This is to ensure that the market and board of directors are aware of such a warning.

2. Requiring a warning letter along with corrective action to be placed before the board of directors: SEBI asking to place warning letters before the board of directors. Further SEBI asks the management to chalk down measures to rectify this and place it before the board of directors so that this is not repeated in future. SEBI directs companies to place these corrective measures taken to rectify non-compliance before the board of directors and further asking companies to reply to SEBI highlighting whether board of directors of listed companies are satisfied with the corrective steps taken by listed company. This is crucial as the company will have to keep in mind placing the warning letter before the board of directors.

3. Warning letters and performance evaluation: SEBI has been directing the board of directors of listed companies to consider this warning letter while doing performance evaluation of concerned individuals who are responsible for lapses or non-compliance.

Disclosure of min. information alongwith warning notices

Disclosure of warning letters or caution notices are made pursuant to point 20 of Para A, Part A, Schedule III of SEBI LODR. Point 20 provides for certain information required to be disclosed viz. name of authority, nature and details of action taken, initiated or order(s) passed, date of receipt of communication, date of violation and financial impact, if any. While disclosing details of warning letters or caution notices minimum details as are stated above shall be disclosed.

Whether it would be necessary to disclose warning letters or caution notices issued to subsidiary companies as well?

As per regulation 30(9) of SEBI LODR listed entity shall disclose all events or information with respect to subsidiaries which are material for listed company. So, regulation 30(9) read with Point 20, Para A, Part A of Schedule III of SEBI LODR listed entity will have to disclose to stock exchange warnings or caution notices issued to subsidiary companies by any regulatory authority alongwith minimum details as stated above.

Whether SEBI initiates adjudication proceedings on same issue for which warning letter is already issued?

There have been cases where SEBI has initiated adjudication proceedings in spite of issuance of warning letters. SEBI on issuance of warning letters or caution notices had directed listed companies to take corrective action. Where listed companies have failed to take corrective action, SEBI has initiated adjudication proceedings against the listed companies.

Recalling of warning letter or caution letter by SEBI: In a recent case subsidiary of a big private sector bank was issued warning by SEBI highlighting non-compliance with certain SEBI regulations. Subsidiary company submitted response to SEBI highlighting compliances done by them with respect to SEBI regulations in respect of which warning letter was issued. SEBI taking note of responses recalled the warning letter. This highlights that appropriate response to warnings issued by SEBI would help them rectified timely. Also, it is important that once warning or caution letters are cancelled adequate and timely disclosure in this regard is sent to the stock exchange.

Conclusion.

In conclusion, it is pertinent to note that, receipt of warning letter from SEBI highlights an existence of a considerable non-compliance. Therefore, the companies are expected to take the issue of warning letter by SEBI very seriously and should take adequate precautions to avoid receipt of such letters. Companies should most prominently be mindful of procedural non-compliances which often result in to receipt of warning letters.

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This article is written by Mr. Vallabh M Joshi – Senior Manager – vallabhjoshi@mmjc.in

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