The Indian securities market regulator – Securities and Exchange Board of India (SEBI) had constituted an expert committee last year for facilitating ease of doing business for listed companies, in line with the overall goals of the Indian Government. The expert committee (Committee) has published its final report on June 26, 2024 (Report) recommending significant changes to the two primary securities legislations in India – the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations or LODR) and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations or ICDR).
The key changes recommended by the Committee under the Report inter alia include the following:
Integration of Periodic Filings
Currently, listed companies are required to make a number of filings on a periodic basis i.e., quarterly / half-yearly / annual, under the LODR Regulations. In order to minimize the number of filings that need to be done on a periodic basis and reduce fragmentation and duplication of information, the Committee has recommended merging various filings under two broad heads – (a) Governance related filings (corporate governance report, statement on redressal of investor grievance etc.); and (b) Financial related filings (financial results, statement of deviation in use of proceeds, related party transactions etc.). An illustrative list of the filings being merged, and the formats of the Integrated Filing (Governance) and Integrated Filing (Financial) have been provided as annexures to the Report. The Committee has also recommended that listed companies would be required to submit the Integrated Filing (Governance) within 30 days from the end of the quarter / half-year / year and the Integrated Filing (Financial) within 45 days (or 60 days for the last quarter) from the end of the quarter / half-year to the stock exchanges. Given that more than 99% of shares of listed companies are held in dematerialized form, the Committee has also recommended doing away with certain filings required under the LODR in relation to shares held in physical form.
Obligation on Promoters, Directors, Key Managerial Personnel (KMPs) for Disclosure of Information to Companies
The Committee noted that currently there is no provision under the LODR casting a specific obligation on the promoters, directors, KMPs of the listed entity to disclose their relatives and interest in other body corporates, which are required for assessing ‘related parties’ and ‘promoter group’ of the listed entity in terms of the LODR. This means that the company has to rely on the information and confirmations provided by a promoter/ director / KMP with respect to disclosures on ‘promoter group’ and ‘related parties’. However, incorrect disclosures by a listed entity have penal consequences even if they are as a result of non-receipt / receipt of incorrect information from its promoters / directors / KMPs. Therefore, the Committee has recommended adding a specific provision under the LODR that would cast an obligations on the promoters, directors and KMPs to disclose all information to the company that would be relevant and necessary for it to ensure compliance with applicable laws.
Post-facto Ratification of Related Party Transactions (RPTs) by Audit Committee
Under the LODR, any related party transaction (RPT) requires a prior approval from the audit committee of the listed company. Now, in order to ensure continuity of business for urgent transactions and avoid listed entities from being penalised due to genuine reasons, the Committee has recommended that an audit committee of a listed company should be able to provide post-facto ratification for RPTs undertaken by the listed company or any of its unlisted subsidiaries within a period of 3 months from the date of the transaction. In this regard, the value of the RPT, whether entered into individually or taken together, during a financial year should not exceed INR 10 million and the rationale for inability to seek prior approval for the transaction should be placed before the audit committee at the time of seeking ratification.
Timeline for Disclosure of Material Events/Information
The LODR was amended last year to mandate that any decision taken by the board of directors of a listed company with respect to an event/information that is considered ‘material’ in terms of the LODR, would need to be disclosed to the stock exchanges within 30 minutes from the closure of the board meeting. This had caused significant compliance challenges for listed companies. Therefore, the Committee has recommended to provide certain flexibility to listed companies in case where the board meeting is conducted after trading hours, as the market will have sufficient time to absorb the information before beginning of the next trading hours. Specifically, the Committee has recommended that if a board meeting closes after the normal trading hours but more than 3 hours before the beginning of the next normal trading hours, the disclosure would need to be made within 3 hours from the closure of the board meeting. On the other hand, if a board meeting closes during the normal trading hours or within 3 hours before the beginning of the normal trading hours, the disclosure shall continue to be made within 30 minutes from the closure of the board meeting.
Disclosure of Tax Litigations/Disputes and Imposition of Penalties
As mentioned above, the LODR was amended last year to significantly amend the stock exchange disclosure framework under the LODR. As part of these amendments, the listed companies were now mandated to disclose any action initiated, action taken or order passed by a regulatory or judicial authority against the listed company or any of its subsidiaries, without the application of any materiality threshold. This caused listed companies to make a lot more disclosures regarding show cause notices and insignificant fines imposed by regulatory authorities (especially tax authorities). Therefore, in order to ease the compliance burden, the Committee has recommended to add a clarification that all tax related notices/demands/disputes/litigations would only need to be disclosed if they are ‘material’ in terms of the LODR. Further, the Committee has also recommended to add a materiality threshold for disclosures made regarding imposition of penalties by regulatory or other authorities, with the threshold being INR 10,000 for penalties imposed by sectoral regulators or enforcement agencies and INR 1,000,000 for penalties imposed by other authorities.
Postal Ballots and Virtual Shareholder Meetings
Under Indian company laws, certain matters have to be necessarily transacted through a postal ballot, wherein the shareholders are sent the notice and have a period of 30 days to send in their approval/rejection with respect to the proposed resolutions through the physical postal ballot. However, listed companies have the obligation under the LODR to provide e-voting facility for all its shareholder resolutions. Therefore, with the introduction of electronic voting systems, the concept of postal ballots has lost its relevance. In this light, the Committee has recommended to do away with the requirement of sending and receiving votes through physical postal ballot papers for listed companies. For the listed companies, postal ballots can be substituted by remote e-voting and the time period for such remote e-voting can be suitably shortened to 7 days (instead of existing 30 days period).
Further, under Indian company laws, there is no enabling provision that allows companies to conduct their shareholder meetings through video conferencing and other audio visual means (VC / OAVM). While the companies were allowed to conduct their shareholder meetings through VC / OAVM during the Covid-19 pandemic, there is no specific legislative provision allowing the same. The Committee noted that globally, shareholder meetings through virtual modes are being allowed, as the same eliminates geographical barriers and facilitates more and more shareholder participation. Therefore, the Committee has recommended permitting listed entities to hold general meetings through VC /OAVM or in a hybrid mode on a permanent basis and accordingly, the notice period for such virtual meetings of a listed entity may be suitably reduced from the existing 21 days’ requirement.
Alignment of Disclosures of Material Litigations and Material Agreements between Listed and To-be Listed Companies
Currently, the ICDR requires to-be listed companies to make disclosure of material litigation in the public issue offer document, basis the materiality policy adopted by the board of directors of such company. However, the LODR provides a quantitative materiality threshold under the LODR which has to be followed by listed companies for making disclosures regarding pending litigations. This means that several litigations may only be disclosed to the public once the company gets listed and bound by the provisions of the LODR. Further, the LODR requires listed companies to disclose actions taken by regulatory and statutory against KMPs and members of senior management of the company, however, a similar disclosure requirement is not present under the ICDR for to-be listed companies. Therefore, the Committee has recommended to align the provisions of ICDR with the LODR and mandating to-be listed companies to make similar public disclosures as are required of listed companies under the LODR.
Further, under the LODR, a listed company is required to make public disclosure of all agreements that are entered into by shareholders, promoters, directors etc. whose purpose is to impact management or control over the listed entity or create any restriction or liability on the listed entity. However, similar disclosures are not required from to-be listed companies under the ICDR which leads to such agreements being disclosed to the public for the first time after listing. Therefore, the Committee has recommended aligning the ICDR with the LODR and mandating to-be listed companies to make public disclosure of all such agreements that are impacting the management or control of the company or creating any restriction or liability on the company, whether entered into by the company itself or any of its promoters, shareholders, directors or KMPs.
The Report has also suggested several other changes, amended text for the relevant provisions of the LODR and ICDR as well as draft formats for the revised filings/disclosures requirements proposed under the Report.