ABSTRACT:
This research paper gives an in-depth understanding of the Securities and Exchange Board of India [1](hereafter mentioned as ‘SEBI’) and its Listing Obligations and Disclosure Requirements Regulation (hereafter mentioned as ‘LODR regulations’). It mainly implies the Second Amendment to the LODR regulations. It gives a detailed explanation of the amendment. The latest amendment states guidelines for the protection of the investors, requirement for shareholder approval for special rights, disclosure of all the material, fulfillment of vacancy, and more such obligations have been stated below. This paper examines the key changes brought about by the Second Amendment and explores their potential implications on the Indian capital markets. By evaluating the impact of these regulatory changes, this study seeks to contribute to the understanding of the evolving regulatory landscape in India.
KEYWORDS :
SEBI – LODR – LODR Second Amendment – Disclosure of Agreements – Intimation to Stock Exchange
INTRODUCTION:
SEBI is a regulatory body that oversees and regulates the securities markets, including stock exchanges, mutual funds, and various financial intermediaries. SEBI’s main role is to protect the interests of investors and promote fair and transparent functioning of the securities market in India. LODR stands for Listing Obligations and Disclosure Requirements. It refers to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, which are a set of regulations introduced by the Securities and Exchange Board of India (SEBI). These regulations lay down the obligations and requirements that companies listed on Indian stock exchanges must follow in terms of corporate governance, disclosure of information, and other related matters. The LODR regulations aim to enhance transparency, accountability, and investor protection in the Indian securities market. An amendment refers to a change, alteration, or modification made to an existing law, regulation, document, contract, or any other formal agreement. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) have been amended and came into force on the 30th day of June 15, 2023. The amendments are mentioned in detail below.
BACKGROUND:
Necessity of the amendments to the LODR Regulations as amendments to the Listing Obligations and Disclosure Requirements (LODR) regulations are introduced to address the evolving dynamics of the market, enhance corporate governance, promote transparency, and align regulatory frameworks with global best practices. Various factors contribute to the necessity of amending LODR regulations:
- Adapting to Dynamic Market Conditions: The financial and economic landscape experiences constant change, necessitating amendments to LODR regulations to accommodate emerging market trends, technologies, and business models.
- Elevating Transparency: Transparency is paramount to instilling investor confidence. If existing regulations are deemed inadequate in ensuring transparency in financial reporting, related party transactions, or other disclosures, amendments may be proposed to bridge these gaps.
- Reinforcing Corporate Governance: Effective corporate governance is pivotal for a well-functioning market. When existing governance practices fall short or instances of corporate misconduct arise, amendments are introduced to fortify governance norms and bolster board oversight.
- Safeguarding Investor Interests: Regulatory bodies strive to protect investors by ensuring they have access to accurate and timely information about the companies they invest in. Amendments could be suggested to enhance the quality of information available to investors.
- Harmonizing with International Standards: As financial markets become increasingly interconnected, there’s a trend toward aligning regulatory standards with international best practices. LODR regulations might be revised to align with global standards, thus enhancing India’s appeal to foreign investors.
- Closing Regulatory Gaps: Over time, companies might exploit regulatory gaps or loopholes to their advantage. Amendments serve to rectify these issues, preventing misuse and ensuring regulatory completeness.
- Mitigating Regulatory Arbitrage: Some companies may exploit regulatory disparities to gain undue advantages. Amendments may be introduced to ensure equitable and uniform treatment of all market participants.
- Updating Disclosure Requirements: Businesses evolve, and new risks emerge. Amendments can reflect changes in materiality and ensure that disclosure requirements remain pertinent to investors’ needs.
- Enhancing Enforcement and Compliance: If regulatory bodies identify non-compliance or shortcomings in enforcement mechanisms, amendments may be recommended to enhance compliance and enforcement processes.
- Incorporating Stakeholder Feedback: Regulatory bodies often seek input from market participants, including companies, investors, and industry experts. If a consensus emerges that certain aspects of the regulations require improvement, amendments can be proposed based on this valuable feedback.
Therefore, the drive to adapt to changing market dynamics, enhance investor protection, elevate corporate governance, and uphold the integrity of the securities market propels amendments to LODR regulations. The objective is to establish a regulatory environment that fosters transparency, accountability, and equitable market practices.
RESEARCH METHODOLOGY:
To study the amended LODR Regulations, a mixed-method research approach will be employed. This approach will involve both qualitative and quantitative methods to gather comprehensive data and insights. The research will encompass the following steps:
- Literature Review: Understanding the existing LODR Regulations and any amendments that have been made. Review relevant literature, research papers, and legal documents to gain a comprehensive understanding of the regulatory framework.
- Research Objectives: Analysed the impact of specific amendments, assessed compliance levels, and defined the scope of this research.
- Regulatory Impact Assessment: This research aims to assess the impact of amended regulations, comparing data before and after the amendments. This could involve comparing financial indicators, market trends, compliance reports, and other relevant factors.
- Stakeholder Perspectives: Exploring perceptions and opinions, and analyzing the qualitative data to identify common themes, concerns, and suggestions expressed by the stakeholders.
- Interpretation of Findings: Interpreted the results of analysis in the context of the LODR Regulations and the objectives of your research. Discussed the implications of findings for listed companies, investors, and regulatory authorities.
REVIEW OF LITERATURE:
The literature review will focus on academic research, industry reports, and publications related to the Amended LODR Regulations. Key areas to be covered in the literature review include:
- Introduction to LODR Regulations. This section shall cover a brief overview of LODR regulations and their significance in regulating listed companies and the discussion of the regulatory authority and its role.
- Applicability of the regulations: Assessing the applicability of the amended LODR Regulations.
- Key changes introduced by the LODR Second Amendment Regulations, 2023: Discuss in depth the changes made in the recent LODR regulations amendment.
By conducting a comprehensive literature review and employing a mixed-method research approach, this research paper aims to provide a comprehensive understanding of the amended LODR Regulations. The findings will contribute to the existing body of knowledge and inform legal professionals, policymakers, and stakeholders about the implications and challenges of the same.
ANALYSIS:
The Securities and Exchange Board of India (SEBI) has made several amendments to the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015. These amendments, which were notified on July 4, 2023, are known as the LODR Second Amendment Regulations, 2023.
The significant changes brought about by the LODR Second Amendment Regulations, 2023 include:
- Enhanced Disclosure Obligations for Agreements: Listed companies are now mandated to disclose all significant agreements, encompassing acquisition, shareholder, joint venture, family settlement, and agreements/contracts with media entities. This includes any binding agreements that deviate from routine business operations. This modification is designed to augment transparency and furnish shareholders with comprehensive insights into the entity’s commercial transactions.
- Mandatory Shareholder Approval for Special Rights: Any distinctive privileges extended to shareholders of a listed company, such as authority to veto board decisions or entitlement to increased dividends, will now require endorsement from shareholders via a special resolution in a general meeting. This amendment aims to ensure that shareholders actively participate in decisions concerning these distinct privileges.
- Obligation to Confirm, Deny, or Clarify News Reports: The revised regulations mandate listed companies to promptly confirm, deny, or provide clarifications on news reports that are not general within 24 hours of their publication. This alteration intends to counter the dissemination of misleading information and ensure that investors have access to accurate details about listed entities.
- Mandatory Whistleblowing Policy: The updated regulations necessitate listed entities to establish a whistleblowing policy that facilitates employees in reporting potential misconduct. This amendment strives to cultivate a culture of adherence to regulations and ethical conduct within listed companies.
- Compulsory Appointment of a Compliance Officer: The amendment necessitates the appointment of a compliance officer by listed entities, responsible for ensuring compliance with the LODR Regulations. The compliance officer is expected to hold a senior-level executive position with proficiency in corporate governance and compliance matters.
- Regular Training Obligations: Listed entities are now required to conduct consistent training sessions for their workforce, acquainting them with the intricacies of the LODR Regulations. This training endeavor is intended to help employees comprehend their responsibilities as dictated by the regulations and enable them to recognize and report potential instances of non-compliance.
In Regulation 17, following Sub-regulation (1C), the subsequent sub-regulations shall be incorporated, as follows:
- Sub-regulation (1D) Implementation: Effective from April 1, 2024, the continuation of a director serving on the board of directors of a listed company shall necessitate approval by shareholders in a general meeting, at least once every five years from their initial appointment or reappointment date, as applicable.
- Approval Requirement for Directors as of March 31, 2024: Directors serving on the board of directors of a listed company as of March 31, 2024, without shareholder approval for the preceding five years or more, shall require endorsement by shareholders in the first general meeting after March 31, 2024.
- Exemptions for Specific Director Categories: Notably, this requirement shall not be binding on Whole-Time Directors, Managing Directors, Managers, Independent Directors, or Directors retiring according to subsection (6) of Section 152 of the Companies Act, 2013. This exemption is applicable if shareholder approval for the reappointment or continuation of these directors or Managers is governed by the stipulations outlined in these regulations or the Companies Act, 2013, and such stipulations have been duly complied with.
- Exclusions for Certain Director Appointments: Furthermore, this requirement shall not be pertinent to directors appointed according to the order of a Court or a Tribunal, or nominee directors of the Government on the board of a listed company (excluding public sector enterprises). Similarly, directors nominated by financial sector regulators on the board of a listed company and directors nominated by financial institutions registered with or regulated by the Reserve Bank of India under standard lending arrangements or nominated by a Debenture Trustee registered with the Board under a subscription agreement for debentures issued by the listed company shall also be exempt from this requirement.
Following Regulation 26, a new regulation is introduced titled “Vacancies concerning Designated Key Managerial Personnel”. When a vacancy arises in a position, it necessitates the appointment of an individual during the interim period. This interim appointee serves the purpose of managing the position’s responsibilities until a suitable candidate is found to occupy the role regularly. However, this modified regulation stipulates that the interim appointee must also meet the qualification criteria for a compliance officer, specifically being a qualified company secretary as defined in Regulation 6(1). Furthermore, all obligations prescribed by pertinent laws apply to this individual appointed for the interim duration.
Vacancies in the position of a director may be attributed to various factors including the completion of their tenure, voluntary resignation, demise, removal, disqualification, or debarment. In instances of directorial vacancies, the following parameters are significant:
- Prompt Filling of Directorial Vacancies: The entity is obligated to promptly fill directorial vacancies, ensuring compliance with Regulation 17(1E). This stipulates that the vacancy should be filled at the earliest and, under all circumstances, within a maximum period of 3 months from the date of the vacancy’s occurrence.
- Vacancy Due to Completion of Pre-fixed Tenure: For cases where a director’s cessation is a result of the completion of a predetermined tenure, the vacancy must be fulfilled on or before the date of such cessation. This is particularly crucial when the vacancy leads to non-compliance with board composition requirements under Regulation 17(1).
The timeline for filling a vacancy depends on the nature of the vacancy and its impact on board composition:
- Casual Vacancy and Board Thickness: The applicability of Section 161(4) of the Companies Act, 2013 is restricted to directors appointed by shareholders. If, for instance, the director was an additional director not ratified by shareholders, the rules of casual vacancy do not apply. Additionally, if a listed entity’s board is adequately constituted, allowing vacancies to remain unfilled as per articles or regulations and if the decision is made not to fill the vacancy, this is acceptable.
- Immediate Filling for Composition Deviation: If a vacancy results in a deviation from board composition norms (e.g., falling below the minimum required directors, independent directors, or a single women director’s office becomes vacant), and the vacancy was foreseeable (not due to unforeseen events like death or sudden resignation), immediate filling of the vacancy is essential from the date of its occurrence.
For instance, if a director’s tenure is set to expire on September 30, 2023, the entity is aware of the date of vacation in advance. Consequently, the vacancy created to post the expiry of the director’s tenure must be filled on or before September 30, 2023.
Following Regulation 30, the subsequent regulation shall be added, referred to as “Disclosure Requirements for Specified Types of Binding Agreements by Listed Entities: Regulation 30A”.
This new regulation delineates quantitative criteria governing the disclosure of material events or information as stipulated in Regulation 30(4). The criteria mandate that the omission of an event or information, that holds a value or expected impact in terms of value, surpasses any of the following thresholds:
- 2% of Turnover: This threshold is based on the last audited consolidated financial statements.
- 2% of Net Worth: This is derived from the last audited consolidated financial statements of the listed entity, excluding cases where the arithmetic value of net worth is negative.
- 5% of Average Absolute Profit or Loss after Tax: This threshold is computed from the average of the absolute value of profit or loss after tax, as outlined in the last three audited consolidated financial statements of the listed entity.
These specified thresholds are predicated on the data provided by the last audited consolidated financial statements of the listed entity. For the current financial year, which marks the first year of applicability, these thresholds will be determined based on the consolidated financial statements as of March 31, 2023. In instances involving profit-related parameters, an average of the last three fiscal years (FYs) – namely, FY 22-23, 21-22, and 20-21 – must be taken into account.
Regarding items categorized under Paragraph A of Part A of Schedule III, the notion of significant market reaction is considered irrelevant since these items are inherently deemed material events. Conversely, for items under Paragraph B, the crossing of a numerical threshold inherently triggers a significant market reaction.
Beyond these scenarios, guidance within the policy framework should facilitate the identification of events that lead to substantial market reactions. The parameters or limits for this identification may either align with Regulation 30(4) or show slight variations. However, the parameters should not greatly exceed the thresholds outlined in the regulation. The underlying goal is to establish a threshold that indicates the potential impact on the prices of listed securities.
Following Regulation 37, a new regulation shall be introduced, titled “Regulation 37A – Sale, Lease, or Disposal of an Undertaking Outside Scheme of Arrangement”.
This new regulation governs listed entities engaging in the sale, lease, or disposal of the entirety or significantly the entirety of the undertaking. If the entity possesses multiple undertakings, this regulation applies to the entire or significantly the entire undertaking of any of these entities. Listed entities carrying out such transactions are mandated to adhere to the following provisions:
- Prior Shareholder Approval: The listed entity is required to obtain prior approval from shareholders through a special resolution before executing the sale, lease, or disposal.
- Disclosure of Objectives and Commercial Rationale: The entity must disclose the purpose and commercial reasoning behind the sale, lease, or disposal of the entire or substantially the entire undertaking in the statement appended to the notice dispatched to shareholders. Additionally, the utilization of the proceeds resulting from this transaction must also be disclosed.
Moreover, there are two key provisos outlined within this regulation:
- Voting Threshold: The special resolution garnered from shareholders will be implemented only if the votes cast in favor of the resolution by public shareholders exceed the votes cast against it by these public shareholders.
- Voting Restriction for Interested Shareholders: Public shareholders who are directly or indirectly involved in the sale, lease, or disposal of the entire or substantially the entire undertaking of the listed entity are precluded from participating in the voting process for this resolution.
Regulation 57 will be replaced with the subsequent text, which reads as follows:
“Notification to Stock Exchanges – Regulation 57:
The listed entity is obligated to furnish a certificate to the stock exchange concerning the current status of interest payment, dividend distribution, or principal repayment or redemption of non-convertible securities. This should be executed within a single working day from the due date of such obligations. The manner and format of submission shall adhere to the specifications set forth by the Board, subject to periodic updates.”
SUGGESTIONS:
The amendments introduced through the LODR Second Amendment Regulations, 2023 represent a notable stride towards enhancing the standards of corporate governance and transparency within India’s listed entities. By adhering to these recommendations, listed companies can effectively demonstrate their unwavering commitment to sound corporate governance and safeguarding investor interests.
To effectively align with the new disclosure mandates, listed entities should establish a robust disclosure framework. This framework must encompass well-defined policies and protocols for the identification, evaluation, and disclosure of material events and information.
Furthermore, listed entities must fortify their corporate governance mechanisms to ensure full compliance with the newly introduced requirements. This encompasses maintaining a requisite number of independent directors on the board, ensuring active participation of independent directors in board meetings, and instituting dedicated risk management and compliance committees.
To expedite the submission of financial results, a reduction in the timeframe could be explored. Presently, listed corporations are mandated to submit their financial results to stock exchanges within 45 days after the conclusion of a quarter or half-year period. Furthermore, advocating for enhanced transparency, listed entities should be urged to provide more comprehensive insights into their operational activities and financial performance.
To facilitate streamlined procedures for investors lodging complaints against listed entities, improvements could be made. Moreover, an augmentation in the penalties imposed on listed companies found in contravention of the LODR regulations could serve as a deterrent against non-compliance.
CONCLUSION:
SEBI (Securities and Exchange Board of India) plays an indispensable role in upholding the integrity and stability of the Indian securities market. Through the enforcement of regulations, facilitation of transparency, and safeguarding of investor interests, SEBI actively contributes to the advancement and expansion of India’s economy. These amendments are strategically designed to bolster transparency, foster accountability, and bolster protection for shareholders. Given the intricate nature of these regulatory modifications, listed entities must seek expert guidance to ensure comprehensive adherence to all stipulations. By proactively aligning themselves with these regulations, listed entities can effectively underscore their dedication to the principles of robust corporate governance and investor safeguarding.
Name: SAHIL CHIRAG GALA
College: SVKM’s Pravin Gandhi College of Law
[1] SEBI, https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=3&smid=0 (last visited Aug 14, 2023).