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Listed Companies Beware of Clause no.36

G S Rao , Last updated: 08 August 2015  

Introduction: SEBI’s recent order against New Delhi Television Ltd(NDTV) for violation of Clause no.36  of listing agreement is a matter of concern for all  listed entities. SEBI slapped a fine of Rs.2 crores on NDTV for its failure to disclose to stock exchanges about a tax demand of Rs.450 crores raised by the Income tax Assessing officer.In fact Clause no.36 is not taken very seriously by some of the listed companies for the reason that prima facie listed entities feel that reporting under this clause is discretionary. This articleanalyses Clause no.36, order of SEBI and concludes with lessons that are to be learnt from this order.

About listing agreement:

Companies which intend to get their Securities listedon stock exchanges are required to make an application to the stock exchanges. On fulfillment of listing criteria and furnishing information,  the applicant company will be required to  sign  a listing agreement(LA)

LA contains several clauses which impose an obligation on the listed entity to furnish information about the company on regular basis and in certain cases on happening of certain events. Violation of listing agreement will attract penalty and delisting of shares. The advantage of listing of shares is that investors can freely trade shares of listed entity in the stock market for values quoted on the stock exchange.

SEBI’s Directions on Compliance of Listing agreement

Listing department of Stock exchange monitors the compliance of these clauses and issues show cause notices for any detected violation of listing agreement.

SEBI vide its circular no.CIR/MRD/DSA/31/2013 dated September 30, 2013 streamlined the process for taking actions against errant listed companiesand laid down  SOP for dealing with violations. It further advised stock exchanges to put in place a mechanism to monitorand file reports of compliance of provisions of listing agreement.

SEBI by its subsequent Circularno.CIR/CFD/POLICYCELL/13/2013 dated 18th November, 2013, advised stock exchanges to strengthen the monitoring mechanism to assess the adequacy or correctness of disclosures/information filed by the listed entities as it will help investors to take decision as to whether to invest/stay invested. Itdirected that monitoring be made covering Top 500 companies in respect of compliance of important clauses such as Clause no.35 (shareholding pattern),Clauseno.36(Disclosure of price sensitive events),Clause no.41(Quarterly/yearly unaudited/audited financialresults) and Clause no.49(Corporate Governance) and  to take action if disclosures are found to be inadequate/inaccurate.

In the above background, a guidance note has been issued by Stock exchangesto guide listed entities as to which events constitute price sensitive information and the manner ofdisclosure as per Clause no.36

About Clause no.36:

Let us have a close look at the wordings of clause 36 of NSE


Apart from complying with all specific requirements as above, the Company will keep the Exchange informed of events such as strikes, lock-outs, closure on account of power cuts, etc. both at the time of occurrence of the event and subsequently after the cessation of the event in order to enable the shareholders and the public to appraise the position of the Company and to avoid the establishment of false market in its securities In addition, the Company will furnish to the Exchange on request such information concerning the Company as the Exchange may reasonably require. The Company will also immediately inform the Exchange of all the events, which will have bearing on the performance/operations of the company as well as price sensitive information.


(Emphasis is on bold)

It would be clear from the above that a listed company is required to

i. intimate immediately events such as strikes, lock-outs, closure on account of power cuts, etc. both at the time of occurrence of the event and subsequently after the cessation of the event to enable shareholders and public to assess the impact of events on performance or operations of the company

ii. intimate any other price sensitive information

The said clause further illustrated the following as events which must be reported immediately:-

i. Change in the nature of business

ii. Disruption in operations due to natural calamities

iii. Commencement of commercial production or operations of any new unit/division.

iv. Developments with regard to pricing /realization arising out of change in Regulatory frame work.

v. Any litigation or dispute and developments outcome which can reasonably be expected to have a material impact on  its present or future operations.

vi. Revision in ratings

vii. Any other price sensitive information such as, issue of shares/forfeiture of shares, amalgamations, acquisitions, amalgamation,merger or demerger, cancellation of dividend/rights/bonus etc

The clause has thus indicated some illustrative cases treating them as price sensitive events but disclosure is not limited to those only but it can encompass any similar events which may have a significant or material impact on performance or operations of the company.

The crucial question is -who will judge what is material? If it is left to the company, it may not report and justify on the ground that it is not material. This issue of materiality has been discussed by SEBI in the NDTVcase with some clarity.

About Guidance note 

BSE vide its circular no.DCS/COMP/11/2014-15  issued  a Guidance note to assist and guide listed companies mainly to educate as to which events need to be disclosed and what would constitute relevant details with respect to the obligation for making continuous disclosures as per Clause 36 of Listing agreement. BSE in its circular states as follows:-

"The companies are urged to submit comprehensive disclosures relating to material events, as they develop or crystallise, from time to time,"

With the above background, it will be appropriate to analyzeNDTV ‘s case for better appreciation of the issues involved and final order.

Brief facts of the case

On 21st February,2014,NDTV had received a tax demand of Rs. 450 crores from the income tax department for the Assessment Year 2009-10. It did not inform the stock exchanges about this demand immediately on its receipt but  ithad informed on or about 26th May/29th May,2014 that tooon a clarification sought by Stock exchanges.  A show cause notice dated 12th February, 2015was issued by SEBI under Rule 4(1) of SCR Adjudication Rules, asking NDTV to explain its stand on alleged violation of Clause no.36

NDTV’s Stand:

Exercise of judgment by Management

NDTV in its reply to show cause explained thatits Management has taken a view that the demand was not material based on the advice of its Tax consultant and mentioned further in its defence about subsequent events such as report of Auditors and disclosures in financial statements.It tried to justify that the management has applied its mind to decide whether the event is material or not and its impact on the profits or performance of the company.

On materiality:

It  contended that the guidance note issued by BSE specifically mentions that disclosure requirement triggers only when the event has a material impact on the profits of the company and in its view the tax demand in question is not material as it relied on tax consultant’s advice ,supported by stay obtained from ITAT and  also on report of auditors

Impact on investors/shareholders

It demonstrated that there was no impact on price movement even after disclosure was made available to the public.There is no complaint about any loss either from the shareholder or investors. SEBI has in fact found these statements to be true.

NDTV relied on Hindustan Steel Ltd  Vs State of Orissa(1969) 2 SCC 627 case and pleaded for not imposing penalty even if it is held that there is a breach as such breach is not deliberate but  is a result of its bonafide belief that demand is not sustainable and therefore non disclosure  did not have any material impact.

SEBI’s Findings and order

On failure to intimate

SEBI noted that NDTV received Tax demand on 21st Feb 2014 but did not disclose the information till 29th May,2014 and even this disclosure was made in response to an inquiry from Stock exchanges. NDTV placed reliance only on interpretation of Clause no.36 and ignored the elaborate guidance note which was issued to make disclosures comprehensive for better appreciation of investors/shareholders. Further NDTV did not inform or furnish sufficient evidence to justify decision of management on assessment of materiality of demand.Therefore non-disclosure of information immediately on the happening of eventamounts violation of Clause no.36.

On materiality:

Nondisclosure of demand of 450 crores, is material, considering the revenue of 350 crores and continuous losses of the company for the past 5 years.It also rejected the contention that there was no impact on price movement post disclosure so as to affect the investors’ decision to invest or stay invested or  exit from the company.


SEBI held  that NDTV had not complied with the Clause no.36 read with guidance note in true letter and spirit. SEBI relied on the decision ofSEBI Vs Shri Ram Mutual Fund LtdSCL 216(SC)wherein it was held that intention of the parties committing such violation becomes wholly irrelevant.SEBI imposed a penalty of Rs.25,00,000/- under section 23 I of Securities Contract(Regulations) Act 1956 read with Rule 5 of SCRA Adjudication Rules and a penalty of Rs.1.75 crores for violation of section 23E of SCRA

Comments on order

The adjudicating officer did not find any evidence with regard to disproportionate gain or amount of loss to investor group or repeated violation by NDTV in this case yet, a huge amount of fine was levied. The author is of the view that firstly levy of penalty of 2 crores appears to be very harsh considering the fact that NDTV obtained a stay from ITAT and subsequently got it extended byDeli high court. Secondly SEBI dismissing these as post developmentsand ignoring also appears to be unreasonable. No one will dispute the fact that such disclosures would bring transparency and pave way for good corporate governance. SEBI’s observation that non-disclosure of substantial demand (450 crores) would have material impact also cannot be disregarded. But SEBI was harsh in rejecting the defence of NDTV that it relied on advice of Tax consultant and managements view. Unfortunately Adjudicating officer also ignored other ultimate defence that there is no share price fluctuation even after disclosure is made public.


The author is of the view that NDTV’s case is an example to understand the intentions of market Regulator and many more such orders may follow.ObviouslySEBI wanted to send a strong message that compliance of listing agreement will be strictly monitored and errant companies will be punished.Therefore it would be safer for  all listed companies  to inform about all litigation demands or  qualify the unsustainable demands with judgments/views of management,to escape penalties.

Tags: Listing agreement, Clause no.36, Securities Contract(Regulation) Act,1956
SCRA  adjudication Rules

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Published by

G S Rao
(Deputy General Manager)
Category Corporate Law   Report

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