SEBI has issued on September 11, 2020, a consultation paper recommending amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (hereinafter referred to as “Listing Regulations”) which have wide-spread ramifications. Before making the amendments operational, SEBI has elicited responses from the stakeholders on the proposal's latest by October 11, 2020, so that these could be considered before implementation of the recommendations.
A critical analysis of the recommendations is as follows:
1) Insert of new sub-regulation (2)
Several additional compliances are called for in respect of companies that figure in the top 100/500/1000 list of companies based on their market cap in the previous year. Such compliances relate to the appointment of Independent women director, setting up of Risk Management Committee, provision of one-way webcasting of proceedings of general meetings, etc. SEBI has observed, disconcertingly, that companies have a tendency to discontinue such compliances once they are out of the above categories due to drop in their market caps. Corporate Governance standards cannot by any means be allowed to oscillate depending upon whether a company satisfies certain benchmarks or not. SEBI has therefore recommended that such additional compliances shall continue, regardless of the fall in market cap of the ranked categories of companies.
2) Insert of Second Proviso under Regulation 15(2)(a)
Companies having a paid-up capital of rupees ten crore or net worth of rupees twenty-five crore are required to comply with the requirements relating to corporate governance as laid down under Regulation 17 to 27 and other regulations. Companies have a tendency to discontinue such compliances once they fall off from such precipice. Corporate Governance is always non-negotiable and Companies will have to continue to ensure compliances, irrespective of a fall in their thresholds.
3) Regulation 24(5)-Disposal of investments in material subsidiaries
At present, listed companies cannot dispose of their holdings in material subsidiaries resulting in a reduction of its shareholding (either on its own or through its subsidiaries) to less than fifty percent or when there is the cessation of control over the subsidiary without a special resolution except in cases where such divestment is made under an arrangement approved by the Court or Tribunal or under a resolution plan duly approved under Section 31 of Insolvency Code and such event has to be disclosed within one day of the resolution plan being approved.
SEBI has observed that such disclosure is not ensured when the disposal of the investment results in the shareholding being reduced to fifty percent. As there is a loss in the status of the investee company as a Subsidiary even when the holding drops to fifty percent, to prevent abuse of this sub-regulation, SEBI has recommended that disclosure be made even where the disposal is “less than or equal to fifty percent”.
4) Regulation 30(6)-Timelines for Disclosure of material information
Pursuant to the above Regulation, the information set out in Part A of Para A in Schedule III has to be sent to the Exchanges within twenty-four hours from the happening of the event. In case of any delay in making such information available beyond the above timeline, companies will have to provide an explanation as to the delay in providing the information.
In respect of items set out in item 4 of the above Para such as the decision of the board regarding the recommendation of dividend, its cancellation,decision on buyback, etc. Stock Exchanges have to be informed within thirty minutes from the conclusion of the Meeting.
FICCI has made a recommendation to SEBI to the effect that information on financial results may be made available to the Exchanges within thirty minutes of the time the Board has approved the same. This practice can reduce the possibility of leakage of price-sensitive information before it reaches the Exchanges.
Accordingly, SEBI has accepted the recommendation of FICCI that companies should provide the financial results within 30 minutes from the time the board has approved the same instead of waiting for the conclusion of the Board meeting.
To ensure compliance of the above, companies will have to add in their communication on the financial results to the Exchanges that the results are being communicated within thirty minutes of their approval by the Board in a departure from the previous practice.
5) Dividend distribution policy-Regulation 43A(1)-To apply to top 1000 Companies
At present, the requirement of the above policy applies only to the top 500 companies based on their market capitalization. This requirement is proposed to be extended to the top 1000 companies.
6) Schedule III-Part A -Para A –Changes in disclosure requirements following withdrawal Corporate Debt Restructuring by RBI
RBI has discontinued the above Scheme through the RBI (Prudential framework for resolution of stressed assets) Directions 2019. Disclosure on the above has been realigned with the requirements of the changes made by RBI.
7) Ease of procedure-Regulation 7(3)-Certification by RTA
At present, the company has to submit a compliance Certificate to the Exchanges signed by the compliance officer and representative of the RTA every half year within one month from the close of the half-year relating to timely completion of activities relating to share transfer facility. As physical transfers are no longer possible, this requirement is being reduced to an annual certification exercise which will be ensured within 30 days from the conclusion of the financial year.
8) Deletion of the second proviso to Regulation 12-Requirement to send warrants by registered post
Where electronic transfer of dividends etc. to shareholders is not possible as they have not provided the required particulars, warrants payable at par shall be sent to members.
The requirement of dispatching warrants for amounts exceeding Rs. 1500/ by registered post is proposed to be withdrawn and other modes of providing warrants to members shall be permitted so that the company shall have the required flexibility in the matter.
9) Requirement of intimating loss of share certificates being relaxed-Regulation 39(3)
As physical share certificates are now in very limited circulation, the requirement of intimating the Exchanges within two days of receipt of information relating to the loss of share certificates shall be done away with. Instead, companies will now provide a report on this every quarter within twenty-one days from the close of the quarter along with a status report on investor grievances under Regulation 13(3).
The above proposal is in acceptance of the recommendation made by the Registrars Association of India(RAIN).
10) Relaxation of Regulation 40(9)-Certification regarding transfers etc. annual requirement instead of a bi-annual requirement
Due to reduction in physical transfers arising out of the prohibition of physical transfers of shares, certification regarding timely action taken on transfers etc.on the above by RTA shall be authenticated by PCS and filed with the Exchanges once a year within 30 days of the close of the financial year instead of the present bi-annual requirement.
11) Change of name of listed company-Regulation 45(3)
At present, change in the name of the company shall be permitted, subject to confirmation of the following changes:
a) time period of at least one year has elapsed from the last name change.
b) at least fifty percent of the total revenue in the preceding financial year has been derived from the new activity suggested by the new name or
c) the amount invested in the new activity /project is at least fifty percent of the assets of the company.
While seeking approval of the shareholders for the change in name by special resolution, the Explanatory statement to be appended to the Notice for the General Meeting shall contain a confirmation from the Practicing CA that the company is compliant with the requirements of Regulation 45(1).The above change in procedure will obviate the need for the company to seek approval of the Exchanges for the change in name and the approval granted by shareholders based on the above certification under Regulation 45(1) shall suffice. This will result in the ease of doing business.
12) Relaxation in Regulations 47(1)(a) and (c)-No need for newspaper notice for directors meeting for the adoption of Financial statements
At present, a company is required to issue a newspaper notice for the following matters:
a) Notice of the meeting of the board at which Statement of financial results shall be discussed.
b) For explaining the deviations or variations in financial statements on a quarterly basis after reviewing by the audit committee and the explanation for such variations in the Board’s Report.
As the above information is made available on the company’s web site, it is proposed to delete the requirements relating to newspaper notices on the above.
However summary of the financial results will have to be published in newspapers as before in the existing format
The above change is salutary and will reduce the cost of compliance.
13) Insert of the definition of the term “Firm”
As present, Regulations do not provide the definition of the above term, the definition shall be inserted in Regulation 2(1)(ib) to define the term to carry the meaning assigned to it under the Partnership Act and LLP Act.
14) Definition of “Working days”
Companies are required to make filings with Exchange within a certain number of working days for various purposes.The definition of “working days” has been provided only in the FAQs to the LODR Provisions. The term “working days” shall mean working days of the Stock exchanges in which the company’s securities are listed and Regulation 2(1)(zn) is proposed to be added for the above purpose.
15) Amendments in the definition of Independent director-Regulation 16(1)(b)(v)
The definition of Independent director in Section 149(6) of the Companies Act, 2013 was amended with effect from 7.5.2018 through the Companies (Amendment)Act, 2017. The changes made therein are being incorporated in the Regulations in alignment with the Act. However, thresholds for a pecuniary relationship with relatives as laid down in the Act are proposed to be lowered in the amended Listing Regulations.
16) Secretarial Audit-Regulation 24A-Secretarial Compliance Report to be provided
The listed company and its material subsidiary shall be required to provide to its members, along with the Secretarial audit report, the Secretarial Compliance Report as the Compliance Report is only a subset of the Secretarial Audit Report.The above will have to be submitted to the Stock Exchanges within sixty days from the conclusion of the financial year.
17) Deletion of Regulation 26(4) due to overlap with Regulation 36(3)(e )
Under Regulation 26(4), the non-executive directors are required to disclose the shareholding held by them either in their names or on a beneficial basis for other persons in the company in which they are proposed to be appointed as directors, in the notice for the general meeting at which they are proposed to be appointed. The above information is also called for under Regulation 36(3)(e ) of the Regulations. It is proposed to delete Regulation 26(4) to avoid the overlap between the two regulations on the same issue.
18) Amendment to Regulation 36(3)-Disclosure relating to the appointment of director
In connection with the appointment or re-appointment of a new director, shareholders shall, inter alia, be provided information relating to the areas of specialization of the director, apart from his shareholding in the company including as beneficial owner in the notice for the meeting. This regulation is being refined further in the light of the proposal to delete Regulation 26(4) as stated above.
19) Submission of the quarterly report on corporate governance-time lines extended-Regulation 27(2)(a)
The quarterly report on Corporate Governance which has to be submitted to the Exchanges at present within two weeks from the close of the quarter will now require to be filed within twenty-one days from the end of the Quarter.
20) Prior intimation to Stock Exchanges regarding the proposal for bonus issue
Any proposal for an issue of bonus shares has to be intimated to the Exchanges under Regulation 29 only if it is proposed to be included as part of the Board’s agenda. Intimation on such a proposal will have to be given to the Exchanges in advance under Regulation 29.This will insulate the investors from any upheaval to the Stock prices if the company chooses to spring a surprise on the investors by making an unscheduled announcement for a bonus issue.
21) Stock Exchanges to be provided details of voting results of shareholders’ meetings within 48 hours-Relaxation in provision-Regulation 44(3)
It is proposed to amend the above regulation to the effect that the results of the voting by members at the general meeting/ through postal ballot shall be intimated to the Exchanges within two working days instead of forty-eight hours from the time of conclusion of the meeting as at present. This will give more time to the companies to make the intimation in particular if the shareholders’ meeting is held towards the end of a week.
22) Uploading of standalone financial results of Subsidiaries-Regulation 46(2)(s)-Insert of proviso relating to financials of overseas subsidiaries
At present financial results of the subsidiaries of the listed company including its overseas Subsidiaries are to be uploaded on the company’s website at least 21 days prior to the annual general meeting at which the consolidated financial results shall be placed.
As regards the financials of the overseas subsidiaries, the following are proposed:
a) If the overseas subsidiary, as per the laws of the country in which it has been set up is required to prepare consolidated financial results, it will be in order if such consolidated results are uploaded on the website.
b) if there is no legal obligation for the subsidiary to have its accounts audited, it will be in order if the unaudited results are hosted on the website.
c) Where the financial statements are in a language other than English, a translated version of the same in English shall be provided on the website.
23) Annual Return to be hosted in the website
In line with the recent amendment notified by the MCA to Section 92(3) of the Act, the Annual Return in MGT-7 shall be hosted on the website of the company and a web link thereof provided as part of the Board’s Report.
Further, under regulation 30(8) all material disclosures made by the company to stock exchanges will be hosted on the company’s website and shall remain on the website for a period of five years. The disclosure of such material events shall also be made under a separate section of the company’s website as per Regulation 46(2).
24) Additional disclosure in CG Report –Details of Risk Management Committee
In the Corporate Governance Report, as part of the annexure to the board’s report, the following information shall be provided as regards the Risk Management Committee set up by the top five hundred companies based on their market cap:
a) Brief disclosure of terms of reference of committee
b) Composition of committee and names of members of the committee
c) Number of meetings held during the year.
d) recommendations and action to be taken to address the risks and its implementation and deviations if any.
a) Brief disclosure of terms of reference of committee
As may be observed, most of the recommendations are welcome in that they will raise the levels of governance by a few notches. The extension in timelines for compliance on several matters shall also come as a relief to the companies.
While finalizing the amendments, SEBI may reconsider the existing provisions in respect of the following matters:
1) Under Para A of Part A of Schedule III relating to Regulation 30, in case there is the resignation of an independent director, the detailed reasons for his resignation shall be provided to the Exchanges together with a confirmation from the Independent director also to the effect that there are no other material reasons other than those provided by the company.
In addition to the above, in the Report on Corporate Governance which is an Annexure to the Board’s Report , the detailed reasons for the resignation of the independent director who resigns before the expiry of his term along with a confirmation from the director that there are no other material reasons other than those provided is to be incorporated.
Considering the fact that the CG Report is prepared after the conclusion of the financial year, it may not be possible to obtain a confirmation from the independent director on the lines stated above, as he may not be available or he may even have expired at the relevant point of time. As the reasons for the resignation have to be confirmed by the Independent director immediately as per Regulation 30, the above duplication in the procedure may be avoided.
2) Under Regulation 36(5), in the notice for the AGM, where statutory auditors are proposed to be appointed/re-appointed, the following disclosures shall be made as part of the Explanatory Statement to the notice:
a) Proposed fees payable to the statutory auditors along with terms of appointment and in case of a new auditor, any material change in the fees payable to such auditor from that paid to the outgoing auditor along with the rationale for the change.
b) Basis of recommendation for appointment including the details in relation to and credentials of the statutory auditors proposed to be appointed.
It is pertinent to note that under Section 139(2) of the Act, listed companies are required to appoint auditors for a time span of five years and it is difficult therefore to foresee the quantum of fees that would be payable to them in this tenure. The fixation of fees as per normal convention should be left to the discretion of the board subject to the recommendations of the Audit Committee as opposed to the above requirement of stating the proposed fees on the body of the notice which is impractical.
SEBI may consider the review of the above two regulations.