SEBI norms to ensure Compliance of certain Listing Condition

CS Avinash Godse 
on 16 December 2013


Putting in place a stronger mechanism to check non-compliance of Listing Conditions, the market regulator Securities and Exchange Board of India (SEBI) came up with its circular vide CIR/MRD/DSA/31/2013 dated September 30, 2013 (Circular)  directing amendment to bye-laws of Recognised Stock Exchanges to ensure appropriate and timely compliances of provisions of  Listing Agreement by Listed Entities. SEBI issues Standard Operating Procedure (SOP) for Stock Exchanges for suspension and revocation of trading of shares of Listed Entities for non-compliance of certain Listing Conditions.

SEBI announced measures like suspension of trading, imposition of monetary penalties and moving the securities to restricted trading category. Now Recognised Stock Exchanges can use imposition of fines as action of first resort in case of non-compliances and invoke suspension of trading in case of subsequent and consecutive defaults.

SEBI has authorised Stock Exchanges to impose penalties ranging from ` 1,000 to ` 1.00 Crore depending on the violation of certain clauses of the Listing Agreement like non-submission or delay in submission of document related to the Company’s Annual Report, Financial Results,Shareholding Pattern and Corporate Governance Compliance Report among others.

In order to ensure effective enforcement of Listing Conditions, Recognised Stock Exchange has to put in place an appropriate system to enforce the liabilities of Listed Entities and their promoters as disclosed under the Listing Agreement.

It has been decided that during the process of the suspension/revocation of the trading as provided in the Standard Operating Procedure (SOP), the concerned Recognised Stock Exchange shall intimate the details of the concerned non-compliant Listed Entity and its Promoter and Promoter Group to the Depositories. On receipt of such intimation, the Depositories shall freeze or unfreeze, as the case may be, the entire shareholding of the Promoter and Promoter Group in such Listed Entity.

SEBI mandates Stock Exchanges to put in place the system to monitor and ensure the compliance of respective Listing Conditions by Companies. It further requires Exchanges, where the shares of the concerned entity are listed, to enforce the compliance of respective Listing Conditions. The Exchanges are required to disclose on its website the action taken against the Listed Entities for non-compliance of the Listing Conditions, including the details of respective requirement, amount of fine, period of suspension, freezing of shares among others.

The Stock Exchange is required to create a new Category 'Z' for trading of shares of such non-compliant Listed Entities wherein trades would take place in 'Trade for Trade' basis and securities transaction is directly settled by the buying and selling firms.

To maintain consistency and uniformity of approach by the Stock Exchanges for taking action against the Listed Entities for non-compliance with certain mandatory Listing Conditions, such as Clause 31, Clause 35, Clause 41, Clause 49 of the Listing Agreement, SEBI has prescribed Standard Operating Procedure (SOP) for suspension and revocation of suspension of trading in the shares. The salient features of the circular are as follows:

a. Imposition of fine (on per day basis) on the Company for non compliance and delay in compliance with continuous Listing Condition such as submission of Annual Report, Shareholding Pattern, Financial Results, Corporate Governance Report among others.

b. In case of non compliance for two consecutive quarters, moving the shares of non-compliant Company to "Z" Category, where the trades would settle on ‘Trade for Trade’ basis.

c. In case non-compliance continues, freezing the shares of the Promoter and Promoter Group before suspension of the trading of shares of the Company.

d. In order to provide exit window for the Non-Promoters, after 15 days of suspension, trading in the shares of non-compliant entity will be available on the "Trade for Trade" basis, on the first trading day of every week for 6 months.

Let us see the brief insight about the directions of SEBI for amendment to bye-laws of recognised stock exchanges with respect to non-compliance of certain Listing Conditions and adopting Standard Operating Procedure for suspension and revocation of trading of shares of Listed Entities for such non compliances:-

A. Imposition of fine on non-compliance of certain clauses of the Listing Agreement:-

Imposition of Fine:

The Recognised Stock Exchange can impose fine on Listed Entities for non compliance and delay in compliance with continuous Listing Condition such as submission of Annual Report, Shareholding Pattern, Financial Results, Corporate Governance Compliance Report, etc as under:

Clause of Listing Agreement

Compliance to be done by the Company as per Listing Agreement

Due Date of Submission

Fine payable for First  Non-Compliance

Fine Payable each subsequent and consecutive Non- Compliance

Clause 31

Submission of copies of Annual Report/ Proceedings of AGM/ EGM

The Company has to submit to the Stock Exchange six copies of the Statutory and Directors’ Annual Reports along with Form A or Form B, as applicable, Balance Sheets and Statement of Profit and Loss and of all periodical and special reports as soon as they are issued and one copy each to all the Recognised Stock Exchanges in India.

Copy of the proceedings at all Annual and Extraordinary General Meetings.

Promptly and without application as soon as they are issued by the Company

Promptly and without application as soon as the meeting is over

If non-compliance continues for more than 5 days, ` 1,000 per day till the date of compliance.

` 2,000 per day till the date of compliance.

Clause 35

Submission of the Shareholding Pattern

The Company has to file with the Exchange the shareholding pattern, separately for each class of Equity Shares/Security in the formats specified in the clause.

-One day prior to listing of its securities on the Stock Exchanges.

- On a quarterly basis, within 21 days from the end of each quarter.

- Within 10 days of any capital restructuring of the Company resulting in a change exceeding +/-2.00 % of the total paid-up share capital

` 1,000 per day till the date of compliance

(+)

Additional fine of 0.1 % of paid up capital of the entity or ` 1.00 Crore,

Whichever is less, For continued non-compliance for more than 15 days

` 2,000 per day till the date of compliance

(+)

Additional fine of 0.1 % of paid up capital of the entity or ` 1.00 Crore,

Whichever is less, For continued non-compliance for more than 15 days

Clause 41

Submission of the Financial Results

The Company Has to Submit its Quarterly, Year To Date and Annual Financial Results to the Stock Exchange

Audited or unaudited Quarterly and Year to Date Financial Results to the Stock Exchange within 45 days of end of each quarter (other than the last quarter)

Audited Financial Results for the entire Financial Year, within 60 days of the end of the Financial Year.

` 5,000 per day till the date of compliance

(+)

Additional fine of 0.1 % of paid up capital of the entity or ` 1.00 Crore,

Whichever is less, For continued non-compliance for more than 15 days

` 10,000 per day till the date of compliance

(+)

Additional fine of 0.1 % of paid up capital of the entity or ` 1.00 Crore,

Whichever is less, For continued non-compliance for more than 15 days

Clause 49

Submission of the Corporate Governance Compliance Report

The Company has to submit a quarterly compliance report to the Stock Exchanges signed either by the Compliance Officer or the Chief Executive Officer of the Company.

The Company has to obtain a certificate from either the Auditors or Practicing Company

Secretaries regarding compliance of conditions of Corporate Governance to be sent to the Stock Exchanges along with the Annual Report

Within 15 days from the close of Quarter.

Promptly and without application as soon as the Annual Return is issued by the Company

` 1,000 per day till the date of compliance.

` 2,000 per day till the date of compliance.

Reconciliation of Share Capital Audit Report

Required as per SEBI Circular No. D&CC/ FITTC/CIR-16/2002 dated December 31, 2002 and CIR/ MRD/DP/30/2010 dated 6th September, 2010

The Company has to submit Reconciliation of Share Capital Audit Report obtain from Chartered Accountant for its ISIN for each Quarter

Within 30 days from quarter end

No fine is prescribed as of now but the recognise Stock Exchange can suspend the trading of the shares of the Listed Entities on Failure to submit information on the Reconciliation of Shares Capital Audit Report, for two consecutive quarters

Note: Paid up capital as mentioned above means paid up capital as on the first day of the financial year in which the non compliance occurs.

Investor Protection Fund:

The amount of fine realized as per the above structure shall be credited to the "Investor Protection Fund" of the concerned Stock Exchange, established with the objective of compensating investors in the event of defaulters' assets not being sufficient to meet the admitted claims of investors, promoting investor education, awareness and research.

Review of compliance status of the Listed Entities:

The Recognised Stock Exchange shall disseminate on their website the names of noncompliant Listed Entities that are liable to pay fine for non-compliance of the conditions of the Listing Agreement. Every Recognised Stock Exchange shall put in place the system to monitor, review and enforce the compliance of respective listing conditions by the Listed Entities. The Recognised Stock Exchange shall review the compliance status of the Listed Entities as follows:-

- Within 45 days from the end of each quarter for clause 35 and clause 49 and

- Within 15 days from the due date of submissions for clause 31 and clause 41

After review the Recognised Stock Exchange are required to issue notices to the non-compliant Listed Entities to ensure compliance and pay fine as per amended bye-laws of Stock Exchange within 15 days from the date of the notice. If any non-compliant Listed Entity fails to pay the fine despite the receipt of the notice as stated above, the Recognised Stock Exchange can initiate appropriate enforcement action.

Discloser on the website of Stock Exchange:-

The Recognised Stock Exchanges shall disclose on its website the action/s taken/initiated against the Listed Entities for non-compliance/s of the Listing Conditions; including the details of respective requirement, amount of fine, period of suspension, freezing of shares, etc.

A. Standard Operating Procedure (SOP) for suspension and revocation of trading of shares of Listed Entities for non compliances:-

Suspension of Trading of Shares:

The Recognise Stock Exchange can suspend the trading in the shares of the Listed Entities on the following grounds:

- Failure to comply with Clause 31 of Listing Agreement with respect to submission of Annual Report for 2 consecutive Financial Years;

- Failure to comply with Clause 35 of Listing Agreement with respect to submission of Shareholding Pattern for 2 consecutive quarters;

- Failure to comply with Clause 41 of Listing Agreement with respect to submission of Financial Results for 2 consecutive quarters;

- Failure to comply with Clause 49 of Listing Agreement with respect to submission of Corporate Governance Compliance Report for 2 consecutive quarters;

- Failure to submit the Reconciliation of Shares Capital Audit Report, for two consecutive quarters;

- Receipt of the notice of suspension of trading of that entity by any other Recognised Stock Exchange on any or all of the above grounds.

Intimation to the non-compliant Listed Entity:

Before suspension of trading on any of the above grounds, the concerned Recognized Stock Exchange shall intimate to the non-compliant Listed Entity in writing calling upon it to comply with respective requirement/s of Listing Agreement and pay the applicable fine as prescribed within 21 days of the date of the intimation. No intimation is required to be given when trading is to be suspended due to the reason of receipt of the notice of suspension of trading of Listed Entity by any other Recognised Stock Exchange.

Freezing of Shareholding of the Promoter and Promoter Group:

Promoters and Promoter Group as disclosed by the Listed Entity to the concerned Recognised Stock Exchange under Clause 35 of the Listing Agreement may suffer for non-compliances of Listing Conditions.

If the non-compliant Listed Entity fails to comply with aforesaid requirement/s and pay fine despite the receipt of the intimation of the Recognised Stock Exchange within the time as aforesaid, the concerned Recognised Stock Exchange shall forthwith intimate the Depositories to freeze entire shareholding of the Promoter and Promoter Group of the non-compliant entity. Simultaneously, the Recognised Stock Exchange shall give a 21 days prior public notice on its website proposing suspension of trading in the shares of the non-compliant Listed Entity. This is to ensure that while the relevant disclosures are not made, such Promoters and Promoter Group should not exit from the Listed Entity.

If the non-compliant Listed Entity complies with respective requirement/s and pays fine 5 days before the proposed date of suspension, the trading in its shares shall not be suspended on the proposed date and the concerned Recognised Stock Exchange shall intimate to the Depositories to unfreeze the shares of the Promoter and Promoter Group of the listed Entity, after 1 month from the date of compliance. Simultaneously, the Recognised Stock Exchange shall give a public notice on its website informing compliance by the listed Entity.

Intimation of suspension to other Recognised Stock Exchanges:

On suspending trading in the shares of the non-compliant entity the Recognised Stock Exchange shall send intimation of suspension to other Recognised Stock Exchanges where the shares of the non-compliant entity are listed. On receipt of such intimation the other Recognised Stock Exchanges shall also suspend trading in the shares of the entity.

Category "Z" for Trading:

The Recognised Stock Exchange shall create a new Category "Z" for trading of shares of non- compliant Listed Entities wherein trades shall take place in 'Trade for Trade' basis. In 'Trade for Trade' basis securities transaction is directly settled by the buying and selling firms.

If a Listed Entity commits two or more consecutive defaults in compliance of the Clause 31, Clause 35, Clause 41 and Clause 49 of the Listing Agreement within 15 days from date of the notice issued, the concerned Recognised Stock Exchange shall, in addition to imposing fine as specified above, move the scrip of the Listed Entities to "Z" Category for trading. The Recognised Stock Exchange shall give 7 days prior public notice to investors before moving the share of non- compliant entity to "Z" category or vice versa. The Recognised Stock Exchange shall move back the scrip of the Listed Entity to the normal trading category, if it complies with respective clauses of the Listing Agreement and completely pays fine prescribed as above.

After 15 days of suspension of trading in the shares of non-compliant entity, Recognise Stock Exchange may allow trading in the shares on the "Trade for Trade" basis, on the first trading day of every week for 6 months. In this regard the trading members/stock brokers of the Recognised Stock Exchange shall obtain confirmation from clients before accepting an order for purchase of shares of non-compliant entity on the 'Trade for Trade' basis.

Further the Recognised Stock Exchange shall publish a caution message "Trading in shares of the Company is under 'suspension and Trade for Trade basis' and trading shall stop completely if the Company remains not compliant for six months " on trading terminals.

Revocation of Suspension of Trading in Shares:

If the non-compliant Listed Entity complies with the aforesaid requirement/s and pays applicable fine within 3 months from the date of suspension, the Recognized Stock Exchange shall revoke the suspension of trading of its shares. If the non-compliant Listed Entity complies with the aforesaid requirement/s and pays applicable fine after 3 months from the date of suspension, the Recognized Stock Exchange may revoke the suspension of trading of its shares after a period of 3 more months from the date of such compliance. The Recognised Stock Exchange shall, 7 days prior to revocation of suspension of trading in shares of the entity, issue public notice on its website.

The trading of shares held by Promoter and Promoter Group can only allowed after expiry of 3 months from the date of revocation of the suspension, the Recognised Stock Exchange shall accordingly send intimation to the Depositories to unfreeze the shares of the Promoter and Promoter Group.

After revocation of suspension, the trading of shares shall be permitted only in the 'Trade for Trade' basis for a period of 3 months from the date of revocation and after this period of 3 months, trading in the shares of the entity shall be shifted back to the normal trading category, after giving prior notice of 7 days to the entity and stakeholder.

Concluding comments:

As provided above, all the Listed Entities are required to observe and follow the listing conditions of the Recognize Stock Exchange in order to avoid hefty penalties and to uphold its growing share prices.  The directions issued by SEBI as an apex regulatory body of the capital market to the Recognize Stock Exchange for action to be taken on non compliant Listed Entity is aimed to protect the interest of Non Promoter Investors.

Earlier for non-compliance of Listing Conditions, Exchanges have been suspend the trading of the shares of the Listed Entities, which affected the interest of Non-Promoters much more than the Promoters as the exit route used to be closed for such investors after suspension of trading. Therefore, SEBI now directed to the Recognise Stock Exchange in case of non compliant Entities to resort to several other measures such as imposition of fines, freezing of shares of the Promoter and Promoter Group, transferring the trading in the shares of the Company to ‘Z’ Category, etc., before suspending the trading of shares of the Company.

The directions issued by SEBI is amply cleared that all Recognize Stock Exchange has to put in place an appropriate system to enforce the liabilities of Listed Entities and their Promoters as disclosed under the Listing Agreement. The directions issued are an ambitious step of SEBI towards the protection of interest of the Non Promoter Investors in the capital market. However, the success of such an initiative needs to be seen.


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