[Akshat and Aniya are students at National Law University Delhi.]
The Securities and Exchange Board of India (Board) is mandated to safeguard the financial interests of market participants in listed companies. This is fundamentally based on the idea that because public companies (more specifically, listed companies) use public capital, they must be subject to a higher standard of scrutiny and compliance.
The Board last week released a consultation paper seeking comments on proposed amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations) and the (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations), which put forth special obligations on public companies.
It may be recalled that in August 2023, the Board set up an expert committee to facilitate ease of doing business under the chairmanship of SK Mohanty, Former Whole Time Member of the Board (Committee), to suggest amendments to the ICDR Regulations and the LODR Regulations. The terms of reference included a review of the existing requirement to balance investor protection while reducing the compliance burden for companies.
In the interim report of the Committee released last week, one of the proposed amendments as an interim recommendation is to extend the time to fill up vacancies of key managerial personnel (KMP) of listed entities from 3 months under Regulation 26A of the LODR Regulations, to 6 months in cases where regulatory approval is required.
This piece hypothesizes that the Committee's interim recommendation of an increased limit for the appointment of KMPs does not address the core problem with the law. It explains the present KMP regime, the proposed amendment, and how the change fails to resolve the actual bottleneck which restricts timely compliance. It concludes by suggesting a balanced framework which meets the objectives of the Committee. Overall, the piece argues that the recommendation is an injustice to the Committee's mandate as it falls short of investor protection and ease of doing business.
Regulation 26A and the Proposed Change
Regulation 26A of the LODR Regulations provides that any vacancy in the office of KMPs in listed companies, which means the CEO, MD, CS, or WTD, must be filled within a period of 3 months. In response to the Regulation 26A, listed companies had voiced reservations before the Committee about the difficulty of finding a quick replacement and the delays in regulatory approvals.
The Committee has now recommended the insertion of two provisions to Regulation 26A of the LODR Regulations, which extend the time for the appointment to 6 months where the approval of regulatory/statutory/government authorities is required.
In the rationale provided for the amendments, the Committee has acknowledged the time-consuming nature of governmental approvals. In the interest of public shareholders, it has not accorded a blanket extension to the appointment timeline. It has only agreed to a carve-out in cases only where government/statutory/regulatory approval is required for a total period of 6 months.
Analysis
The proposed amendments, read with the rationale provided by the Committee, lead to 2 results directly in conflict with the mandate of investor protection and reduction of compliance burden.
First, despite the concern raised by listed companies and recorded by the Committee, the difficulty in finding a replacement has not even been acknowledged in the proposed amendment. This is likely because the Committee did not consider such a difficulty noteworthy. Second, the Committee has tacitly accepted that approvals necessary for KMP appointment lead to delays beyond 3 months, as required in the LODR Regulations. However, it has not proposed suitable guidelines or directions to government authorities to prescribe an upper limit for the disposal of applications involving KMPs in listed companies. It has not even nudged the relevant authorities to dispose of the applications as soon as possible.
The second conclusion is where the heart of the problem lies. The Committee's failure to provide an antidote for the delay in approvals not only amounts to tacit acceptance that such delays are a de facto part of the business environment but is also a condonation that they are unrepairable and bound to continue.
The recommendation denies even the minute possibility of a nudge or cures in the process, which leads to the timely disposal of applications in the regulatory landscape. The recommendations' denial of even a nudge/cure, which will protect the interests of investors by ensuring the timely appointment of KMPs, leads to a perpetuation of governmental inefficiency.
Recommended Framework
The 3 month-upper limit for appointment of KMPs must be retained. The following framework may be used to balance the two competing interests of investor protection and ease of compliance:
Time-bound regulatory approvals
It must be mandated to decide on all approvals necessary for the appointment of KMPs within 45 calendar days from the date of receipt of application through an online application system. This will ensure adequate headroom with listed companies of another 45 days to carry out the remaining formalities, such as appointment, intimation, application, etc., while sticking to the upper limit. It is suggested that the processing status of the application may be made public on the Board's website. This will ensure transparency and predictability to the listed company and the investor.
Penalties against HODs and negligent officersÂ
In cases where applications are delayed due to negligence or wilful omission of the department, penalties must be levied on the head of the department or concerned officer by the Board on a continuing basis. A parallel of this penalty has been brought in via the 2023 amendments to the Environment Protection Act 1986 via the insertion of Section 16A. It is appropriate and desirable for the Board to impose penalties in cases where approvals are delayed. This will be both a deterrent for erring officials and an assurance to listed companies that compliance requirements are not imposed on the company but shared between the regulator and the company.
Extensions to KMP timeline in specified force majeure
It is only in exceptional circumstances like force-majeure that a grace period of 15 days must be allowed. This must be through an exhaustive and limited set of events as an annexure to Regulation 26A itself, where such extensions are permitted regarding the appointment of KMPs. This will add to both predictability and investor protection.
Conclusion
In conclusion, the Committee's recommendation fails to address the critical G2B challenge: a delay in approvals that prolongs the KMP vacancy timeline. It takes the regulatory delays as a given and then attempts to solve the conundrum with extended timelines in cases where approvals take time rather than attempting to shorten the approval period.
The proposed amendment falls foul of its objectives of investor protection and ease of compliance. It is through solving the regulatory challenge by providing outer limits and consequences while retaining the 3 month upper limit that both aims can be met. It is only then that India Inc. would truly look at business as easy in a strenuous regulatory environment and a slowing global economy.