[Aadhruti and Aditya are students at National Law University Odisha.]
The recent amendments to the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR) have once again aligned with the regulator’s aim of bridging the information gap between the listed companies and the market participants through comprehensive regulations.
The trading of securities is based on a lot of speculation where investors use hard information and a rigorous analysis to form a speculative view of the stock they are interested in buying. Hence, availability of such information on the listed entity in the market becomes essential in helping prospective buyers to fairly value each security. In this context, the LODR is the leading authoritative text governing the principles of disclosures required of listed entities. It also provides for corporate governance requirements relating to the board of directors, key managerial persons, promoters etcetera. These governance requirements become essential for creating stability and consistency in the market, thus ensuring that the performance of the securities is independent of corporate actions. The regulations were introduced to create more compliant listed companies and improve the capital markets in India. The 14 June 2023 notification brings in a fresh set of streamlined disclosure requirements for increased transparency by universalizing what needs to be disclosed.
What Has Changed?
Prior to the amendment, the LODR provided companies with subjective assessment of disclosures resulting in adverse information asymmetry since they could easily circle around their obligations through the excessive discretion afforded to them. Regulation 30 read with Schedule III of the LODR provides for disclosure requirements to the Stock Exchange from the Listed Companies on the basis of 'materiality'. Schedule III, Part A enlists certain events, further categorized into Para A and Para B. While the former mandates the disclosure of the specified material events, the latter provides for assessment of materiality by the companies themselves. The criteria for this assessment was prescribed within the three-pronged provision in Sub-Regulation 4, Clause (i). On the basis such determination, listed entities formulate their own test/policy of materiality, as prescribed under Clause (ii). This prescribed assessment gave significant leeway to companies since Sub-Clause (c) of Clause (i) read with Clause (ii) provides for a subjective assessment through the 'opinion of the board of directors' without having to provide reasons for the same.
With the amendment now in place, SEBI aims to make disclosure requirements more objective and quantitative by providing for their numerical thresholds. Provision VII of the amendment provides that events in Para B must be disclosed if they meet thresholds which relate to the quantified value or impact on a company's financials such as turnover, net worth or profit or loss after tax deduction. Further, the amendment inserts a key provision after Clause (ii), aimed at solidifying these objective criteria. Policies/ tests of materiality formulated by the listed companies must now ensure that any of the prescribed criteria mentioned in the amended regulations are not diluted, thus increasing transparency in company policies while reducing the scope for possible loopholes simultaneously.
Disclosure requirements were earlier only for Part A events with an umbrella timeline of twenty-four hours. The amendment now prescribes a clear time demarcation for Part A and Part B events, on the basis of their source. Events emanating from the board of directors’ meeting or from within the listed company (i.e., internal events), are required to be disclosed within 30 minutes and 12 hours respectively, whereas events which are external in their source have 24 hours for their disclosure.
Precise additions have been made to previously broad Regulation 30(11) that the top 100 and thereafter the top 250 companies are now required to confirm the veracity of events or information reported to mainstream media within 24 hours of their reporting. These must be events which are indicative of a public rumor that is circulating amidst the investing public. From a bird's eye view, this amendment aims at creating obligations on the companies rather than giving them the option to take action on their own initiative.
Certain personnel of the company (shareholders, promoters, directors, KMPs, employees, etc.) who are parties to any agreements specified within Clause 5A, to which the listed entity is not a party, must disclose these to the listed company. These agreements must be of such a nature so as to affect the management of the company, directly or indirectly except those executed in their 'normal course of business'. This amendment ensures that the public investors are aware of any third-party commitments of the listed entity in a timely manner. The only potential drawback could be that since the listed company is not a party to the agreement, such disclosures could- i) hamper the agreement’s completion due to breach in confidentiality or ii) be challenged on the grounds of contractual privity. A closer analysis of the provisions highlighted in this section emphasize the amendment’s multiple benefits for the market.
Effectiveness of Disclosures: An Analysis
Disclosure of information by listed companies is essential for a variety of reasons such as- for the informed decision-making by investors among other stakeholders such as banks. However, disclosure of information has become important at a much higher level, that is, for the effective functioning of capital markets altogether. Company leadership is in the position of possessing exclusive information regarding profitability of investments, revenue streams and changes in strategy among others. Since investors and other firms which provide capital to these companies require such information for optimum allocation of resources, a set of regulations mandating disclosure become important for facilitating the functioning of capital markets. Moreover, one of the important reasons for stock price inaccuracy is non-public information, where information crucial for determining share value is not known by the majority of investors. The solution to this information gap induced share value is proper disclosure requirements. Similarly, confirming or denying the veracity of events or information reported in mainstream media can also decrease speculation in the market, thus creating a more stable market.
The new objective criteria will lead to a uniform disclosure of information by listed companies for capital providers to make a comprehensive decision. It will also help eliminate any advantages that a company might gain due to the earlier subjective requirements for disclosure. However, this also benefits the listed companies since with lesser discretion in their hands they could now comply with the objective criteria and avoid future punitive action by SEBI against them which leads to unavoidable losses in the market.
On the forefront, the new requirements may seem beneficial to the companies as well since with more objective norms and lesser managerial discretion, companies will have a more compliant executive which may not be able to use its position to gain personal benefits out of the company’s shares. However, this has an underlying problem of the decreasing total income for the executive which can in turn cost the companies more in compensation. The burden of executive pay would simply transfer from the market to the company. Moreover, there still runs the risk of executives endangering the entire company for personal gain since scandalous incidents relating to managerial positions hardly stay insulated from the stock market’s ripple effects.
With the amendment there is now an obligation to disclose specific agreements (irrespective of the listed entity being a party), the requirement for the opinion of the board of directors on the vested interests of the entity in such agreements and further, the approval from the shareholders. These changes are a welcome step to ensure that there is no information disparity between the management and shareholders of the entity and thereafter the public at large. This effectively curbs instances of promoters singlehandedly restricting the shareholder involvement.
Moreover, with set standards for what shall be considered material under Schedule III, Part A, Para B, consistency of crucial information will also be maintained. The importance of disclosure of information is crucial to the risk assessment by investors, which is at the core of allocation of capital, especially for equity investors. Since there is an uncertainty around ROIs on stocks, information disclosure, which can even remotely affect prices, becomes important. As the Consultation Paper on Strengthening Corporate Governance - Amendments to the SEBI in point 3.8 highlights, the new amendments are the need of the hour to ensure the protection of shareholders in listed companies and thus uphold the principles of corporate governance.
Conclusion
Disclosure requirements are crucial for a transparent and efficient functioning of any capital market. With increased objectivity and stricter time-bound requirements, SEBI has pushed for symmetrical information disclosure among the specified listed companies. SEBI has introduced these amendments with a clear intention to remove information asymmetry in the market as well as streamline corporate governance norms for listed companies. The resultant changes clearly have the potential to positively influence the market and instill more confidence in investors. However, how companies will embrace these changes is still subject to speculation.