[Sarthika is a student at Damodaram Sanjivayya National Law University.]
The Securities and Exchange Board of India (SEBI), the securities market regulator, has been making constant amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (SEBI LODR) responding to Finance Minister’s commitment to reduce compliance burden and promote ease of doing business. In its latest tranche of strategic overhaul, SEBI introduced the SEBI LODR (Amendment) Regulations 2024 vide notification dated 17 May 2024. The amended regulations reflect the recommendations set out in the SEBI’s Expert Committee report and consultation papers released in late 2023 and early 2024. The amendments introduces, amongst other things, (i) revised methodology for calculating the market capitalization of companies, (ii) disclosure framework for rumour verification, (iii) timeline for mandatory applicability of corporate governance (CG) requirements for high value debt listed entities (HVDLEs) and filling of vacancies of key managerial persons.
The author aims to debunk the rationale, implications, and potential challenges of the amended SEBI LODR. This article explores whether these changes align with the practical realities of business operations and promote ease of doing business in India.
Market Rumour Verification Requirement: Need to Balance Disclosure Requirements with Confidentiality
To curb price speculation and prevent the impact of false market sentiments on the price of securities of the listed entities, SEBI, through its notification dated 14 June 2023 introduced a proviso to Regulation 30 (11) of the SEBI LODR. The proviso mandates eligible listed companies to confirm, deny or clarify any reported event or information in the mainstream media concerning matters specified under Regulation 30 of the SEBI LODR. However, market participants raised evident concerns about the misalignment between the provision’s definition of ‘materiality’ and its original intent. Addressing these concerns and incorporating the proposal cited in consultation paper dated 28 December 2023, SEBI has introduced a new framework for rumour verification through the present amendment. Under the amended framework, companies must either confirm, deny or clarify the rumour if: (a) there is a material price moment, (b) the rumour appears in the ‘mainstream media’, and (c) the rumour pertains to a specific, impending event or information. Additionally, companies are not required to respond if the rumored event or information is not specific or does not qualify for a response.
While the intention is to benefit the investor from enhanced disclosures, it may inadvertently undermine sensitive strategic alliances or compromise first-movers advantage pursued in business confidentiality. Most transactions are bound by non-disclosure agreements (NDAs), which extend to rumours as well, limiting the companies’ liberty to confirm or deny such rumours. SEBI has remarked that the circulation of rumours itself indicates a breach of an NDA. However, this explanation appears to be a tenuous justification for the outright violation of existing NDAs upon rumour verification by companies.
To address the market concerns regarding release of premature news bound by NDA, SEBI should consider integrating a ‘carve-out’ akin to those found in Singaporean and Australian Regulations:
Exception to Rule 701 of the disclosure policy permits issuer to temporarily withhold specific information from public disclosure if it is confidential and reveling it prejudice the ability of the issuer to pursue its corporate objectives. For instance, if negotiations between the parties have not stabilized or information concerns an incomplete negotiation, the issuer can defer immediate disclosure.
Echoing the Singaporean approach, immediate disclosure of market sensitive information is exempted provided: “(a) information concerns an incomplete proposal or negotiation or trade secret, (b) the information is confidential and (c) a reasonable person would not expect it to be disclosed.”
A similar carve-out in the SEBI LODR would harmonize the legitimate commercial interests of entities and their stakeholders with the reasonable expectations of investors and regulators for the timely release of market sensitive information.
Revised Framework for Market Capitalization (M-cap) Computation
Entities categorized as Top 100, Top 500, and similar tiers are subjected to enhanced compliance requirements based on their m-cap as of March 31st each year. This methodology had several drawbacks amongst other things: First, reliability of single-day m-cap created an arbitrary benchmark. Inorganic spikes or dips in share prices on the m-cap day-driven by internal or external factors such as rumours or financial maneuvers could skew rankings. Second, the tight turnaround compliance deadline of April 1, upon meeting the applicability threshold, complicated the process for the newly established companies. Lastly, indefinite compliance burden on listed entities, even when their m-cap consistently remains below the applicability threshold, resulted in unnecessary compliance costs and hindered business operations.
To address these concerns, a revised framework effective from 31 December 2024, has been introduced. Under the amended Regulation 3(2), market capitalization will be averaged over a six-month period (1 July to 31 December) and recognized stock exchanges will compile a list of the top 100/250 companies based on this average. By calculating an average over a reasonable period, the impact of short-term market fluctuations would be minimized. This will lead to a more accurate representation of the entity’s market size and ensures that the ranking is reflective of the company’s performance over an extended period rather than a snapshot of a single day. Companies must comply within three months from 31 December (i.e., 1 April) or at the start of the next financial year, whichever is later. This allows adequate preparation time for newly ranked entities.
Additionally, if a company’s market capitalization remains below the threshold for three consecutive years, the compliance requirements will cease at the end of the financial year following the third year. Here, the ‘sunset clause’ may alleviate the compliance costs for companies; however, it could result in frequent changes to a company’s regulatory status. This instability might undermine management effectiveness and increase perceived risk for investors, potentially deterring investment.
Additionally, there is a risk of potential ranking manipulation. Without indefinite regulatory categorization, companies might attempt to alter their rankings to evade compliance obligations. While a high ranking enhances reputation and attracts investors, it also entails greater regulatory scrutiny and compliance costs. If the compliance burden outweighs the benefits of a high ranking, companies might resort to manipulating their standings. A comparable approach was adopted by US public companies that opted to “go private” in response to the increased compliance costs imposed by the Sarbanes Oxley Act of 2002.
Furthermore, SEBI should clarify on the issue of varying rankings for a listed entity across different stock exchanges. The Expert Committee had recommended adopting the highest ranking across exchanges, but SEBI has not yet ratified this proposal during its board meeting on 15 March 2024. Without clear guidance on this issue, there is a risk of confusion and potential difficulties in applying regulations to leading companies.
Extension of CG Norms Deadline for HVDLEs
In its notification dated 7 September 2021, SEBI mandated that CG norms would mandatorily apply to HVDLEs. The recent amendment has extended this mandatory applicability to 31 March 2025. While the intention is to provide further time to these entities to ensure compliance, there are practical hurdles in its application that merit discussion.
SEBI’s memorandum dated 15 March 2024 elucidates that issuers of HVDLEs comprise of not only companies incorporated under the Companies Act 2013 but also trusts, REITs, InvITs, bodies corporate incorporated and governed by various respective statutes. Such issuers have their own statutory requirements relating to the composition of the hoard of directors and specific framework governing their board compositions and overall management. More particularly, in case of HVDLEs wholly governed by government, directors are appointed by the State or Central Government. For these entities, requiring shareholder approval for director appointments at a General Meeting under the SEBI LODR appears redundant and merely procedural. The memorandum notes that due to such complexities, compliance rates were significantly low, with 71% of HVDLEs failing to meet CG requirements between April and June 2022. The latest memorandum reaffirms ongoing issues with non-compliance among HVDLEs.
Given the distinctive structures of HVDLEs and the practical challenges they face in meeting the CG norms under the SEBI LODR, SEBI should continue CG compliance for HVDLEs on a ‘comply or explain’ basis for a period until a tailored framework is established. SEBI should draw inspiration from the Corporate Governance Code adopted by Financial Reporting Council of United Kingdom. The code provides flexibility through its ‘comply or explain’ approach, aiming to encourage companies create governance processes and practices tailored to their particular circumstances and business structure. It observed boilerplate statements, playing back the words within the code rather than applying the spirit of the code, did not deliver the transparency that the market needs. They emphasized that a cogent explanation for a departure from a CG requirement demonstrated better governance than a default approach of box ticking compliance with a provision that does not suit the company’s business structure. Grant Thornton’s 2022 and 2023 report indicates that the proportion of reports fully complying with the Code, including detailed explanations for any non-compliance, has risen, with deviations often being a matter of timing.
Endorsing a ‘comply or explain’ regime for HVDLEs could potentially bring down the large non-compliance of CG norms among HVDLEs. This approach would allow HVDLEs to communicate salient and pertinent information to stakeholders, whilst acknowledging that there is no one size fits all approach for companies reporting on their governance. Concurrently, SEBI should also advocate for high-quality explanations that reflect sound governance practices. The move would reinforce SEBI’s motto of ensuring ‘Ease of Doing Business’ on one hand and ensuring good governance practices on the other.
Conclusion
Overall, the amendment reflects an ongoing effort to bridge the gap between regulatory requirements and practical challenges encountered by Indian companies. SEBI’s proactive engagement with industry stakeholders highlights its dedication to grasping the complexities of business operations and market dynamics. This collaborative strategy ensures that regulatory changes are not mere theoretical concepts but are designed to enable smooth compliance and operational efficiency for listed entities. However, critical considerations as discussed remain. Further clarification and adaptation is essential to for enhancing the overall ease of doing business in India’s financial markets, thereby fostering investor confidence, attracting investment flows, and supporting economic growth through a more favourable business ecosystem.
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