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Discussion Paper on Clause 36 of Equity Listing Agreement

Finsec Law Advisors

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SEBI recently released a discussion paper on review of clause 36 of the equity listing agreement. Presently, Clause 36 imposes an obligation on listed companies to make prompt disclosures to the stock exchanges of any price sensitive information or events which may have an impact on the performance or operations of the company. Companies currently enjoy discretion on deciding which events are material or price sensitive based on a broad and indicative list of material events provided under the Listing Agreement. SEBI felt that such discretion led to voluntary and inadequate disclosures by the listed companies in the securities market.SEBI, by way of this discussion paper, proposes to introduce stringent laws on the requirement of issuer companies in relation to immediate disclosures of price sensitive information.  It proposes to practically take away the discretionary powers from the management of the companies in making such disclosures and replacing it with a long list of events and tests based on which disclosures will be required to be made within a short span of one day. Additionally, it has suggested qualitative criteria or quantitative criteria for determining whether a specific event/ information would be considered material for disclosures.Further, the Discussion Paper provides three parameters to ascertain the price sensitivity of a particular information: (i) price impact test which covers information regarding the listed entity, which if published is likely to materially affect the share price of the listed entity, (ii) reasonable investor test which refers to information which  is likely to be used by a reasonable investor for making investment decisions and thus which is likely to impact the share price, and (iii) information/event which the Board of Directors considers price sensitive.This proposal, if implemented, will result in disclosures of a lot of unnecessary information which may not be material, relevant or required for public dissemination. Such disclosures may at times result in loss of trade secrets and interference with confidentiality. Further, companies may find it difficult to ascertain within one day whether an event or information is required to be disclosed under the vague tests of materiality proposed to be introduced by SEBI.SEBI would be better advised to remove the long list of events and information to be disclosed and instead replace it with broad standards coupled with enhanced liabilities on defaulting companies.