On September 11, 2020, the Securities and Exchange Board of India (SEBI) issued a consultation paper seeking comments from the public on the proposed amendments to the SEBI (Listing Obligations and Disclosure Requirements) regulations, 2015 (LODR Regulations). The key objectives of the proposed amendments are to strengthen the corporate governance practices and disclosure requirements, ease the compliance burden on listed entities, and harmonise the provisions of the LODR Regulations with the provisions of the Companies Act, 2013 (Companies Act). Some of the key proposals are mentioned below:
1. Corporate Governance Norms
Companies with different market capitalisations have varying degrees of compliance requirements under the LODR Regulations. According to SEBI, it has been observed that once companies fall below the top market capitalisation category, they stop complying with the requirements applicable to such category. SEBI has proposed to add a new clause to Regulation 3 which would provide that the compliance obligations that become applicable to listed entities on the basis of market capitalisation shall continue to apply even when such company falls below the market capitalization thresholds for which the provisions apply, in order to ensure that these companies, which may return to the top market capitalization category in the future, continue to adhere to a high standard of corporate governance. Similarly, a new clause is proposed to be added to Regulation 15 which would provide that once the provisions of Chapter IV become applicable to a listed entity, the same shall continue to apply irrespective of subsequent change in the equity-share capital or net worth of such entity.
The second change proposed by SEBI to the corporate governance norms is concerning the disclosure of the outcome of a board meeting in terms of the events, such as issue of dividend, buyback of securities etc., as specified in Paragraph A (4) of Part A of Schedule III to the LODR Regulations. As per the extant law, listed entities are required to disclose the result of the board meetings pertaining to the above-mentioned matters within 30 minutes of conclusion of the board meeting. SEBI has proposed to amend this requirement such that the disclosure would have to be made within 30 minutes of the board of directors approving such proposal even if the board meeting has not concluded by then. The rationale behind this proposal is that board meeting might stretch to the end of the day or even the next, which increases the changes of leakage of such information to the market and a prompt disclosure would help in preventing the same.
2. Compliance obligations of listed entities
In terms of the compliance obligations of the listed entities, SEBI has proposed to remove the requirement of publishing an advertisement in a newspaper for certain information, as required under Regulation 47(1)(a) and (c) of the LODR Regulations. As listed entities are required to provide such information on their own websites as well as the websites of the stock exchanges they are listed on, the requirement of disclosing such information through an advertisement in a newspaper was found to be a burden that could be dispensed with. SEBI has also proposed to modify the obligation under Regulation 39(3) wherein listed entities are required to inform the stock exchanges regarding loss of physical share certificates and issuance of duplicate certificates within two days of receiving such information. Instead, it is proposed that the listed entity may file a quarterly report on this issue.
3. Harmonising the LODR Regulations with Companies Act
In order to harmonise the requirements under the LODR Regulations with the Companies Act, SEBI has proposed that any change in the name of a listed entity shall be approved by its shareholders. According to the proposal, the explanatory statement in the notice seeking such shareholder approval shall include a certificate from a practicing chartered accountant or company secretary that the proposed name shall reflect the activity the company does or proposed to do as required under Regulation 45(1) of the LODR Regulations. SEBI has further proposed to exempt such name changes from the requirement of an approval by the stock exchange, as the same is being approved by the shareholders.
In congruence with the requirements under Section 92(3) of the Companies Act, SEBI has proposed to add a new clause to Regulation 46 which would require a listed entity to display the annual returns filed by the entity on its website. The proposal further requires listed entities to disclose all material events on their own websites as required to be disclosed to stock exchanges under Regulation 30(8) of the LODR Regulations. SEBI has also proposed to insert a clause to Regulation 46(2)(s) which provides that if a listed entity has a foreign subsidiary, it should upload the consolidated financial statements of such foreign subsidiary on the website of the listed entity. Based on the informal guidance issued by it to HCL Technologies Limited, SEBI has provided that if the foreign subsidiaries of a listed entity are not required to get their financial statements audited, such listed entity can upload the un-audited financial statements of such foreign subsidiary.
Further, SEBI has proposed to do away with the requirement under Regulation 26(4), which imposes an obligation on non-executive directors to disclose their shareholding in the listed entity, including shareholding held on a beneficial basis, at the time of their appointment, as the same is substantially met with under Regulation 36(3) of the LODR Regulations. Regulation 36(3) is proposed to be modified to accommodate the disclosure of shareholding held on a beneficial basis. In order to bring congruity between the eligibility criteria of independent directors, SEBI has proposed to import the eligibility criteria given under Section 149 of the Companies Act to Regulation 16(1)(b)(V) of the LODR Regulations. However, SEBI has opted to maintain a lower threshold for pecuniary transactions as compared to the Companies Act. SEBI has also proposed to insert a clause to Regulation 24A which would require listed entities to submit a secretarial compliance report within sixty days from the end of each financial year.
The corporate governance measures proposed by SEBI are positive steps, which would improve the existing corporate governance framework applicable to listed entities. Further, these measures introduced by SEBI to harmonise the provisions of the LODR Regulations with those of the Companies Act would help in maintaining uniformity in the compliance requirements for listed entities, and help in reducing their compliance burden and costs.