Listing and disclosure rules consolidation: A good step?

By Sawant Singh and Aditya Bhargava, Phoenix Legal
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The Securities and Exchange Board of India (SEBI) notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, on 2 September. The regulations are designed to consolidate all post-listing requirements applicable to entities that have any securities listed on a stock exchange, thereby eliminating the need for issuers of multiple categories of securities to refer to multiple regulations.

A photo of Sawant Singh
Sawant Singh

With “streamlining” and “consolidation” as catchwords, the regulations consolidate the provisions of the listing agreements entered into between issuers and stock exchanges for issue of various types of securities such as equity shares, non-convertible debentures, non-convertible redeemable preference shares, Indian depository receipts, securitized debt instruments and mutual fund units, reducing the listing agreement to a much smaller document. SEBI’s press note on the notified regulations says the provisions of the regulations have been aligned with those of the Companies Act, 2013, and that forms of listing agreements will also be prescribed.

Continuing what seems to be a recent trend among Indian financial sector regulators, the regulations appear to be a hybrid mix of principles and prescriptions, with a chapter titled “Principles Governing Disclosures and Obligations of Listed Entity” followed by chapters prescribing obligations of listed entities in minute detail.

The principles prescribed by the regulations include: (a) information should be prepared in accordance with “applicable standards of accounting and financial disclosure”; (b) the listed entity should ensure that information provided to the stock exchange is not misleading; (c) disclosures should be accurate and timely and presented in simple language; (d) investors should be able to access information of the issuer through cost-efficient channels; and (e) a listed entity should follow its obligations in “letter and spirit taking into consideration the interest of all stakeholders”.

The regulations further prescribe a general obligation for listed entities to ensure that all key managerial personnel, directors, promoters and other relevant persons comply with the responsibilities and obligations assigned to them under the regulations.

A photo of Aditya Bhargava
Aditya Bhargava

Some see the regulations as being pro-investor. For instance, to bolster investors’ confidence and with a view to preventing fraudulent transactions such as insider trading, the regulations require entities whose shares or convertible instruments are listed to disclose information on board meetings on dividend declaration or cancellation, buyback of securities, fund-raising, alteration of capital, and financial results, within 30 minutes of the conclusion of the meeting.

Other events such as fraud, whether by the listed entity or its promoters or key managers; agreements which are not in the normal course of business such as shareholders’ agreements, joint venture agreements, and family settlement agreements; and corporate debt restructuring have to be disclosed within 24 hours of the occurrence of the event. In the same vein, dividend, interest and redemption payments must be made through electronic means, or through “payable at par” cheques where an electronic payment facility is not available.

The regulations also introduce amendments to SEBI’s debt listing regulations, which now require: (i) issuers to deposit 1% of the issue amount in case of an issue to the public; (ii) new issuers to enter into a listing agreement and existing issuers to enter into a fresh listing agreement within six months of notification of the regulations; and (iii) compliance with continuing listing obligations specified in the listing agreement.

Similar amendments to SEBI’s regulations on issue and listing of non-convertible redeemable preference shares and on the public offer and listing of securitized debt instruments have also been introduced by the regulations.

Criticism has been levelled on the extent of the disclosures required under the regulations. For instance, entities whose shares and convertible securities are listed are required to disclose a schedule of meetings with analysts and institutional investors together with presentations on financial results made to such persons within 24 hours of such meetings. This reduces the flexibility of the listed entity to explore options for its business, particularly if the results of any such meetings have to be disclosed immediately. A more suitable disclosure requirement would be one which is linked to a monetary threshold or a materiality or “price sensitivity” standard. SEBI must also recognize that extensive disclosures may desensitize common shareholders and crucial information which may affect their decision making process may get lost in a proverbial deluge.

So as not to catch issuers and market participants unaware and off-guard, the regulations prescribe that except for provisions on ordinary resolutions on related-party transactions and the reclassification of promoters, the regulations will only become effective 90 days after notification.

While SEBI’s press note states that the regulations have been issued pursuant to a consultative process, given the clamour around the disclosure requirements, it would be useful for SEBI to re-evaluate these to see if any amendments can be introduced to rationalize them.

Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.

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