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India Inc is staring at significantly higher compliance and governance costs, following the Securities and Exchange Board of India’s (Sebi’s) latest tightening of disclosure norms and regulations around the filling of key positions, the materiality of information, and third-party transfers.
Recently, the securities market regulator amended the Listing Obligations and Disclosure Requirements (LODR) to introduce a raft of changes that will affect how listed companies go about transparency and disclosures.
The new framework will further empower public shareholders and soon move towards a ‘comply or be penalised regime or comply or explain’ in the case of high-value debt-listed entities.
One of the major changes towards transparency requires the top 100 listed companies to confirm, deny, or clarify any rumour or information reported in mainstream media within 24 hours, effective October 1.
The obligation will be extended to 250 companies, starting next financial year (2024-25).
“It can dampen the commercial vigour of the listed entity (as tracking such rumours is likely to be a time-consuming and tedious process), as the listed entity is now under obligation to not only comment on a market rumour but also provide its status,” says Sharad Abhyankar and Vaibhav Mittal of Khaitan & Co in a note analysing the latest amendments.
Legal experts believe that the companies will be required to keep pace and effectively track media developments to timely verify and respond.
“Although mainstream media has been defined, the interpretational developments thereof would be interesting to watch out for vis-à-vis finfluencers,” adds the duo.
Sebi has not only shortened the timeline for disclosures but also introduced quantitative thresholds for determining the materiality of events and transactions.
For instance, if an event or piece of information has a value impact of 2 per cent of turnover or net worth or 5 per cent of the average absolute value of profit or loss after tax, it will be classified as ‘material’.
“Disclosure of material events based on newly prescribed quantitative criteria of turnover/net worth/profit and that of certain types of agreements involving promoters and related parties is likely to pose inevitable practical difficulties because of the involved subjectivity,” says Harish Kumar, partner, Luthra & Luthra Law Offices India.
Another major challenge cited by consultants and legal advisors is the requirement of shareholders’ approval for any sale or lease with third parties.
“The provision to require the public shareholders to approve even third-party business transfer transactions appears to be somewhat overreaching.
"Safeguards already exist for any related party transactions.
"Extending them to third-party transactions will lead to administrative delays and potentially place unnecessary roadblocks in such transactions,” says Vaibhav Gupta, partner, Dhruva Advisors.
Among other key changes, Sebi has mandated shareholder approval every five years for continuation as a director on the board of a company, exposing them to proxy advisory scrutiny and evaluation.
This will put an end to the practice of board permanency, which will allow some individuals to continue on the boards without being liable to retire.
Moreover, listed companies will have to fill key vacancies in positions like chief executive officer (CEO), managing director (MD), and chief financial officer within three months of the vacancy, putting pressure on companies to instil a succession plan.
Legal experts say this change, along with the requirement on board composition with respect to non-executive directors and independent directors, could bring some implementational challenges and prove to be tough with the limited pool of talent.
The market watchdog has also enhanced disclosures for listed companies on fraud or defaults by a director or senior management, regulatory action, and the arrest of key managerial personnel. Sebi has also given clarity on the definitions of fraud and default.
The amendments to LODR were approved by the Sebi board at its meeting in March.
The changes were first proposed in a discussion paper in February.
While the board has approved most proposals, it didn’t accept the proposal on freezing the dematerialised accounts of the MD and CEO for continued non-compliance.
Industry players say the proposal had received negative feedback from industry captains.
“Sebi’s proactive role in addressing any challenges that arise from the implementation of the LODR amendment will be crucial to its successful execution.
"While most amendments underscore the need for listed entities to introspect on the spirit of compliance, it is clear that the compliance and governance costs of listed entities will continue to grow substantially,” reads a note by Khaitan & Co.
