Background
SEBI has recently notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“the Listing Regulations”). They will primarily replace the Listing Agreement and certain related provisions. On the face of it, it may appear that the notification is old wine in a new bottle. A superficial review may even create an impression that the Listing Regulations make merely cosmetic/ aesthetic changes in that they organise into categories/ chapters the myriad of clauses that were messily placed in the Listing Agreement, being the result of random additions/deletions and endless amendments. However, a closer analysis reveals that there are several structural changes and new requirements/modifications. Primarily, the status of the provisions has been substantially elevated from a set of provisions that had a dubious legal status to a proper law with, as we will discuss later, severe consequences. The rights and obligations of various parties that were unclear and uncertain under the Listing Agreement are now clearer, well-defined and attributed directly and specifically. More important is the fact that the obligations of various persons such as the company, its directors, the Chief Financial Officer, Company Secretary, etc. and even the auditors and the Audit Committee have increased. The life of the already overburdened and underpaid independent directors will worsen further.
The new regulations are fairly lengthy, though this is also on account of the fact that they seek to cover the listing obligations of not just equity shares but also other types of securities. Still, the 111 page long regulations would need a deep study to understand their implications. In this article, some highlights are briefly discussed.
Nature of the Regulations
The Regulations largely compile, rewrite and re-organise at several places, the familiar Listing Agreement and certain related provisions, in the form of Regulations. The Listing Agreement primarily provide for certain obligations of companies whose securities have been listed on recognised stock exchanges. The requirements include disclosures of important developments in such companies, of periodic accounts, etc. The Listing Agreement is also the place where Clause 49 that covers the requirements relating to corporate governance are placed. There are several other requirements contained in other provisions. These are now gathered at one place in an organised manner in the new Listing Regulations. Thus, while the SEBI ICDR Regulations pave the road to listing of securities of a company, the Listing Regulations
now provide for requirements of their continued listing.
A formal and very short Listing Agreement of course continues (which listed companies are required to execute) but the substantive provisions are now in the Listing Regulations. Further, the Listing Regulations provide for separate chapters for requirements in case of different type of listed securities.
Date when the regulations shall come into effect
The bulk of the regulations shall come into effect from 1st December 2015 (except, however, as will be seen later, for two sets of provisions that have come into effect immediately, i.e. from 2nd September 2015). This has given time for companies and others concerned to absorb the contents, changes and implications of the new
provisions.
More severe punishment for violations
The primary structural change is that, instead of the provisions being in the form of a listing agreement, which, at least conceptually, had a dubious legal status and hence implications, the Listing Regulations have a well recognised and well defined status and implications.
The Listing Agreement was of course not a mere private agreement where only the signing parties could act against each other. For example, section 23E of the Securities Contracts (Regulation) Act, 1956, provided for a stiff penalty for violation of listing conditions. The stock exchanges too ensured discipline and enforcement to considerable extent. Further, SEBI had direct control over the provisions. Nevertheless, the element of uncertainty remained. Moreover, the final recourse of contraventions of the Listing Agreement could, in theory, only be of terminating the Listing Agreement. This would mean delisting the shares in the present case which would obviously be counter productive as this would harm the shareholders for no fault of theirs. SEBI has of course been using its generic and wide powers to take action and pass fairly stringent orders. It has debarred directors, executives, etc. and generally taken penal action in various forms. However, this is not a happy situation. For one, such action is taken only in extreme cases. Further, the role and liability of various parties remains unclear.
Now that the provisions are in the form of regulations, there are clear penalties and other actions under the SEBI Act and the Listing Regulations. Parties such as directors, compliance officers, Auditors, Independent Directors, etc. are clearer on what their role is now.
Penalties are now specific and well defined. Penalties would be levied on specified parties, of defined amounts and as per specified transparent due legal process. It is clearer what the roles of the company (which is primary and generally comprehensive), the compliance officer (there are some provisions made for them directly), and the audit committee are.
Generally, as seen later, corporate governance provisions too have been elevated to status of law and the roles of individual parties or groups are now directly defined.
Regulation 98 also provides specifically for various actions by the stock exchanges in case of contraventions of the Listing Regulations. These actions include levy of fine, suspension of trading, etc. These actions are in addition to the penal and other actions under the SEBI Act. In many cases, there may be further action under the Companies Act, 2013 too.
Corporate governance now a law
Clause 49, as a legal term, is now history. Earlier, as a clause bearing that number, it was part of the Listing Agreement and thus had implications only as much as of the Listing Agreement. Now it is a specific component of the Listing Regulations.
While the requirements remain largely unchanged, considering that each requirement lays down what each person, committee, board, etc., has to do, the liability of parties is now specific and defined. These parties would now know what are the requirements statutorily expected of them and what are the consequences of non-compliance.
Chartered accountants and other professionals including auditors who are associated with listed companies in various ways will particularly need to pay heed to and understand the new provisions well.
Related party transactions
The requirements for approval, disclosure, etc. of related party transactions are largely carried over from Clause 49. The requirement of obtaining prior approval of the Audit Committee for all related party transactions continues. The relaxation for giving prior omnibus approval for certain types of recurring transactions as also for transactions up to a specified value under certain conditions also continues.
As earlier, material (as defined) related party transactions require approval of shareholders by way of a special resolution where related parties shall not vote. Two changes were expected. One was that the resolution required would be ordinary and not special. This change has been made and with immediate effect. Thus, now, only an ordinary resolution is required for approval of material related party transactions. The other was that only the bar on voting on such resolutions should be on only those parties that are related for the purposes of the proposed transactions. This change has not materialised. All related parties are barred from voting at such resolution. The definition of related party transactions remains broader. To these and certain other extent, the requirements under the Regulations are different from the corresponding requirements under the Companies Act, 2013.
Disclosures of material developments
The new Regulations provide for substantially revised provisions for disclosures by companies. Investors and markets generally expect suo motu and prompt disclosure of developments by the company. However, there was uncertainty on what to report, when to report, who to report and how to report. Balance is required between sending a deluge of information where a few important things get hidden in a pile of information, and reporting arbitrarily selective aspects only at the last possible date. Balance is also required in reporting things too early and too late when rumours and leaks have already caused havoc to the markets.
The Regulations now provide for completely re-written requirements for disclosures of material developments. They are divided broadly into two categories – disclosures of developments that are material as per certain specified guidelines and developments that are deemed to be material and hence to be reported. The stage at which the developments are to be disclosed has also been defined, and once that stage is reached, the requirement also is for prompt disclosure.
Of particular note are the deemed material items. For example, certain types of frauds are deemed to be material developments irrespective of the amounts involved.
Obligations of the Board
The regulations now specify and define, even if largely general terms, the obligations and duties of the Board of Directors of a listed company. This is of course largely carried over from clause 49. However, again, considering that the requirements are now in the form of regulations, they will have greater implications. They will need closer attention.
Accounts and financial Disclosures
The requirements of making periodic disclosure of results continue largely as earlier. This aspect would require greater study and analysis particularly by CFOs and Auditors.
Cessation of a person/group from the Promoter Group
Though relatively an infrequent happening, persons seeking to be excluded from the Promoter Group present not just a sensitive issue, but also remains uncertain in terms of legal provisions. For example, an individual or even a family/group may desire to be excluded from the Promoter Group. This may be because they no more hold partly or wholly any control or they wish to relinquish control. Being in control, even if it is joint, results in certain obligations which they wish to relinquish too, along with the control. At the same time, allowing such exclusion may result in persons having control or even a material connection being excluded from obligations. The Listing Regulations now contain fairly comprehensive and transparent requirements for permitting such exclusion. These requirements have come into effect from 2nd September 2015.
Conclusion
The lengthy Regulations provide for many things with far ranging implications that cannot be even highlighted in a short article. However, it is clear that the job of the board, director, committees, compliance officer, etc. has increased substantially. While in the short term, the transition from the Listing Agreement to the isting Regulations may be smooth, in the longer term perhaps, as companies and others are regularly hauled up and penalised in various forms, the implications of the changes will be realised. It is becoming more and more difficult to exist as a listed company and to be associated with a listed company. In the longer term the question that will confront us is, whether and to whom it is financially and otherwise rewarding to be so?
