SEBI’s Proposed Disclosure Requirements for Listed Entities: A Critical Analysis

Timely disclosure of relevant information by the listed entities to stakeholders through stock exchanges is an integral aspect of Corporate Governance. Disclosures ultimately results in transparency and equal access of information to all stakeholders. Chapter II of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI Listing Regulations’) relates to ‘Principles governing disclosures and obligations of listed entities’. Few important provisions relating to disclosures for listed entities are: (i) Listed   entity   shall   refrain   from   misrepresentation   and   ensure   that   the information   provided   to   stock   exchange(s) and investors is not misleading, (ii) Listed entity shall provide adequate and timely information to stock exchange(s) and investors, (iii) Listed  entity  shall  ensure  that  disseminations  made  under  SEBI Listing Regulations (and circulars made thereunder) are adequate, accurate, explicit, timely and presented in a simple language, (iv) Channels for  disseminating  information  shall  provide  for  equal,  timely  and  cost efficient access to relevant information by investors, (v) Listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders.

SEBI has proposed to amend certain disclosure requirements for listed entities. In the second week of November 2022, SEBI floated a Consultation Paper to review the disclosure requirements of material events or information under SEBI Listing Regulations. Understanding the possible impact of some important recommendations is relevant for Compliance Officers for listed entities. Through the proposed changes, SEBI intends to enhance the disclosure requirements and at the same time reduce the reporting period to stock exchanges, in certain cases. In this article, the author discusses the impact of few important proposed changes in the disclosure regime under SEBI Listing Regulations. SEBI’s recommendations are discussed in the light of existing principles governing disclosures and obligations of listed entities.

‘Codifying’ materiality: Under the extant provisions of SEBI Listing Regulations, certain events are deemed to be material events[1] and for certain events the disclosure depends upon the application of the guidelines for materiality[2]. In relation to the latter requirement, it is mandatory for listed entities to have a policy for determination of materiality. Now, in the Consultation Paper, SEBI has proposed minimum quantitative monetary threshold for such disclosures. The proposed thresholds are: (i) 2% of turnover[3], (ii) 2% of net worth[4], (iii) 5% of 3-year average of absolute value of profit/loss after tax[5]. If the said recommendation is implemented then discretionary power and application of Chapter II of SEBI Listing Regulation[6] becomes largely irrelevant. Every disclosure will then be required to be ‘measured’ whether the same is required to be disclosed or not. Interesting to note, that some events may not have immediate monetary value or determination of such value is difficult at the time of making disclosures to stock exchanges, e.g. product launch or disruption of operations of any one or more units of division of listed entities or granting/withdrawal of key statutory licenses.

Some recommendations, would be against certain important provisions of Chapter II of SEBI Listing Regulations, which includes that listed entity shall ensure that disseminations made under SEBI Listing Regulations are adequate, accurate, explicit, timely and that the listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders. If certain listed entities are not complying with the Chapter II of SEBI Listing Regulations, then SEBI may take action against such entities under securities laws, but, making such ‘discretionary’ disclosures as mathematical calculations would not serve the desired purpose. Such discretion exercised by the board of directors of listed entity is provided under Regulation 30 of SEBI Listing Regulations, materiality policy and Chapter II of SEBI Listing Regulations.

Confirming or denying events reported by mainstream media: Under the extant provisions of Regulation 30(11) of SEBI Listing Regulations, the listed entity may on its own initiative also, confirm or deny any reported event or information to stock exchange(s). In the Consultation Paper, SEBI has proposed that top 250 listed entities[7] shall necessarily confirm or deny any event or information reported in mainstream media, whether in print or digital mode, which may have material effect on the listed entity under the SEBI Regulation.

It is interesting to note that the only top 250 listed entities would have to mandatorily confirm or deny any event or information reported in ‘mainstream media’. For other listed entities, the said decision is at the discretion of the board of directors. Also, SEBI has not suggested any definition of ‘mainstream media’ and its jurisdiction. In this case, the question would be – whether the news report in New York Times relating to the listed entity (other than top 250 listed entities) would require any confirmation or denial of any reported event or information? Also, the question would be – whether blogs by market influencers would fall under ‘mainstream media’. In my view, this decision should be entirely left on the board of directors or compliance officers of the company. Probably, the said suggestion would be based on the recent case of Reliance Industries Limited, wherein SEBI had imposed penalty on Reliance Industries Limited and its compliance officers for alleged non-compliance of Regulation 30(11) of SEBI Listing Regulations w.r.t. the Facebook deal. On appeal, SAT granted stay on the SEBI order and observed that “One of the question which arises for consideration is whether the word ‘may’ juxtapose to the word ‘shall’ under Regulation 30(11) is mandatory or directory.”[8] This suggestion may be implemented after SAT clears air over the said compliance under Regulation 30(11) of SEBI Listing Regulations.

Reasons for resignation: SEBI also proposes reporting of reasons for resignation of KMP or senior management personnel. According to the suggestion, in case of resignation of KMP or senior management or a director (other than independent director), the letter of resignation along with detailed reasons for the resignation as given by KMP or the senior management or the director shall be disclosed to the stock exchanges by the listed entities within 7 days from the date of resignation. So now every director (independent or not), CEO, CFO, CS and statutory auditor would have to provide detailed reasons for resignation. This would be in light of the recent events of siphoning of funds, fraudulent related party transactions, frauds, possible bankruptcy situation, etc.

Timeline for reporting of certain events: SEBI proposes to reduce the timeline for reporting of certain events under SEBI Listing Regulations. It is suggested that same can be reported in three different ways: (i) not later than 24 hours from the occurrence of event or information – in case of those events or information which do not emanate from listed entity, (ii) not later than 12 hours from the occurrence of event or information – in case of those events or information that emanate within listed entity, (iii) within 30 minutes from the closure of meeting of the board of directors in which certain decisions are taken. The said reporting relates to the events or information under Part A of Schedule III of SEBI Listing Regulations (i.e. for both events, disclosure without any application of guidelines and disclosure upon application of guidelines of materiality).

All these are significant amendments proposed by SEBI would change the disclosures by listed entities to the stock exchanges. Some recommendations by SEBI would change the reporting and compliance functions in listed entities. The recommendations would increase the flow of information to stock exchanges and at a lesser time gap. In my view, SEBI should enforce non-compliance of provisions under Chapter II of the SEBI Listing Regulations (relating to ‘Principles governing disclosures and obligations’) for ensuring proper compliance. Codifying and measuring all events and information in monetary terms would ultimately eliminate discretion by the board of directors and compliance officers.