Corporate Law Newsletter – SEBI (Amendment) Regulations : Nov 2023

Introduction

Comments and suggestions were invited by the public on the Consultation Paper on Strengthening Corporate Governance at Listed Entities by Empowering Shareholders – Amendments to the SEBI (LODR) Regulations, 2015 dated February 21, 2023. The Consultation Paper aimed to address issues such as special rights of shareholders, board permanency and disclosure requirements for certain listed entities. Several changes have been incorporated in the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2023 (“Amendment Regulations 2023”) vide notification No. SEBI/LAD-NRO/GN/2023/117 dated 14th June 2023. The Amendment Regulations 2023 have been introduced to strengthen corporate governance for listed entities, enhance disclosures by listed companies and ensure strict adherence to the Amendment Regulations 2023. 

Category I- Disclosures

• As per  Regulation 30(6) of the Amendment Regulations 2023, listed companies must make disclosures to the stock exchanges within 30 minutes after any material information has been discussed at the board meeting. The stock exchanges must be informed within 12 hours from the occurrence of the event within the listed entity and 24 hours from when the event occurs from outside the listed entity. The erstwhile regulation states that disclosures must be made “as soon as reasonably possible” which leaves room for ambiguity. Thus, the new regulation provides further clarity on the timeline.
• Under Regulation 30(4)(i)(c) of the Amendment Regulations 2023, there are 4 categories of events or information that trigger reporting requirements to the stock exchange. The Amendment Regulations 2023 have standardized the quantitative threshold for establishing materiality of an event or information. Previously, there was no quantitative threshold to determine materiality of an event or information. Pursuant to the amendment, exceeding any of the following thresholds would warrant disclosures.

1. 2% of turnover (as per the last audited consolidated financial statements of the listed entity);
2. 2% of net worth (as per the last audited consolidated financial statements of the listed entity, except in case the arithmetic value of the net worth is negative); or
3. 5% of the average absolute value of such profit or loss after tax (based on the last three audited consolidated financial statements of the listed entity).Any continuing event that transforms into a material event after the Amendment Regulations 2023 have been enforced, must be disclosed by such listed entity within 30 days from the date of effect of these of the Amendment Regulations 2023. The listed entity must formulate a Materiality Policy to determine the materiality of an event or information (“Materiality Policy”). Such Materiality Policy must not dilute the prescribed quantitative thresholds directly or indirectly.

• The Amendment has taken into consideration the importance of the employees in identifying such potential material event/information and reporting it to the Key Managerial Personnel (“KMP”) which has been addressed under Regulation 30(5) of the Amendment Regulations 2023. Thus, the listed entity must publicize its Materiality Policy to aid the employees in carrying out their responsibilities and must also establish a reporting infrastructure.  
• Regulation 30(11) of the Amendment Regulations 2023 provides that the listed entities, specifically the top 100 (effective from October 1, 2023) and top 250 (effective from April 1, 2024) must confirm/clarify/deny the current status of any material information or event that is reported on mainstream media being specific in nature, within 24 hours of such reporting. The time-bound obligation would require the entities to be updated with mainstream media reports and ensure compliance with this regulation.
• Regulation 46(2)(o) of the Amendment Regulations 2023 provides for a timeline for the listed entity to publish on their website the schedule of analysts or institutional investors for the investors meet at least 2 working days in advance. Prior to the Amendment Regulations 2023, there was no timeline specified for publishing such information. 
• Listed entities must comply and disclose details for the events provided under Schedule III. A few instances have been listed below:

1. Cyber security incidents or breach/loss of data in the quarterly compliance report on corporate governance in the format prescribed by the Securities and Exchange Board of India
2. Actions or orders passed by any regulatory/statutory/enforcement/judicial authority against the listed entity regarding suspension, imposition of fine or penalty, settlement of proceedings, debarment, disqualification, closure of operations, sanctions imposed, warning or caution or any other similar action(s) by whatever name called
3. Certain types of agreements that are binding and not in the normal course of business such as shareholder agreements, joint venture agreements, family settlement agreements 
4. Fraud committed by a director, senior management, or subsidiary as well as their arrest
5. Change in senior management
6. Resignation of senior management, director, and compliance officer.

• Regulation 34(2)(f) of the Amendment Regulations 2023 has replaced the Business Responsibility Report (“BRR”) with the Business Responsibility and Sustainability Report (“BRSR”).  BRSR is the new reporting format that shall link the financial output of an entity with its Environmental Social and Governance (“ESG”) performance. The format of the BRSR has been provided by SEBI in the Master Circular dated July 11, 2023. The ESG disclosure reporting requirements have increased. This requires entities to provide key performance indicators which are figures that help companies evaluate the environmental, social and governance impact of their activities. These indicators are provided under the circular dated July 12, 2023, BRSR Core- Framework for assurance and ESG disclosures for value chain. 

Category II – Corporate Governance

• Vacancies of certain Key Managerial Personnel such as manager/managing director/whole-time director/chief executive officer must be filled by the listed entities within 3 months from the date of the said vacancy as per Regulation 26A of the Amendment Regulations 2023. For any interim appointments, the entities must comply with the applicable laws and special consideration must be given to Section 203 of the Companies Act, as it prohibits dual employment of persons in such positions. 
• SEBI has identified the issue of board permanency which means a director that is appointed indefinitely or as stated in the articles of associates as permitted permanent director. Due to the provisions related to the retirement of directors under the Companies Act, the SEBI has issued this requirement. Regulation 17(1D) of the Amendment Regulations 2023 which will come into effect from April 1, 2024, states that the shareholders must give approval in a general meeting at least once in 5 years from the date of appointment or reappointment for the director to continue serving on the board.

There are certain exceptions to this regulation which are: 

• Managing director/manager/independent director/whole-time director/director who is retiring in accordance with Section 152(6) of the Companies Act,2013 if the approval by shareholders for continuation has been obtained;
• Director appointed by a court or tribunal;
• Nominee Director of a financial sector regulator or Government on the board;
• Director nominated by a financial institution that is regulated by the RBI under any lending arrangement that is in its normal course of business;
• Director who is nominated by a board registered debenture trustee under a subscription agreement for issued debentures of such listed entity.

Further, the amendment requires all promoter directors to obtain shareholders’ approval to continue serving on the board.

• Regulation 17(1E) of the Amendment Regulations 2023, mandates listed entities to fill in the vacancy of a director within 3 months from the date of such vacancy. This regulation does not contradict the LODR requirements that require entities to maintain board composition. In the event such a vacancy causes an imbalance in the statutory board composition then the listed entity must fill the office of the director on the date it is vacated. Entities lacking proper board planning would appoint a director in haste to fill in the vacancy which would affect the management of such entity as they would not have enough time to properly assess the candidate.
• Regulation 31B of the Amendment Regulations 2023 states that special rights such as nomination rights, affirmative voting, anti-dilution rights, right of first refusal, divestment rights and tag-along rights that are granted to any shareholder would require the approval of the shareholders of a listed entity once in every 5 years. This regulation has been inserted to provide equal treatment to all shareholders, especially in listed entities where certain shareholders have perpetual commercial rights even after listing and dilution of their stake. 
• The following exceptions do not require approval to exercise special rights:
  • a financial institution that is regulated by the RBI under any lending arrangement that is in its normal course of business and becomes a shareholder due to such arrangement; and
  • a board-registered debenture trustee under a subscription agreement for issued debentures of such listed entity and becomes a shareholder due to such arrangement.

• With effect from June 14, 2023, high-value debt-listed entities have a year to comply with the Amendment Regulations or explain non-compliance but after such date, it will lead to penalties in accordance with the provisions of the Securities and Exchange Board of India Act, 1992, rules and regulations.  

Conclusion

The 2023 amendment to the LODR regulations has reduced ambiguity regarding certain terms, provided shorter timelines for disclosures, added further disclosures pertaining to cyber events and breaches of data considering current events and mandated shareholder approval to enhance corporate governance. This will increase accountability, ensure fair practices, protect the rights of the investors, and ensure strict compliance. While many of the previous regulations have been retained with revisions, certain additions have been made by the SEBI to address market challenges and implementation hindrances.