SEBI Proposes to Overhaul the Continuing Disclosure Framework

On November 11, 2022, the Securities and Exchanges Board of India ("SEBI") released a consultation paper ("Consultation Paper") on a review of Regulation 30 (hereinafter referred to as "Regulation 30") of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations"). Regulation 30 mandates every listed entity to disclose material events or information such as acquisitions, mergers, amalgamation, forfeiture of securities, revision in ratings, etc.

The Consultation Paper was released after SEBI received numerous complaints regarding improper, delayed, misleading, and inaccurate disclosures by listed entities. In addition, listed entities had also expressed reservations about Regulation 30 as they were confused about the policy they had to develop for the determination of material events or information. Considering the complaints and reservations expressed by investors and listed entities, SEBI has reviewed Regulation 30 and released the Consultation Paper proposing changes. In this article, we will analyze the extant Regulation 30 of the LODR Regulations along with the changes proposed by SEBI in its Consultation Paper. 

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Understanding Regulation 30 of the LODR Regulations

A robust framework of laws governing disclosure is essential to keep investors abreast of material information that would help them make investment decisions. Listed entities are those whose securities are listed on a stock exchange. The performance, disclosures, and transparency of listed entities affect investors, the public, and the market in general. The LODR Regulations, which apply to listed entities, enhance transparency and fair disclosures. Regulation 30 mandates listed entities to make certain disclosures related to material events or information to the stock exchanges. 

Under Regulation 30, all the events or information prescribed in Para A of Part A of Schedule III ("Para A") of the LODR Regulations are deemed material. Therefore, every listed entity must make disclosures of the items listed therein. These items include but are not limited to acquisitions, mergers, amalgamation, forfeiture of securities, fraud or defaults by KMPs, etc. Under Para B of Part A of Schedule III ("Para B"), listed entities have to disclose material events or information that the listed entities consider material. They have to institute a policy to determine which events or information are material. According to Regulation 30, they have to frame this policy keeping in mind the events or information, the omission of which might result in (i) discontinuity or alteration of publicly available events or information; or (ii) significant market reaction. SEBI has proposed significant changes to Regulation 30, keeping in mind the reservations and complaints expressed by listed entities and investors. Here are the changes proposed by SEBI:  

Critical Changes Proposed in the Consultation Paper

1. Materiality Threshold

Para B provides discretion to listed entities to frame their policy as to what can be considered material apart from the events or information enumerated in Para A. SEBI observed that many listed entities do not disclose events or information they consider immaterial but which are material. Further, many listed entities follow a generic materiality policy which keeps stakeholders such as investors, regulators, stock exchanges, and the public in the dark concerning certain events or information that are significant enough to warrant disclosure but do not come under the purview of the listed entities' materiality policy. Therefore, SEBI proposes introducing a materiality threshold to determine which events or information can be construed as material. 

The Consultation Paper prescribes that under Regulation 30, a listed entity shall divulge any event or information above a threshold value or expected impact which exceeds (i) 2% of the turnover; (ii) 2% of the net worth; or (ii) 5% of the three-year average of profit or loss after tax.

The rationale given by SEBI behind this change is that any impact on turnover will affect the net worth, and any effect on the net worth will inevitably affect the market value of the company's shares. Due to market fluctuations, one year's profit or loss may not be the suitable threshold value, so SEBI has proposed five per cent of the three-year average of profit or loss.  

SEBI has also proposed that listed entities shall frame their policy in a way that ground-level employees can ascertain which events or information could be material, and they can subsequently inform the KMPs. This has been proposed keeping in mind that certain events or information originate at the ground level, which KMPs might not come across. 

2. Timeline for Disclosure

Considering the speed at which word travels in the digital age, SEBI has proposed to reduce the timelines for disclosure of certain events or information. For example, the timeline for disclosure of events or information such as acquisition, scheme of arrangement, issuance or forfeiture of securities, buyback of securities, agreements which impact the management and control of the listed entity, etc., has been reduced to within 12 hours. In addition, material events or information originating from decisions arrived at in a board meeting need to be disclosed within 30 minutes from the closure of the said board meeting. 

3. Market Rumours 

Regulation 30 provides discretion to listed entities to confirm or dispel any market rumours to the stock exchanges. Market rumours significantly affect the performance of stocks and market sentiments. Moreover, due to the influence of social media and instantaneous communication platforms, market rumours can spread like wildfire today. Keeping this in mind, SEBI has proposed that the top 250 listed entities must either confirm or deny the news of any event or information reported in media that could have a material effect on it. 

There are many situations where an event or information could potentially be a material event or information but may not materialize. Therefore, it can be challenging for listed entities to decide whether or not to disclose such an event or information. 

4. Cyber Security Incidents

With the advancement in technology, cyber security has become of considerable importance. Consequently, a significant data breach or cyber security incident can have a material effect on the listed entity. Therefore, SEBI has proposed that listed entities disclose cyber security incidents or breaches with details and analysis every quarter under the compliance report submitted under Regulation 27 of LODR Regulations. 

5. Insertion of New Disclosures Under Para A 

SEBI has proposed that listed entities shall also make the following disclosures under Para A:

a) Resignation

Listed entities shall disclose to the stock exchanges the resignation of KMPs, directors other than independent directors, and senior management personnel, along with detailed reasons for resignation, within 7 days from the date of such resignation. 

b) Unavailability of Managing Director or Chief Executive Officer  

Listed entities must disclose to the stock exchanges if their Managing Director or Chief Executive Officer is unavailable or indisposed to fulfil their requirements for more than 1 month within 12 hours of such an event or information. 

c) Announcement of an event or information that is not already publicly available

Every listed entity shall disclose to the stock exchanges announcement or communication made by its KMPs, promoters, directors, or senior management to any form of mass media within 12 hours of such an announcement or communication. The announcement or communication is not caveated by anything. Any announcement or communication might come under its ambit, thus, increasing compliance for listed entities without advancing the interests of the investors. 

d) Action taken against the listed entity or key personnel

SEBI has moved the regulatory action disclosure from Para B to Para A. Every listed entity shall disclose to the stock exchanges within 24 hours any action against it or its KMPs or senior management or directors or promoter or subsidiary concerning the listed entity, including but not limited to sanctions, suspension, closure of operations, imposition of fine or penalty, search or seizure, etc. 

It is interesting to note that there is no materiality threshold concerning this disclosure. It is unclear how such disclosures would benefit investors without any threshold. 

e) Voluntary revision of financial statements

A listed entity voluntarily revising its financial statements or board of directors' report under section 131 of the Companies Act, 2013 shall disclose the same to the stock exchanges within 12 hours.

f) Delay or default in payment

Every listed entity that makes a delay or default in the payment of dues, fines, penalties, etc., to any enforcement, statutory, regulatory, or judicial authority shall disclose to the stock exchanges within 24 hours of such delay or default. However, SEBI has not placed a materiality threshold on disclosing delay or default in payment. Without a materiality threshold, it is unclear how such disclosures would protect investors. 

Conclusion   

The Consultation Paper proposes to enhance compliance for listed entities and reduce the time to disclose certain events or information. The changes suggested, if notified, would significantly affect continuing disclosures under LODR Regulations. Listed entities would need to formulate a materiality policy keeping the proposed materiality threshold in mind. 

Further, SEBI has not placed a materiality threshold on the disclosure of certain events, such as disclosure of delay or default in payment or action taken against the listed entity or its personnel. In the absence of such a threshold, it is unclear how such disclosures would further the investors' interests or help the regulators protect stakeholders. Initially, SEBI gave until November 28, 2022, for submission of public comments, which has been extended until December 12, 2022. It would be interesting to see how the industry reacts to the Consultation Paper and what changes SEBI makes after receiving feedback from stakeholders.