Originally published June 2, 2021

Event-based and prompt disclosure of material information are directed towards keeping public shareholders abreast of the developments of the listed entity. A statutory obligation in this regard was initially provided under the erstwhile clause 36 of the Equity Listing Agreement (Listing Agreement), which laid down an indicative list of events which may be considered as 'material' and are required to be intimated on an immediate basis to the stock exchanges. Presently, this obligation is provided under Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

It should be noted that clause 36 is to be read with section 21 of the Securities Contracts (Regulation) Act, 1956 (SCRA), which requires an entity to comply with the conditions of the Listing Agreement. Any failure to make timely disclosures would attract penalties under the provisions of SCRA.

Recently, on May 03, 2021, in the matter of Suzlon Energy Limited & Anr. v. SEBI, the Securities Appellate Tribunal (SAT) had addressed the validity of invoking section 23E of the SCRA for imposition of penalty, a practice commonly followed by SEBI while adjudicating violations of clause 36 of the Listing Agreement.

In the above matter, SEBI had passed an order against the Appellant, a company engaged in providing solutions for wind energy generation, for failure to make announcements in relation to the cancellation of certain orders, which was considered by SEBI as 'material information' warranting disclosure under clause 36 of the Listing Agreement. In this regard, SEBI had imposed the following penalties for the aforesaid violation: Rs. 5 lakh each under section 23(A)(a) of the SCRA, which deals with the penalty for failure to furnish information, and section 15HB of the SEBI Act, 1992 (SEBI Act) and a penalty of Rs. 1 crore under section 23E of the SCRA, which deals with failure to comply with listing conditions.

On appeal, while SAT upheld SEBI's finding on the merits of the matter and the penalties imposed under sections 23A(a) of the SCRA and 15HB of the SEBI Act, the penalty imposed under section 23E of the SCRA was set aside. According to SAT, the words 'failure to comply with listing conditions' used in section 23E cannot be equated to a 'failure to comply with clause 36 or other conditions of the Listing Agreement'. In this regard, SAT also referred to rules 19 and 19A of the Securities Contracts (Regulation) Rules, 1957, which lays down the conditions for listing of securities on a stock exchange, and clarified that section 23E is attracted when the conditions under rule 19 are violated, and not for violation of Clause 36.

In the above matter, an important distinction has been drawn out by SAT between conditions that are applicable on an entity prior to listing and the conditions imposed subsequently under the Listing Agreement. SAT held that section 23E of the SCRA can be invoked only in case of violations of the former, i.e., conditions applicable prior to listing. The distinction is also of particular significance in light of the difference in the quantum of penalty which can be imposed under sections 23E and 23A(a) of the SCRA. While section 23A(a) provides a maximum penalty of Rs. 1 crore, section 23E allows SEBI to impose a penalty up to Rs. 25 crores.

In the past, SEBI has consistently placed reliance on section 23E for imposing penalties while adjudicating violations of clause 36 of the Listing Agreement. The above decision is likely to effect a change in this ongoing trend and come to the aid of listed entities facing huge penalties for delayed or non-disclosure of 'material' information.

Note: On July 25, 2022, in an order arising out of the appeal before the Supreme Court, the issues under consideration have been delineated. The two issues are: firstly, whether violation of listing agreement leading to non-compliance of listing conditions under section 23E of SCRA and secondly, if a penalty has been imposed for violation of the listing agreement under section 23A, then whether the penalty can be imposed for failure to comply with the listing conditions under section 23E of the SCRA. The decision on the issues is pending.

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