India: Corporate & Commercial Monthly Newsletter | April 2023

SEBI | Tightened norms for securities buy-back

SEBI notified the SEBI (Buy-back of Securities) (Amendment) Regulations, 2023 on February 07, 2023, which came into force on March 09, 2023 to further amend the SEBI (Buy-Back of Securities) Regulations, 2018 (Regulations) for providing restrictions on placements of bids, price and volume for a company seeking to buy back its shares through the exchange route.

At present, a company can exercise the tender offer route and the buy-back route to buy its shares listed on the bourses. As per the amended Regulations, a company can now buy-back shares and specified securities of value up to 25% of aggregate value of the paid-up capital and free reserves of the company, based on standalone/consolidated financial statements of the company, whichever sets a lower value. However, the buy-back of equity shares of a company shall be only permissible to the extent of 25% of the paid-up equity share capital of the company for that financial year. Further, the enforcement of the amendment has restricted the buy-back of securities to either from existing shareholders or holders of specified securities on a proportionate basis through a tender offer, or through the open market by the book building process or through the stock exchange.

The Regulations are applicable to buy-back of securities for all companies where the board of directors has approved a resolution to buy-back securities on or after the 30th day of notification of the amendment (i.e., March 09, 2023).

• Regulation 16 of the Regulations, states that buy-back of securities shall take place through a stock exchange having a nationwide trading terminal. For buy-back of shares through a stock exchange, a separate window shall be created by the concerned stock exchange and shall remain operational for the period during which the offer to buy-back securities are open.
• Clause (vi) of Regulation 16 provides that the buy-back of securities through a stock exchange shall be subject to restrictions on placement of bids, price and volume as specified by SEBI.

In order to ensure a smooth transition to the new regime for buy-back of securities, SEBI published the Circular No. SEBI/HO/CFD/PoD-2/P/CIR/2023/35 dated March 08, 2023 (Circular) to provide operational guidance to all listed entities, recognized stock exchanges and registered merchant bankers.

Key aspects

• Buyback through Stock Exchange Route: Pursuant to Clause (vi) of Regulation 16, the following restrictions are placed upon companies undertaking buy-back through stock exchange route:
  
  • The company shall not buy-back more than 25% of the average daily trading volume (in value) of its shares or other specified securities in the 10 trading days preceding the day on which the buy-back was made.
  • The company shall not place bids in the pre-open market, and during the first and last 30 minutes of the regular trading session.The company's purchase order price shall be restricted to the range of 1% above or below the last traded price.
  
  The Circular makes the compliance of the restrictions the prerogative of the company and the brokers appointed by it. The stock exchange has been empowered to impose appropriate fines and take other enforcement action in case of non-compliance.
  
  
• Margin Requirement for deposits in escrow account:
  
  • Regulation 9(xi)(c) of the Regulations allows a combination of various assets such as cash, bank deposits with scheduled commercial banks, bank guarantees in favor of merchant bankers by other scheduled commercial banks, deposits of frequently traded securities and equity shares, government securities or units of mutual funds invested in gilt funds or overnight schemes, to be used to maintain the escrow account for buy-back of securities, as per the margin requirements laid down by SEBI under Regulation 20(ii) of the Regulations.
  • The portion of the escrow account consisting of assets other than cash shall be subject to appropriate haircut in accordance with the SEBI Master Circular for Stock Exchanges and Clearing Corporations dated July 05, 2021, as amended from time to time.
  • Further, the merchant bankers have been advised to ensure the availability of adequate funds in the escrow account post the haircut till the completion of all formalities of the buy-back.

SEBI | New framework on ESG disclosure, investing and rating

In its meeting on March 29, 2023, the SEBI has approved a regulatory framework for ESG disclosures and has also formulated specific measures for ESG investing by top listed companies.

Key aspects

• Disclosure: To enhance reliability of ESG disclosures, a Business (Responsibility and Sustainability Report) Core (BRSR) has been introduced. The BRSR will contain a limited set of Key Performance Indicators (KPIs), for which listed companies will need to obtain a reasonable assurance. BRSR Core will be applicable to top 150 listed entities (by market capitalization) from FY 2023-2024 and will gradually be extended to top 1000 listed entities by FY 2026-2027.
  
  Given significant footprints in their value chains, it is proposed that ESG disclosure and assurance requirements will be introduced for such value chains. Thresholds for the same will be specified later. The value chain disclosures and assurance will initially be applicable to top 250 listed entities (by market capitalization) on comply or explain basis from FY 2024-2025.
• ESG investing: SEBI has introduced a number of new measures to ensure that the risk of mis-selling and greenwashing is addressed. Some of them are:
  • Mandating ESG schemes to invest at least 65% of AUM in listed entities where the assurance on Core BRSR is undertaken.
  • Mandating third party assurance and certification by the board of AMCs on compliance with the objective of the ESG scheme.
  • Mandating disclosure on fund-manager commentary and case studies which inter-alia highlight how the ESG strategy is applied to the fund/investments.
  • Mandating enhanced disclosures on voting decisions with a specific focus on ESG factors.
    
    
• Ratings: For facilitating the credibility of ESG ratings, the ESG Rating Providers (ERPs) are required to offer a separate category of ESG Rating called as the Core ESG Rating. The Core ESG Rating will be based on the assured parameters of the BRSR Core.

SEBI | Incentive program to encourage individuals to report tips on defaulters

• SEBI has introduced a reward mechanism for informants who provide credible information about the assets of defaulters to help recover fines from elusive offenders. Per the new mechanism, the reward may be granted in two stages - interim and final. The interim reward amount will not exceed 2.5% of the reserve price of the asset, or INR 5 lakh, whichever is less. The final reward amount will not exceed 10% of the collected dues, or INR 20 lakh, whichever is less.
  
  
• SEBI has issued a list of 515 defaulters where information can be provided. It will set up an Informant Reward Committee to recommend the eligibility of reward, comprising the chief general manager of the Recovery and Refund Department, the concerned recovery officer having jurisdiction in the matter, another recovery officer nominated by the chief general manager, and an officer in the grade of deputy general manager or higher of the Office of Investor Assistance and Education nominated by the chief general manager in charge of the Investor Protection and Education Fund (IPEF).
  
  
• The amount of reward granted to the informant will be paid from the Investor Protection and Education Fund. The new guidelines have become effective from March 8, 2023.

SEBI | Consultation Paper to address board permanency in listed entities

As per the Companies Act, 2013, unless the Articles of Association of a company (AoA) provide for the retirement of all directors at every Annual General Meeting (AGM), not less than two-thirds of the total number of directors shall be persons whose period of office is liable to determination by 'retirement by rotation' and out of the said two-thirds, at least one-third of directors shall retire from office every year through rotation¹. At the first AGM of a public company held next after the date of the general meeting at which the first directors are appointed and at every AGM, one-third of such directors are liable to retire by rotation². The directors to retire by rotation at every AGM shall be those who have been longest in office since their last appointment³. Therefore, not all directors are subject to retirement by rotation, or subject to the shareholders' approval, after his/her initial appointment.

On February 21, 2023, SEBI released a consultation paper titled 'Consultation Paper on Strengthening Corporate Governance at Listed Entities by Empowering Shareholders - Amendments to The SEBI (LODR) Regulations, 2015' (Consultation Paper). Amongst other aspects (agreements binding listed entities, special rights granted to certain shareholders, sale, disposal or lease of assets of a listed entity outside the 'scheme of arrangement' framework) the Consultation Paper aims to address the issue of board permanency in listed entities which may provide undue advantage to the promoter enjoying a permanent position and can be prejudicial to the interest of the public shareholders.

The Consultation Paper has summarized the existing provisions and practices of appointment of permanent directors as the following:

• Not all directors serving on the board of listed entity may be subject to retirement by rotation.
• There may be some directors who are appointed to the board of a listed entity without a defined tenure and not liable to retirement by rotation, such as non-independent non-executive directors.
• In addition to the above, by virtue of the provisions of the AoA, a person can be appointed as a director on a permanent basis. Such director, so appointed on basis of the provisions of AoA, serves as a permanent director on the board of the company. This allows such directors to serve on the board of a listed entity for as long as they desire without being subject to the evaluation by shareholders and enjoy board permanency.

After highlighting the issue stated above, the Consultation Paper has put forth the need for introducing periodic shareholders' approval requirement for all categories of directors of a listed entity, thereby providing legitimacy to the director to continue to serve on the board. This approval process should substantially address the concerns around grant of board permanency by listed entities to certain selected persons (mostly promoter-directors or related persons) by invoking the rights conferred on it by the AoA or by virtue of such persons being appointed as directors, deliberately making them not liable to 'retirement by rotation' and without a defined tenure.

Consequently, on March 29, 2023, SEBI in its Board Meeting approved amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to strengthen corporate governance at listed entities by empowering shareholders to do away with practice of permanent board seats by a periodic shareholders approval for any director serving on the board of a listed entity.

The approved amendment is meant to strengthen overwatch of shareholders in appointments to the board of directors of listed entities, whilst also providing a remedy in case of decline in the performance of a company. The periodic shareholders' approval is an admirable move to bolster the corporate governance norms of such listed entities. The amendment in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 can be expected shortly.

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Footnotes

1. Section 152 (6) (a) of the Companies Act, 2013

2. Section 152 (6) (c) of the Companies Act, 2013

3. Section 152 (6) (d) of the Companies Act, 2013

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