The Securities and Exchange Board of India ("SEBI") has been cognizant of several lapses by listed companies in making true and fair disclosures related to its operations in the recent past causing sudden erosion of wealth of its shareholders or even collapse of companies. SEBI has therefore taken several steps in strengthening the disclosure norms to create transparency and accountability by listed companies. In this spirit, SEBI has deliberated amendments to the SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 ("LODR Regulations") and introduced the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 ("LODR Amendment Regulations 2023").
Keys Features of LODR Amendment Regulations 2023:
With a view to bring more transparency and to ensure timely disclosure of material events or information by listed entities, SEBI issued notification dated June 14, 2023, to amend the LODR Regulations by the LODR Amendment Regulations 2023 and some of its key amendments include:
- Reconfirmation of Director. In Regulation 17, after sub regulation (1C), a new requirement has been added with effect from April 1, 2024, which requires continuation of a director serving on the board of directors of a listed entity to be subject to the approval by the shareholders at least once in every 5 (five) years from the date of their appointment or reappointment, as the case may be. Further, continuation of a director serving on the board of directors of a listed entity as on March 31, 2024, without the approval of the shareholders for the last 5 (five) years or more will also be subject to the approval of shareholders in the first general meeting to be held after March 31, 2024. This requirement however is not applicable inter alia to (i) a whole-time director, (ii) a managing director/manager, (ii) independent director (iii) director appointed pursuant to the order of a court/tribunal, (iv) nominee director of the Government of a listed entity, other than a public sector company, (vi) nominee director of a financial sector regulator etc. The intent of this inclusion is to weed out non-performing non-executive directors who are holding positions for a long time under contractual arrangements with the entity.
- Disclosure of Private Agreements. Regulation 30A, inserted by
the LODR Amendment Regulations 2023, requires all shareholders,
promoters, promoter group entities, related parties, directors, key
managerial personnel (KMP) and employees of a listed company or of
its holding, subsidiary and associate company who are parties to
agreements which either directly or indirectly (i) impact the
management and control of the listed entity or (ii) impose any
restriction or liability upon the listed entity to inform to the
listed company about those agreements to which the listed company
is not a party, within 2 (two) working days from the date on which
they have entered into such agreement. The listed company is
required to disclose all such agreements to the Stock Exchanges
including disclosure of any recission, amendment or alteration of
such agreements thereto, whether or not the listed entity is a
party to such agreements.
The intent of the above inclusion is to ensure that all shareholders have access to information about the rights available to other stakeholders of the company to reduce disparity of information and the listed entity is also aware of the obligations imposed upon it by parties to such agreements. While the enforceability of these agreements on the company will continue to be debated, it brings transparency of contractual arrangements among parties pertaining to a listed entity.
- Special Rights Require Shareholders' Approval. Under the newly inserted regulation 31B, after the passing of the LODR Amendment Regulations 2023 (w.e.f. July 14, 2023), any special right granted to the shareholders of a listed entity will be subject to the approval by the shareholders in a general meeting by way of a special resolution once in every five years starting from the date of grant of such special right. However, any such special rights available to the shareholders of a listed entity as on the date of coming into force of the LODR Amendment Regulations 2023 will be subject to the shareholders' approval only after a period of five years from the effective date, i.e., such approval for all exiting rights will need to be taken by July 14, 2028. While the term 'special rights' has not been defined, it would include any special voting rights, nomination or governance rights related to the listed entity and would include any special rights granted to the promoters of the entity.
- The requirement of shareholder approval under Regulation 31B will not apply where the grant of such special rights to shareholders of a listed entity is made to a financial institution registered with or regulated by the Reserve Bank of India under a lending arrangement; or a debenture trustee registered with SEBI pursuant to a subscription agreement for debentures.
- Transfer of Undertaking Requires Approval. Regulation 37A has been introduced by virtue of which any listed entity which sells, leases or otherwise disposes of the whole or substantially the whole of its undertaking(s) outside of a scheme of arrangement mechanism (such as a business transfer agreement), will require prior approval of shareholders by way of special resolution wherein the votes cast by the public shareholders in favour of the resolution should exceed the votes cast by such public shareholders against the resolution. Earlier, only a special resolution from the shareholders of the company was required under the Companies Act, 2013 for such business transfer arrangements.
- This requirement will not be applicable to the transaction between holding company and its wholly owned subsidiary. However, the above exception from approval will lapse and the listed entity will need to take prior approval from the shareholders if (a) the wholly owned subsidiary intends to sell, lease, or otherwise dispose of the whole or substantially the whole of the undertaking received from a listed entity, whether in whole or in part, to any other entity, or (b) the listed entity dilutes its shareholding below 100% in its wholly owned subsidiary prior to the sale, lease or disposal of the undertaking.
- Several other amendments have been made to the Schedule III to the LODR Regulations to ensure more transparency for instance, disclosure requirements have become more specific with respect to fraud or defaults by a listed entity, its promoter, director, KMP, senior management or subsidiary or arrest of key managerial personnel, senior management, promoter or director of the listed entity.
While the intent of the amendments in LODR Regulations is to bring accountability and transparency, it may impact the private equity dealings of listed entities in view of additional compliances required of the listed entities. Many arrangements that earlier didn't require disclosures or shareholder's approval prior to grant of special privileges have been brought under the ambit of disclosure norms and will require more clarity in reporting by the company in regard to its operations and management and will make such information available to shareholders and public (which was earlier hidden or not disclosed).
Following these amendments in LODR Regulations, SEBI had further issued stringent guidelines to enforce time-bound regime for disclosing of details of material events or information by listed companies vide its circular dated July 13, 2023. Among the disclosures specified in relation to material agreements, details of nominee on the board of directors of the listed entity and potential conflict of interest arising out of such agreements are required to be disclosed. Additionally, the timeline for compliance has been reduced with disclosures now having to occur within 12 (twelve) to 24 (twenty-four) hours of the event. For instance, in case of material events or information including those related to acquisitions, scheme of arrangement, split or consolidation of shares, issuance or forfeiture and buyback of securities, the timeline for disclosure by the entity is specified as within 12 (twelve) hours.
Further, shareholder agreements, joint venture agreements, as well as agreements entered into by shareholders, promoters, related parties, directors, key managerial personnel, and employees of the listed entity or of its subsidiary, which can directly or indirectly or potentially impact the management or control of listed entity are required to be disclosed within 12 (twelve) hours where listed entity is a party and within 24 (twenty-four) hours where the listed entity is not a party.
2. SEBI issued circular dated July 13, 2023, (https://www.sebi.gov.in/legal/circulars/jul-2023/disclosure-of-material-events-information-by-listed-entities-under-regulations-30-and-30a-of-securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-201-_73910.html), which has come into effect from July 15, 2023. This Circular is in furtherance to the previous Master Circular dated July 11, 2023 (https://www.sebi.gov.in/legal/master-circulars/jul-2023/master-circular-for-compliance-with-the-provisions-of-the-securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-by-listed-entities_73795.html) which had provided a comprehensive framework for the compliance requirements specified under LODR Regulations by consolidating all applicable circulars issued by SEBI till June 30, 2023.
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