With an aim to make the current disclosure regime for listed entities more robust and streamlined, the Securities and Exchange Board of India (“SEBI”), has issued a consultation paper proposing amendments to its existing provisions of Regulation 30 -- Listing Obligations and Disclosure Requirements-- Regulations, 2015 or “SEBI Listing Regulations”.
The changes proposed by the Consultation Paper carry the potential of revamping the disclosure regime significantly. The key proposals and consequences of implementing them have been briefly analysed below:
Quantitative thresholds for determination of materiality
The current regulations broadly categorise the disclosure requirements of listed companies into two parts: (i) events which are deemed to be material and therefore are mandatorily required to be disclosed (“Para A Disclosures”); and (ii) events which are required to be disclosed only if it is covered under the materiality policy formulated by the company itself (“Para B Disclosures”).
The Paper primarily deals with changes to the Para B Disclosures. While Regulation 30(4) of the SEBI Listing Regulations provides guidance to the listed entity on the determination of materiality, in practice most listed entities are seen to adopt rather generic materiality policies. This further leads to the listed entity having sole discretion to determine whether an event is material or not for its disclosure to the stock exchange. This practice leads to high levels of subjectivity in public disclosures, which in turn may result in information asymmetry in the market and adversely impact shareholders.
In order to limit the currently unbridled discretion available to listed entities, SEBI has proposed that disclosures be based on quantitative criterion. Accordingly, listed companies will be required to disclose events whose threshold value or expected impact in terms of value, exceeds the least of the following:
(a) 2 percent of turnover, as per the last audited standalone financial statements;
(b) 2 percent of net worth, as per the last audited standalone financial statements; or
(c) 5 percent of the 3-year average of absolute value of profit/loss after tax, as per the last 3 audited standalone financial statements.
By prescribing the above limits, SEBI has sought to considerably blur the lines of difference between Para A Disclosures and Para B Disclosures. In many ways, this is a welcome change as it sets clear expectations for both the listed entities and the shareholders, and brings about a level of certainty to the Para B Disclosures a listed entity must necessarily make. Having said that, while the proposed amendment strikes to curb the wide range of discretion exercised by listed entities (a step in the right direction) the suggested low disclosure thresholds may result in an information overflow, ultimately resulting in potential (and perhaps avoidable) stock fluctuations.
Verification of market rumours
Presently, pursuant to Regulation 30(10) of the SEBI Listing Regulations, listed entities are under an obligation to respond to all queries raised by the stock exchanges with respect to any event. Further, as per Regulation 30 (11) of the SEBI Listing Regulations entities may at their ‘own initiative, confirm or deny any reported event or information to the stock exchanges’. However, with the rise of digital media (which includes within its ambit social media), market rumours permeate rather rapidly and lead to fluctuations in share prices which may be detrimental to the shareholders / listed entities. As a result, retail investors often face the brunt of such rumours leading to fluctuations in share prices.
To address this issue, SEBI proposes to move from a reactive to a proactive disclosure model. It intends to make it mandatory for the top 250 listed entities (based on market capitalization) to confirm or deny any event reported in ‘mainstream media’, whether in print or digital mode, which may have a material effect on the listed entity. While beneficial to the interest of (especially) retail investors, the implementation of such proactive obligations (i.e., tracking rumours across various platforms) is likely to be quite onerous and challenging especially given the ever-expanding number of media platforms. Further, entities would have to develop the necessary infrastructure to track all such rumours and to provide a timely response, failing which they would be liable for a penal action.
As companies routinely engage in certain activities which may not fructify and given that rumours may crop up at any stage (say pre-negotiation or even mid-negotiation), any acceptance or denial of such rumours may be premature and prove to be counterproductive for the listed entity. A forced acceptance or denial of a rumour (intended to serve the interests of the public shareholders) may unwittingly lead to a negative commercial impact on the listed company (which ultimately results in a negative impact on public shareholders, the very persons the regulations seek to protect).
It currently also remains unclear as to what qualifies as ‘mainstream media’ and whether mainstream media is inclusive of mainstream social media platforms like Twitter etc. A clarification in this regard would be helpful especially since there are numerous digital and print media platforms and to expect listed entities to respond to all such rumours would not be feasible.
Disclosure timelines
In order to keep pace with the digital age where information spreads rapidly, SEBI has proposed to shorten the disclosure timelines. For events or information emanating from the listed entity, the disclosure timeline has been reduced from 24 hours to 12 hours.
The shorter timelines should have a positive impact on reducing concerns surrounding information asymmetry and might also effectively help mitigate market rumours, thus curbing (to a certain extent) share price fluctuations and arbitrage opportunities.
— The authors, Abhishek Dadoo, is a Partner, and Gaurang Mansinghka & Shubhra Wadhawan are Associates, at leading law firm Khaitan & Company. The views expressed are personal.
(Edited by : C H Unnikrishnan)
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