- The Securities and Exchange Board of India (‘SEBI’) constituted an Expert Committee on August 24, 2023, under the chairmanship of Shri S.K. Mohanty.
- The primary objective of this Committee being to facilitate ease of doing business for listed entities in India by harmonizing the provisions of the Issue of Capital and Disclosure Requirements (‘ICDR’) and Listing Obligations and Disclosure Requirements (‘LODR’) Regulations.
- Now the expert committee has suggested recommendations via consultation paper which was released on June 26, 2024 and is open for public comment until July 17,2024.
- The Expert Committee has submitted its final recommendations on LODR and ICDR Regulations and the report of the Expert Committee consists of three parts:
- Part A of the report deals with recommendations relating to ease of doing business under the LODR Regulations;
- Part B of the report deals with recommendations relating to ease of doing business under ICDR Regulations.
- Part C of the report deals with recommendations relating to harmonization of provisions of ICDR and LODR Regulations.
Let’s now analyse what all recommendations are proposed
Part A: recommendations relating to ease of doing business under the LODR Regulations
Chapter I : FILINGS AND DISCLOSURES
1. Single Filing system :
Currently, under Regulation 10 of the LODR Regulations, listed entities must file reports and documents with recognized stock exchanges using electronic platforms like BSE’s Corporate Announcement Filing System (CAFS) and NSE’s NSE Electronic Application Processing System (NEAPS). The recommendation suggests implementing a single filing system through API-based integration between stock exchanges, allowing documents filed with one exchange to be automatically shared with and disseminated by the other exchange(s).
2. Integration of periodic filings:
Currently, listed entities must disclose various information on a quarterly, half-yearly, and annual basis. The recommendation suggests streamlining these disclosures by merging certain reports, eliminating redundant requirements, and consolidating multiple submissions into single disclosures to reduce repetition and administrative burden.
3. System Driven disclosure of certain filings :
Currently, listed entities must disclose filings like the shareholding pattern per Regulation 31 and revisions in credit ratings as per Clause 3 of Para A of Part A of Schedule III of the LODR. The recommendation suggests replacing the quarterly shareholding pattern submission with more frequent System Driven Disclosures (SDD) from depositories, automating the shareholding pattern disclosure from depository participants, and making credit rating disclosures system-driven, similar to SAST and PIT disclosures. This automatic disclosure system would enhance the frequency and efficiency of sharing shareholding patterns and credit ratings with exchanges.
4. Website disclosures :
Currently, Regulation 46 of LODR requires listed entities to maintain a functional website and update content within two working days of any changes. The recommendation allows listed entities to publish direct links to curated disclosures on the stock exchange websites, reducing the need to continually update their own websites with this information.
5. Newspaper advertisement :
Currently, Regulation 47 of the LODR Regulations mandates that listed entities publish their financial results and shareholder notices in one national and one regional newspaper. The recommendation suggests making detailed newspaper advertisements for financial results optional, instead requiring a small box advertisement with a QR code and weblink to the full financial results for investors.
CHAPTER II : BOARD OF DIRECTORS AND ITS COMMITTEES
1. Timeline to fill up vacancies in Board Committees
Currently, Regulation 17(1E) of the LODR Regulations requires listed entities to fill any director vacancy within three months, but there are no specific timelines for filling vacancies in Board Committees. The recommendation suggests implementing a three-month timeline to fill vacancies in Board Committees as well.
2. Timeline for shareholder approval for appointment or reappointment of director of a listed entity
Currently, regulation 17(1C) of the LODR Regulations requires shareholder approval for board appointments within 3 months or by the next general meeting, with public sector companies allowed to wait until the next AGM or EGM. The Committee recommends excluding the time taken for regulatory or government approvals from this time limit and granting exemptions from shareholder approval for directors nominated by courts, tribunals, or financial sector regulators.
CHAPTER III : PROMOTERS AND CONTROLLING SHAREHOLDERS:
1. Framework for reclassification of promoter or promoter group entities
Currently, Regulation 31A of the LODR Regulations outlines the reclassification process for promoter or promoter group entities as public shareholders, requiring approvals from the board, shareholders (if applicable), and stock exchanges. The Committee recommends streamlining this process by having the board consider reclassification requests within two months, the listed entity apply for a stock exchange no-objection certificate (NOC) within 5 days, and the stock exchanges provide the NOC within 30 days. Following NOC receipt, shareholder approval must be sought within 60 days, after which the entity notifies the stock exchanges and completes the reclassification.
2. Obligation for disclosure of information to the listed entity
Currently, the LODR Regulations require listed entities to disclose shareholding patterns quarterly and related party transactions half-yearly, but do not obligate promoters, directors, or key managerial personnel (KMPs) to disclose their relatives or interests in other entities, causing difficulties in ensuring accurate disclosures. The Committee recommends adding a new sub-regulation requiring promoters, directors, and KMPs to disclose all relevant information to help listed entities comply with applicable laws and provide accurate information to shareholders.
CHAPTER IV :RELATED PARTY TRANSACTION
1. Definition of related party transaction
Currently, Regulation 2(1)(zc) of the LODR Regulations exempts specific transactions from being classified as related party transactions (RPTs), including preferential issues of securities and certain corporate actions like dividends and rights issues. The Committee recommends expanding these exemptions to include corporate actions by subsidiaries of listed entities, acceptance of certain deposits by banks under RBI regulations, and retail purchases by directors or employees from the listed entity or its subsidiaries under uniform terms. These changes aim to clarify and broaden the scope of exemptions from RPT definitions under the LODR Regulations.
2. Approval of RPTs by the audit committee of the listed entity
Currently, Regulation 23(2) of the LODR Regulations mandates prior approval by the audit committee for all related party transactions (RPTs) involving the listed entity, including those of its unlisted subsidiaries above specified thresholds. Recommendations by the Committee propose excluding remuneration to directors, KMPs, or senior management (excluding those in the promoter or promoter group) from requiring audit committee approval if not material, and allowing post-facto ratification of RPTs by independent directors on the audit committee within three months or the next committee meeting, with conditions to limit the value and ensure disclosure. These changes aim to streamline processes while maintaining transparency and governance standards under the LODR
3. Omnibus approval of RPTs by the audit committee
Currently regulation 23(3) of LODR allows the audit committee to grant omnibus approval for related party transactions (RPTs) proposed by the listed entity, but it is not explicitly stated whether this applies to RPTs proposed by subsidiaries of the listed entity. Now the Committee recommends clarifying that the provision of omnibus approval under Regulation 23(3) of LODR should also apply to RPTs proposed by subsidiaries, as the regulation is intended to cover all RPTs by the listed entity and its subsidiaries as defined under Regulation 2(1)(zc) of LODR.
4. Exemption from approval requirement for RPTs
Currently regulation 23(5) of LODR exempts audit committee and shareholder approval for RPTs between two government companies, between a holding company and its wholly owned subsidiary (WOS), and between two WOS of a listed holding company.The Committee recommends extending these exemptions to include transactions for payment of statutory dues to the government, transactions between two public sector companies, and transactions between a public sector company and the government. This broadens the scope of exemptions to facilitate smoother operational transactions involving government entities.
5. Half yearly disclosure of RPTs
Currently regulation 23(9) of LODR requires half-yearly disclosure of RPTs in the format specified by SEBI Circular no. 2021/662, now part of Section III-B of Master Circular no. 2023/120. The Committee recommends exempting the disclosure of remuneration and sitting fees paid by the listed entity or its subsidiary to its director, KMP, or senior management (except those who are part of the promoter or promoter group) from Regulation 23(9) of LODR, provided these payments are not material as per Regulation 23(1).
CHAPTER V:DISCLOSURE OF MATERIAL EVENTS OR INFORMATION UNDER REGULATION 30
1. Timeline for disclosure of material events or information
Currently regulation 30(6) of LODR requires listed entities to disclose material events within thirty minutes of the board meeting’s closure, with specific guidelines for certain disclosures, including litigation, within twenty-four hours as per SEBI Circular no. SEBI/HO/CFD/CFD-PoD-1/P/CIR/2023/123. The Committee recommends the following adjustments to the disclosure timelines for events decided in board meetings and litigations:
a) For disclosures of events decided in board meetings:- If the board meeting closes after normal trading hours but more than 3 hours before the start of the next normal trading session, the disclosure should be made within 3 hours of the meeting’s closure. If the board meeting closes during normal trading hours or within 3 hours before the start of the next normal trading session, the disclosure should be made within 30 minutes of the meeting’s closure.
b) For disclosures of litigations or disputes where claims are made against the listed entity, the timeline for disclosure should be increased to 72 hours from the existing 24 hours.
2. Disclosure of acquisition by listed entities
Currently acquisition of shares or voting rights in a company requires disclosure if it results in holding 5% or more, changes holding by more than 2%, or exceeds the materiality threshold specified under regulation 30(4)(i)(c) of LODR. The Committee suggests increasing the disclosure threshold to 20% for direct or indirect holdings in listed or unlisted companies and subsequent changes exceeding 5%. For unlisted companies, acquisition or changes exceeding 2% should be disclosed quarterly. Additionally, detailed disclosures are recommended for ‘to be incorporated’ companies, covering information such as incorporation details, industry, background, approvals, consideration, cost, and shareholding percentage.
3. Disclosure of tax litigation or disputes
Currently listed entities must disclose information about any litigation or dispute impacting the entity, including cumulative material amounts, and actions taken or orders passed by regulatory or judicial bodies.The Committee recommends clarifying that tax litigations and disputes, including tax penalties, should be disclosed under sub-para (8) of Para B based on materiality criteria, not under sub-para (20) of Para A. Disclosures should include new tax litigations or disputes within 24 hours, quarterly updates on existing tax litigations or disputes , and cumulation of related outcomes for materiality determination.
4. Disclosure of imposition of penalty:
Currently, Sub-para (20) of Para A requires listed entities to disclose penalties imposed by authorities. The Committee suggests specifying a monetary limit for immediate disclosure of penalties, with a lower threshold of Rs. 10,000 for sectoral regulators or enforcement agencies and a higher threshold of Rs. 10 lacs for other authorities. Penalties below these thresholds should be disclosed quarterly as part of the Integrated Filing (Governance).
5. Clarification w.r.t disclosures of material events specified under schedule III of LODR Regulation
The Committee recommends aligning disclosures of fund raising outcomes with Regulation 29 to include only proposals involving securities issuance under sub-para (4) of Para A. It suggests clarifying that fraud by senior management not classified as promoter, director, or KMP should be disclosed under sub-para (6) of Para A only if related to the listed entity. Additionally, the Committee proposes specifying types of forensic audits requiring disclosure under sub-para (17) of Para A in LODR Regulations for clearer guidelines.
Kindly note from here onwards recommendations by the Expert Committee are quoted directly
CHAPTER VI : OTHER COMPLIANCE REQUIREMENTS AND OBLIGATIONS
1. Relaxations from certain Compliance requirements for companies coming out of the IBC Framework
In order to provide time for companies coming out of corporate insolvency resolution process (CIRP) to ensure compliance with LODR, the following relaxations may be provided: –
- 3 months for filling up the vacancy of KMPs subject to having at least one full-time KMP;
- 3 months to have required board / committee composition.
- Additional time of 45 days (or 60 days for annual results) to be provided for disclosure of financial results for the quarter in which the resolution plan is approved.
2. Subsidiary related compliance requirements
The requirement of approval of shareholders under regulation 24(6) for sale, disposal or lease of assets of material subsidiary shall not be applicable if such a transaction is between two wholly owned subsidiaries of the listed entity.
3. Record date
1)Time gap between intimation and actual record date to be reduced to minimum 3 working days (from 7 working days) except for corporate action through a scheme of arrangement. 2) Minimum gap between two record dates to be reduced to 5 working days (from 30 days). 3) Minimum gap between two book closures to be omitted.
4. Schemes involving reduction of capital on account of writing off accumulated losses
Doing away with the requirement of obtaining no-objection letter from stock exchanges for schemes involving writing off accumulated losses against share capital of the company (applied uniformly to all categories of shareholders) or against the reserves of the company. The draft scheme to be filed with stock exchanges only for disclosure purposes.
5. Analyst or institutional / Investor meet
The following are recommendations relating to analyst of institutional investor meet:
- Disclosure of names of analysts or institutional investors in the schedule of analyst or institutional investor meet shall be optional for listed entities.
- Presentations prepared by a listed entity for analyst or institutional investors meet or post-earnings / quarterly calls to be disclosed to Stock Exchanges before the beginning of such events.
- Video recordings of post-earnings / quarterly calls may be uploaded within 48 hours.
- Audio / video recordings to be available on website for 2 years (instead of 5; to be preserved by company for 8 years) and transcripts to be available on website for 5 years (to be preserved by the company for 8 years).
6. Annual Reports
Doing away with the requirement to send physical copies of abridged Annual Report to shareholders whose email id is not available. Instead a letter to be sent to such shareholders indicating the link from which the annual report can be downloaded. The requirement to dispatch Annual Reports specified in regulation 36(2) of LODR may be omitted. Annual Report needs to be submitted to the Stock Exchange on or before commencement of its dispatch to the shareholders.
7, Postal ballots
Suggestion to MCA to exempt listed entities from sending postal ballots to its shareholders. Postal ballots may be substituted with remote e- voting. The period for which e-voting needs to be kept open may also be reduced suitably (from the existing timeline of 30 days to 7 days).
8. Payment of dividend / Dividend warrants
Suggestion to MCA to do away with the requirement of dispatching dividend warrants for smaller amounts (less than Rs. 10) in cases of non-availability of bank account details or failure of delivery of dividend credit through electronic means. In such scenarios, the dividend to be kept in the unpaid account and shall be sent to the shareholders when the cumulative amount exceeds Rs.10 or before transfer to IEPF.
CHAPTER VII : FACILITATING SHAREHOLDER PARTICIPATION IN GOVERNANCE OF LISTED ENTITIES
Virtual / electronic and hybrid shareholder meetings
Suggestion to MCA to permit virtual general meetings and, hybrid general meetings on a permanent basis. Notice period for electronic / virtual meetings to be suitably reduced (from the existing requirement of 21 days to 7 days). The requirement to send proxy forms for general meetings held virtually to be dispensed with.
CHAPTER VIII:STRENGTHENING CORPORATE GOVERNANCE AT LISTED ENTITIES
1. Diversity in the institution of IDs, meetings of IDs and Risk Management Committee:
Encourage top 2000 companies to have 1 women ID and constitute a risk management committee (right now only top 1000 listed entities). Encouraging top 2000 companies to have more than the mandatory annual meeting of IDs without the presence of non-IDs and the management.
2. Strengthening the position of Compliance Officer
Compliance Officer to be designated as a KMP and to be an whole- time employee not one level below the board of directors. This shall help in strengthening the position of compliance officers commensurate with the responsibilities cast upon them.
3. Secretarial auditors
In order to strengthen the secretarial audit at listed entities and to prevent conflict of interests, the following are recommendations on secretarial auditors appointed at listed entities: (i) Provisions relating to appointment, reappointment of secretarial auditors be inserted in LODR Regulations in line with provisions for appointment, re-appointment of statutory auditors prescribed under section 139 (1) and (2) of Companies Act, 2013. An individual may be appointed for a term of 5 years and a firm may be appointed for a maximum of 2 terms of 5 years each subject to approval of shareholders in a general meeting. (ii) Provisions relating to eligibility (shall be a peer reviewed company secretary) and disqualifications (where there is conflict of interest) may also be prescribed in the LODR Regulations. (iii) A cooling-off period of 5 years for re-appointment of an individual as a secretarial auditor (after 1 term of 5 years) and for re-appointment of a secretarial audit firm (after two consecutive terms of 5 years) . (iv) Provisions relating to removal of secretarial auditors with the approval of shareholders of a listed entity may be inserted in the LODR Regulations. (v) From April 1, 2025, appointment, re-appointment or continuation of secretarial auditors of listed entities shall be in compliance with the aforesaid provisions. Further, with effect from April 1, 2025, the Secretarial Compliance Report submitted by a listed entity to be signed only by the Secretarial Auditor or by a Peer Reviewed Company Secretary who satisfies the aforesaid requirements.
4. Compensation / profit sharing agreements surviving after listing
Any pre-listing compensation or profit-sharing agreement that subsists after listing would require ratification of shareholders in the first general meeting held after listing.
5. Additional information on website
The following additional documents / information to be disclosed on the website of a listed entity in the interest of the investors: Article of Association, Memorandum of Association, Brief profile of board of directors and Employee benefits related scheme documents.
CHAPTER IX:DRAFTING CHANGES
Following drafting changes to certain provisions of the LODR regulations and related circulars:
- Omission of definition of half-year, disclosure of details of material RPTs in the quarterly corporate governance, references to transfer of shares in physical form under regulation 40 of LODR, and redundant disclosures in the annual report.
- Clarification on cessation of applicability of corporate governance provisions, prior approval of shareholders for appointment or re-appointment of non-executive director crossing 75 years of age, applicability of regulation 17(1D) of LODR, gap between 2 consecutive meetings of the Board of Directors and its Committees, disclosure of details of agreements under regulation 30A of LODR, and group governance unit.
- Recommendations of the Board of Directors to the shareholders to specifically include rationale of the Board.
- Modification to regulation 39(2) of LODR on issuance of Letter of Confirmation instead of certificates.
PART B: RECOMMENDATION RELATING TO ICDR REGULATIONS
CHAPTER X : SUGGESTIONS TOWARDS EASE OF DOING BUSINESS AND PROVIDING CLARITY WITH THE OBJECTIVE OF INCREASING TRANSPARENCY IN RESPECT TO PROVISIONS UNDER ICDR REGULATIONS
1. Price Band Advertisement and other issue related advertisements
- Combining pre-issue advertisement and price band advertisement as single advertisement.
- Disclosure of certain information with a quick response (QR) code link.
- Disclosure of pre-issue shareholding and post-issue shareholding for promoter, promoter group and additional top 10 shareholders.
2. Voluntarily disclosure of proforma financials in public issue, rights issue and for QIPs
- Permitting Issuers to voluntarily include proforma financial statements for such additional fiscal periods as it deems necessary, including, even if the acquisition or divestment was undertaken before the completion of the latest period(s) for which financial statements are disclosed in offer document.
- Permitting issuers to voluntarily disclose financial statements of the subsidiaries/businesses acquired or divested.
- Permitting issuers to voluntarily disclose proforma financials (on a consolidated basis) to disclose the impact of acquisition proposed to be done from proceeds of the issue.
3. Requirement to make public announcement after filing of draft offer document
The requirement to issue advertisement after filing DRHP to be changed from “two days” to “two working days” and 21 day period for public comments to be calculated from the date of advertisement instead of date of filing.
4. Certification requirements where one of the objects of the issue is loan repayment
Certificate for utilization of the loan can be obtained from a peer reviewed chartered accountant instead of statutory auditor, in following cases:
- for period not audited by the current statutory auditor; or
- loan was for subsidiary and current statutory auditor of the issuer is not the statutory auditor of subsidiary.
5. Eligibility conditions for IPO
Flexibility to be provided under eligibility conditions for an IPO by allowing issuers with outstanding Stock appreciation rights (SARs) to file DRHP where such SARs are granted to employees only and are fully exercised for equity shares prior to the filing of the RHP.
6. Clarification regarding additional conditions for an OFS prescribed under Regulation 8A
Limits set out for offer for sale under Regulation 8A of ICDR needs to be calculated with reference to the shareholding as of the date of the draft offer document and apply cumulatively to the total number of shares offered for sale to the public and any secondary sale transactions prior to the issue.
7. Deletion of provision related to reservation for employees in rights issues
In terms of the framework of a rights issue under the Companies Act, 2013 and Regulation 74(3) of the ICDR, shares are required to be offered on a rights basis only to shareholders of the company as of the record date. Accordingly, in the context of a rights issue, ICDR provision related to employee reservation needs to be deleted in rights issue chapter.
8. Disclaimer for illustration on disclosure of weighted averages of certain ratios in the basis for offer price section
For illustrative format on disclosure of certain ratios in the basis for offer price section given at Schedule VI of ICDR, following clarification needs to be provided: “The table above is for illustrative purposes only. Appropriate due diligence shall be exercised by the lead managers in assigning weights.”
9. Disclosure of pre-IPO transactions
To enhance transparency and information available for investors, issuer needs to make disclosure of pre-IPO transactions after filing of DRHP and details pertaining to such transactions to stock exchange(s).
10. Promoter Lock-in period where issue proceeds are used for Repayment of Loans and such loan have been utilized for Capital Expenditure:
In case of loans being repaid from the proceeds of the issue and if such loans were utilized for capital expenditure, it needs to be clarified that longer promoter lock-in period as in case of capital expenditure object, applies.
11. Disclosure of information on standalone basis where issue proceeds is used to fund working capital
Additional disclosures to be provided based on the audited standalone financial statements in cases where issue proceeds is used to fund working capital.
12. Common checklist for in-principle approval of the stock exchange – Already implemented by exchange.
PART C – RECOMMENDATION RELATING TO HARMONIZATION OF THE PROVISIONS OF ICDR AND LODR REGULATIONS
CHAPTER XI : SUGGESTIONS TO HARMONIZE REQUIREMENTS UNDER ICDR AND LODR REGULATIONS
1. Aligning disclosures related to Material Litigation in ICDR with LODR
Alignment of the material litigation disclosure requirements by listed companies and to-be-listed companies, ensuring clarity and parity in disclosures of litigation prior to and after the listing of an issuer.
2. Aligning definition for identification of Material Subsidiary thresholds
Aligning terminology for identification of a material subsidiary under the ICDR and LODR by referring to consolidated “turnover” instead of “income”.
3. Disclosure of material agreements in offer documents
Aligning requirement on disclosure of material agreements that are entered into by shareholders, promoters, directors etc. to ensure parity in disclosures of material agreements by listed and to-be-listed companies.
4. Alignment of qualifications of the compliance officer under ICDR with the provisions of the LODR
Aligning ICDR with LODR by mandating the compliance officer to be a Company Secretary.
5. Aligning definitions under ICDR and LODR
- Align the definition of the term “associate” under the ICDR with the definition under the LODR.
- Include definition for term “financial year” in ICDR as available in LODR
- Align the definition of “securities laws” under the LODR with the definition under the ICDR
- Include the definition of “SR equity shares” in LODR as available in ICDR.