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Are Listed Companies Making Disclosures Updating Material Development? - MMJC
Introduction:
Regulation 30 of the Securities Exchange Board of India (Listing Obligation and Disclosure Requirement), Regulations, 2015 (‘SEBI LODR’) read with Schedule III of SEBI LODR provides for disclosure of events or information by listed entities to stock exchanges. This regulation casts responsibility on the listed entities to make disclosures of any event or information which, in the opinion of the board of directors of the listed company are material. Regulation 30 (7) of SEBI LODR provides as follows: “The listed entity shall, with respect to disclosures referred to in this regulation, make disclosures updating material developments on a regular basis, till such time the event is resolved/ closed, with relevant explanations. Hence as per SEBI LODR, continuous updates on disclosures already made to stock exchanges are required to be made so that market participants are updated in this regard.
In this article we are going to ascertain and understand as to what can be considered as ‘material developments’ for the purpose of giving updates on already disclosed information to stock exchange.
Analysis
The term ‘material development’ is not defined in SEBI LODR. As per Merriam Webster dictionary- the word ‘material’ would mean – ‘having real importance or great consequences. So, it means any development on the already disclosed event or information which has a greater consequence or is a significant development on the already disclosed event or information, will be considered as ‘material development.’ To understand this further let us see few enforcement orders of SEBI in this regard. In the case of Asian (Hotels) North Limited[i] (‘company’), SEBI had alleged company for violation of regulations 30(7) of SEBI LODR. In this order, the company on November 13, 2020, disclosed to the stock exchange, restructuring plan approved by its Board of Directors. Further in this matter one of the lenders i.e. Yes Bank had issued a Loan Recall Notice dated February 17, 2022, against the company, and declared the company’s account as NPA with effect from December 20, 2020. The company assailed this action of Yes Bank before Hon’ble Delhi High Court. This loan recall notice as well as related litigation were not disclosed by the company to the stock exchange at all. In this regard Asian (Hotels) North argued that “the default of the Company and declaration of NPA as alleged by Lenders, had been principally stayed by the Hon’ble Delhi High Court and is sub-judice before the Hon’ble Delhi High Court. Aforesaid issues were yet to be decided by the Hon’ble Delhi High Court, even at the interim stage, thus, there was no occasion to make any disclosure regarding declaration of the Company’s accounts as NPA.”
In response to this SEBI stated that, “Loan recall Notice, declaration of loan as NPA by the lenders and filing of suit by company before Hon’ble High Court of Delhi etc. are intricately linked with the implementation of the Restructuring Plan which had been disclosed earlier by the Company. Therefore, as per the requirement of Regulation 30(7), Noticee was required to make the disclosures regarding the same and make such disclosure regarding developments on a regular basis until the event is resolved. As per Regulation 30(7), even the said litigation, though sub judice, was required to be disclosed until decided by the court or final resolution was there.”. In this case SEBI stated that as it was already disclosed that company would be undergoing a restructuring then it meant that the debts would be settled by all lenders. But when Yes Bank decided not to be a part of restructuring plan and seek the repayment of debts this event would mean that there would be a change to restructuring plan. Hence this was required to be disclosed.
Further in one more adjudication order of AGI Greenpac Limited[i] (‘Noticee’) it was seen that, Noticee had made a disclosure to the exchanges dated October 31, 2022, which mentioned that the Resolution Professional had issued a letter of intent to the noticee confirming that the committee of creditors of HNG Industries ltd (‘HNGIL’) had approved resolution plan submitted by the Noticee and declared Noticee as the successful resolution applicant in the Corporate Insolvency Resolution Process of HNGIL. Further Noticee mentioned that as per regulations of Competition Commission of India (CCI) they had to file certain forms with CCI with regard to such proposed transaction with HNGIL. Further Noticee repeatedly made disclosure to NSE, that it had had filed certain forms with Competition Commission of India (CCI) as per the Regulations of CCI. However CCI in its order dated March 15, 2023 had stated as follows: ‘The Commission in its meeting held on February 9, 2023, considered the information on record, details provided in the Notice and the responses filed by the Acquirer, and formed a prima facie opinion that the Proposed Transaction is likely to cause an appreciable adverse effect on competition(AAEC) in relevant market(s) in India. Accordingly, in terms of Section 29(1) of the Act, a show-cause notice dated 10 February 2023 (SCN) was issued to the Acquirer, wherein the Acquirer was directed to respond in writing, within 30 days of the receipt of the SCN, as to why investigation in respect of the Proposed Transaction should not be conducted.’ Noticee had not disclosed to stock exchange about this SCN issued by CCI. Noticee had failed to disclose the material developments with respect to SCN issued by CCI. Here SEBI mentioned that “CCI had issued the SCN after forming an opinion about the proposed transaction which was likely to cause an adverse effect. Thus, the Noticee should had disclosed the issuance of the SCN as it could had led to material impact.”
Noticee contended that receipt of SCN from CCI, was only a prima facie opinion given by CCI against proposed transaction and the issuance of the said SCN did not even culminate into an investigation by the CCI against it. Also Noticee mentioned that as soon as CCI approved the proposed transaction same was promptly informed to SE on March 16,.2023 of the receipt.
SEBI stated that ‘CCI issued the SCN after forming an opinion that the proposed transaction was likely to cause an adverse effect. Thus, the Noticee should had disclosed the issuance of the SCN as it could had led to material impact. Further, the Noticee should had disclosed the same as a material development.’
Particularly important to note in this adjudication order that SEBI was of the view that once the disclosure of the CCI order to exchange had been deemed material, any challenge, litigation with respect to the order which had the effect of changing the outcome of the CCI order, thus would be material.
So, after understanding the views taken by SEBI, we can say that any event /information which has capacity to change the outcome of what was already disclosed to stock exchange can be considered as material development. Further one of the understandings is also that the original event/ information should be intricately linked to the material developments around it inorder to be disclosed to stock exchange.
In the adjudication order of Future Enterprise Limited (‘FEL’)[i] it was seen that FEL was a Future Group Company. Arbitration Proceedings was initiated by Amazon on October 05, 2020 before Singapore International Arbitration Centre (‘SIAC’) wherein the promoters of the FEL, were respondents. The said Arbitration proceedings were inter alia with respect to the composite Scheme of Arrangement between Future Group and Mukesh Dhirubhai Ambani (MDA) Group. Thereafter Amazon obtained an interim order from ‘SIAC’ on October 25, 2020, preventing the transaction’s progression.
Now FEL had earlier provided a disclosure on August 29, 2020, about the composite scheme between Future group and MDA Group under the provisions of regulation 30 of LODR Regulations to exchanges. However, FEL delayed disclosing information about arbitration initiation by Amazon against such composite scheme to exchanges until November 1, 2020, resulting in alleged violations of SEBI LODR Regulations. The FEL had defended itself by stating that commencement of the Arbitration Proceedings was not considered a material event by the FEL and thus not disclosed. FEL further contented that as it was neither a party to any agreement nor to arbitration proceedings initiated by Amazon because , Future Retail Limited, a group company of the FEL had filed its objections to the Arbitration Proceedings on October 06, 2020 before SIAC.
SEBI stated that ‘the ‘Scheme’ which was inter-alia the subject matter of the arbitration proceedings was already disclosed by the FEL to exchange as a material event and therefore the arbitration proceedings and its outcome having an effect of stay on scheme between Future Group and MDA Group, should had been disclosed by the FEL.
The key learnings from this matter highlight the importance of timely and transparent disclosure of material events by listed companies, the necessity of a clear process for assessing the materiality of information, and strict adherence to regulatory requirements like SEBI LODR.
In one of the Settlement orders of PC Jewellers limited [i], it was seen that PC Jeweller Limited (‘PCJ’) violated regulation 30(1), 30(4)(i) and 30(7) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 by failing to regularly update the stock exchanges about material developments regarding its proposed buy-back offer. Specifically, PCJ had not disclosed the State Bank of India’s (‘SBI’) objections to the buy-back offer in a timely manner, even though these objections constituted material information.
On May 10, 2018, the Board of Directors of PCJ had approved the proposal of “buy-back” of its fully paid-up equity shares from its shareholders through the tender offer route. On July 07, 2018, PCJ wrote to SBI for providing ‘no objection certificate’ (‘NoC’) for its proposed “buy-back” offer and on same day SBI issued its objection to PCJ. Letter issued by SBI dated July 07, 2018, wherein SBI had refused permission to PCJ to go ahead with its “buy-back “offer and stated that –“we advise that the present priority of the lenders is towards reduction of overall Bank exposure while maintaining adequate liquidity in the company to support its operations. Accordingly we are not in favour of the proposed buyback plan which envisage outflow of Rs. 424.00 crs of cash/funds in the form of buyback. We therefore advise that Bank had decided to not to permit to go ahead with its proposed buyback plan.
On July 12, 2018, PCJ again wrote to SBI for granting NoC for its proposed “buy-back” offer to which SBI showed its inability to accede to the request of PCJ for granting NoC to its proposed “buy-back” offer.
On July 13, 2018, PCJ had made a corporate announcement that its “buy-back” offer was withdrawn due to non-receipt of NoC from its bank SBI.
Exchanges came to know about this event of objections raised by SBI for buyback offer vide its letter dtd July 7,2018 when they sought clarification from SBI. PCJ had not disclosed the information about the objection of SBI to BSE as well NSE.
PCJ had admitted before BSE that ‘it had not appraised its board of the necessary approvals that would be required for successful initiation of “buy-back” offer. This action of PCJ was not in keeping with the principles of full disclosures and transparency, even to its board, especially in view of the fact that its management was aware that the consent of the bank was required as a pre-condition as mentioned in the loan covenants. SEBI stated that PCJ should had notified BSE about refusal of NoC by SBI on July 07, 2018, instead of waiting till end of the period of postal ballot, as it constituted material information in regard to the ongoing voting for approving its “buy-back” proposal. When NSE mentioned to PCJ that they should had informed the exchange about the developments of buy back offer & SBI’s Objection to the same, PCJ contended before NSE that the objection raised by SBI was not material.
SEBI observed that PCJ had not disclosed the objection raised by SBI vide letters dated July 07, 2018 and July 12, 2018 for its proposed “buy-back” offer and on July 13, 2018, it had disclosed to BSE and NSE that in view of the non-receipt of the requisite NoC from SBI, its board of directors had decided to withdraw the “buy-back” offer. SEBI had found that non-disclosure of SBI’s objections by PCJ was a material information and required to be disclosed to the stock exchanges as prescribed under the regulation 30(1), 30(4)(i) and 30(7) of the LODR Regulations. On perusal of above referred orders, what can be considered as ‘material development’ of already disclosed event or information would differ on case to case. Hence it is necessary to keep track of updates or developments happening in relation already disclosed events or information. Once they are identified it needs to be ascertained on following parameters whether they are material developments or not?
- Intricately Linked Events: Developments having consequences that are going to affect the previously disclosed material events should be updated as material developments.
- Potential Impact on Previously Disclosed Information: Any event or information that has the potential to change the outcome of what was already disclosed to the stock exchange should be considered material. This includes updates that might affect the company’s financial health, strategic initiatives, or regulatory compliance.
Conclusion:
The cases discussed highlight the common pitfalls where companies misinterpret or fail to recognize the need for continuous disclosure, particularly when events are still under adjudication or subject to regulatory scrutiny. Listed Companies need to understand that the materiality of an event is not limited to its initial disclosure but extends to any subsequent developments that could influence the event’s outcome. Listed entities must put in place systems for identifying material developments and diligently update the stock exchanges about ongoing developments until the issues are resolved or closed.
This article is published in Taxmann. The link to the same is as follows: –
https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024387/abcd
This article is written by Ruchira Pawase – Associate – ruchirapawase@mmjc.in and Vallabh Joshi – Senior Manager- vallabhjoshi@admin
[1] https://www.sebi.gov.in/enforcement/orders/mar-2022/adjudication-order-in-respect-of-future-enterprises-limited-in-the-matter-of-future-enterprises-limited_56883.html [1] https://www.sebi.gov.in/enforcement/orders/nov-2019/settlement-order-in-respect-of-pc-jeweller-limited-in-the-matter-of-pc-jeweller-limited_44871.html