Sale of stake in Associate Company by a listed entity– Disclosures requirement - MMJC

Introduction

Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), Regulations, 2015 [‘SEBI LODR’] requires disclosure of material events or information to stock exchanges. Materiality for disclosure of events or information to stock exchanges is determined pursuant to Reg. 30(4) of SEBI LODR[1]. There are certain events specified in Para A, Part A of schedule III of SEBI LODR that are required to be disclosed by listed entity without applying materiality thresholds. In this write up we will see as to when disclosure requirement would be triggered if a listed entity has decided to sell stake in associate company? Sale of stake in associate company is a deemed material event as per Para A, Part A of schedule III of SEBI LODR.

Disclosure of stake sale in associate company

Schedule III Part A, Para A, Point I of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), Regulations, 2015 [‘SEBI LODR’] states as follows:

“Acquisition(s) (including agreement to acquire), Scheme of Arrangement (amalgamation, merger, demerger, or restructuring), sale or disposal of any unit(s), division(s), whole or substantially the whole of the undertaking(s) or subsidiary of the listed entity, sale of stake in associate company of the listed entity or any other restructuring.

Explanation (2) mentions that “sale or disposal of subsidiary” and “sale of stake in associate company” shall include-

(i) an agreement to sell or sale of shares or voting rights in a company such that the company ceases to be a wholly owned subsidiary, a subsidiary, or an associate company of the listed entity; or

(ii) an agreement to sell or sale of shares or voting rights in a subsidiary or associate company such that the amount of the sale exceeds the threshold specified in subclause (c) of clause (i) of sub-regulation (4) of regulation 30.”

It is clearly mentioned in the Point I, Para A of Schedule III that the listed entity is required to make disclosure to the stock exchange for sale of stake in associate company if it is exceeding the threshold specified in subclause (c) of clause (i) of sub-regulation (4) of regulation 30 or if due to stake sale the associate company ceases to be so of the listed entity.  

The threshold specified in subclause (c) of clause (i) of sub-regulation (4) of regulation 30 is the materiality threshold determined by the company every year for the purpose of giving disclosure to stock exchange under Para B of Schedule III of SEBI LODR. So, if the consideration on sale of stake in associate company exceeds the materiality threshold determined by company pursuant to SEBI LODR, then disclosure would be required to stock exchange.   

Timing of disclosure of stake sale in associate company

Once it is decided that sale of stake on associate company shall be disclosed the next question arises is as to when shall this disclosure be made to stock exchange? With respect to disclosure of events or information to stock exchange guidance is given in annexure III, of SEBI circular dt: July 13, 2023, relating toDisclosure 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, 2015[‘July 2023 circular’][1]. As per annexure III of July 2023 Circular events or information that are subject to approval of board of directors and shareholders shall be disclosed to stock exchange when accord is received from both. However, if event or information is price sensitive then disclosure to stock exchange shall be given within thirty minutes of the approval of board of directors mentioning that it is subject to shareholders approval.

In case of sale of stake in associate company once the board of directors have given its accord for sale of stake then disclosure shall be given. Further if this sale of stake in the associate company is subject to approval of shareholders, then disclosure shall be given stating that it is subject to approval of members of the company.

Disclosure on actual sale of stake in associate company: As per regulation 30 sub- regulation (7) of SEBI LODR states 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”  Once sale of stake in associate company is approved by the board of directors till the actual sale happens updates needs to be given to the stock exchange. Intimation shall also be given to stock exchange when the stake is actually sold by the listed entity.

Minimum information for sale of stake in associate company

As per July 2023 Circular, the listed entity shall provide minimum details stated below alongwith regarding sale of stake in associate company. These details shall be provided either when it is approved by board of directors or shareholders or when actual sale happens, as the case may be:

• the amount and percentage of the turnover or revenue or income and net worth contributed by such unit or division or undertaking or subsidiary or associate company of the listed entity during the last financial year.
• date on which the agreement for sale has been entered into.
• the expected date of completion of sale/disposal.
• consideration received from such sale/disposal.
• brief details of buyers and whether any of the buyers belong to the promoter/

promoter group/group companies. If yes, details thereof.

• whether the transaction would fall within related party transactions? If yes, whether

the same is done at “arm’s length”.

• whether the sale, lease or disposal of the undertaking is outside the Scheme of Arrangement? If yes, details of the same including compliance with regulation 37A of LODR Regulations.
• additionally, in   case   of   a   slump   sale, indicative   disclosures   provided   for

amalgamation/merger, shall be disclosed by the listed entity with respect to such slump sale.

Conclusion

The sale of a stake in an associate company by a listed entity underscores the critical importance of disclosure requirements. Ensuring that such material information is accurately and promptly communicated to the stock exchange is not just a regulatory obligation, but a cornerstone of maintaining information symmetry in the market. By adhering to the principles set forth in SEBI’s LODR regulations, listed entities play a vital role in keeping market participants informed and fostering transparency, which is essential for the integrity and efficiency of the financial markets.

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[1] The listed entity shall consider the following criteria for determination of materiality of events/ information:

• the omission of an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; or
• the omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date; or
• the omission of an event or information, whose value, or the expected impact in terms of value, exceeds the lower of the following:

(1) two percent of turnover, as per the last audited consolidated financial statements of the listed entity.

(2) two percent of net worth, as per the last audited consolidated financial statements of the listed entity, except in case the arithmetic value of the net worth is negative.

(3) five percent of the average of absolute value of profit or loss after tax, as per the last three audited consolidated financial statements of the listed entity

In case where the criteria specified in sub-clauses (a), (b) and (c) is not applicable, an event or information may be treated as being material if in the opinion of the board of directors of the listed entity, the event or information is considered material:

[2] 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