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- Disclosure Under SEBI LODR of Fines and Penalties Levied – Making it Relevant
Disclosure Under SEBI LODR of Fines and Penalties Levied – Making it Relevant - MMJC
Introduction
Securities and Exchange Board of India (‘SEBI’) had issued a consultation paper dt: November 12, 2022 wherein it was proposed inter-alia to add a provision mandating disclosures to stock exchanges of penalties levied on listed companies. This proposal was discussed and approved in the SEBI board meeting dt: March 29, 2023 and SEBI vide its amendment notification dt: June 15, 2023 amended Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 [‘SEBI LODR’] and added Point 20 under Schedule III Part A, Para A. Pursuant to notification of this amendment it is observed that listed companies have been disclosing penalties levied on listed companies by any authority howsoever miniscule it may be as disclosure of penalties is now a deemed material event. This article highlights challenges that may arise due to these disclosures and impact these disclosures may have on investors.
Background
Point 20 under Schedule III Part A, Para A reads as follows:
20. Action(s) taken or orders passed by any regulatory, statutory, enforcement authority or judicial body against the listed entity or its directors, key managerial personnel, senior management, promoter, or subsidiary, in relation to the listed entity, in respect of the following:
(a) suspension;
(b) imposition of fine or penalty;
(c) settlement of proceedings;
(d) debarment;
(e) disqualification;
(f) closure of operations;
(g) sanctions imposed;
(h) warning or caution; or
(i) any other similar action(s) by whatever name called;
along with the following details pertaining to the actions(s) initiated, taken or orders passed:
- name of the authority;
- nature and details of the action(s) taken, initiated or order(s) passed;
- date of receipt of direction or order, including any ad-interim or interim orders, or any other communication from the authority;
- details of the violation(s)/contravention(s) committed or alleged to be committed;
- impact on financial, operation or other activities of the listed entity, quantifiable in monetary terms to the extent possible.
This point clearly states that penalty levied by any authority on any of the above-mentioned entities shall be disclosed. The terms regulatory authority, statutory authority, enforcement authority, or judicial body are not defined anywhere. Hence the meaning of these terms would have to be taken as per dictionary.
While highlighting the need for amendment to SEBI LODR it was stated that, “In the recent years, SEBI has been receiving many complaints / references regarding inadequate / inaccurate / misleading / delayed disclosures made by the listed entities. Listed entities from their end have also expressed that uniformity in the guidance to the listed entities is required for determining
materiality of events or information…Needless to emphasize here is that timely dissemination of information would help in reducing information asymmetry.”
We perused some sample disclosures given to stock exchanges by listed entities informing penalties levied. On perusal of these disclosure, it was observed that listed companies are disclosing all penalties levied by any authority as specified under point 20. It is also observed that penalties levied for non-compliance with certain contractual or licensing norms viz. improper documentation with respect to onboarding of clients, non-filing of certain forms etc. are being disclosed. Further penalties levied against listed companies for non-compliance with business-related laws by any branch or shop belonging to the company are also being disclosed. Below is analysis of some random disclosures made to stock exchanges by listed companies regarding disclosure of penalties levied. This data ranges from August 2023 till date:
| Sr. No | Particulars | No. of companies | Min. penalties being levied |
| 1 | Listed companies being penalized for violation of LODR | Six | Penalties levied with minimum amount being Rs 5000/- approx. |
| 2 | Listed companies being penalized for violation of RBI rules and regulations | Three | Penalty levied with minimum amount being Rs 1500 approx. |
| 3 | Listed companies being penalized for violation of foreign rules and regulations | Two | Penalty levied with minimum amount being US $50 approx. |
| 4 | Listed companies being penalized for violation under various taxation laws | Seven | Tax demand being made with minimum amount being Rs 850,000 approx. |
| 5 | Listed companies being penalized for violation of other laws and regulations | Two | With minimum amount of penalty being as Rs 5000/- |
As it is seen above listed companies are disclosing miniscule penalties to stock exchanges. It also needs to be understood that continuous disclosure of such penalties would burden the shareholders with information which may not be so relevant considering the net worth of listed companies. Also, there is a possibility that relevant and important information disclosed to stock exchange would be missed or would get suppressed in these disclosures of miniscule penalties. Further it also needs to be noted that disclosure of these penalties is also disclosed in the context of unlisted subsidiary companies pursuant to regulation 30(9) of SEBI LODR.
Repeated levying of penalties
Repeated penalties being levied against listed companies speak about the compliance management systems of company. The intent of bringing the provision of disclosure of penalties is to allow investors to be aware of violations and nature of violations being done by listed companies. These would include penalties which are substantial in nature or regulatory action that may cause disruption of operations or consequences in the nature of debarment has occurred, cancellation of license or patents etc.
But what if these penalties are disclosed to stock exchanges cumulatively at the end of every quarter? This would give investors a comprehensive list of penalties levied on a listed company in a quarter and would also help to achieve the intent of bringing this provision. Disclosure of list of penalties levied on quarterly or periodic basis to stock exchanges would help investors focus on information that is relevant, will not mislead investors with miniscule information and would reduce compliance burden on companies.
Conclusion
Relevance of disclosures have been highlighted by Securities Appellate Tribunal under various orders. Hon’ble SAT in the matter of Coimbatore Flavors & Fragrances Ltd. vs SEBI (Appeal No. 209 of 2014 order dated August 11, 2014), has held that “Undoubtedly, the purpose of these disclosures is to bring about more transparency in the affairs of the companies. True and timely disclosures by a company or its promoters are very essential from two angles. Firstly, investors can take a more informed decision to invest or not to invest in a particular scrip secondly; the Regulator can properly monitor the transactions in the capital market to effectively regulate the same.“
Further in the matter of Appeal No. 66 of 2003 – Milan Mahendra Securities Pvt. Ltd. vs. SEBI–the Hon’ble SAT, vide its order dated April 15, 2005, held that, “the purpose of these disclosures is to bring about transparency in the transactions and assist the Regulator to effectively monitor the transactions in the market.”
Disclosures to stock exchanges act as a crucial factor in evaluating listed companies. It is necessary to ensure that disclosure to stock exchanges is made of in a manner in which it helps investors to take decisions.
This article is published in Taxmann. The link to the same is as follows: –
This article is written by CS Vallabh M Joshi – Senior Manager – RND Team – vallabhjoshi@admin