LODR Sixth Amendment - MMJC

Securities and Exchange Board of India [“SEBI” or “Board”] vide its Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Sixth amendment) Regulations, 2022 [LODR Sixth amendment] amended certain provisions of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 [SEBI LODR]. An analysis of these amendments is presented below in three parts:

A new proviso is inserted to sub-regulation (2A) of Regulation 25 of SEBI LODR – Obligations with respect to independent directors. As per Regulation 25(2A) “The appointment, re-appointment or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution”. As per Companies Act, 2013 (“The Act”) appointment, re-appointment or removal of Independent Directors can be done by ordinary resolution for first term and re-appointment for second term must be done by special resolution.

In this regard, SEBI in its board note (summary of discussions done on a particular agenda in SEBI board meeting) has stated that it had received representations from market participants inter-alia stating that in case where there are multiple promoter groups holding substantial shareholding, appointment of an independent director may be opposed by one set of promoters due to internal disagreements with others, thereby rendering the proposed special resolution infructuous. These representations were examined in the light of the aforesaid challenges faced by some companies in appointing Independent Directors by way of a special resolution. On deliberation it was suggested that appoint Independent Directors through “majority of minority” would be considered as an alternate method for appointment of Independent Directors in addition to the requirement of Ordinary Resolution for appointment in terms of the Act, specifically for companies facing challenges in appointing Independent Directors through a special resolution.

This amendment was effected by adding a proviso to Regulation 25(2A) of SEBI LODR. So, now if Independent Director fails to get appointed pursuant to a special resolution then it will be checked whether the resolution for appointment of Independent Director could be said to be passed by way of the alternative method explained as follows: 

I) The votes cast by all the shareholders in favor of the resolution is more than the votes cast against the resolution, and

II) The votes cast by the public shareholders in favor of the resolution is more than the votes, if any, cast by them against the resolution.

If the resolution crosses the above two thresholds, then such a resolution for appointment of the Independent Director would be deemed to be approved by shareholders. This method of appointment of Independent Directors would be applicable for appointment of Independent Directors for First term only.

In case an Independent Director is appointed by this alternative method in First Term, then his removal shall also be subject to same voting pattern as explained above at (I) and (II). A point to be highlighted here is that for removal of such Independent Director(s) appointed by this method, special resolution passed, which does not meet this criteria, will not be considered as valid. The removal of such Independent Director will be considered as approved only if resolution is passed based on above criteria only.

From the Act perspective, a question arises that whether appointment or removal of Independent Director done as per first proviso to Regulation 25(2A) would be required to be filed with Ministry of Corporate Affairs (MCA) in e-form MGT-14? It appears that MGT-14 will have to be filed in this regard by selecting the option of “requisite majority” in the said e-form MGT-14.

Another question arises that whether it would be mandatory for High Value Debt Listed Entities to appoint Independent Directors as per first proviso to Regulation 25(2A) of SEBI LODR or they can explain as to why they cannot comply with this part until March 31, 2023?

B. Monitoring agency to certify utilization of proceeds under Preferential Issue and Qualified Institutional Placement.

Utilization of Proceeds Amendment to Regulation 32(6) and (7) – statement of deviation(s) or variation(s)

1. Existing provisions: Provisions related to appointment of and reporting by Monitoring Agency are prescribed under various regulations of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 [‘SEBI ICDR’] for Initial Public Offer (IPO), Rights Issue, Further Public Offer (FPO), SME-IPO where the issue size exceeds Rs. 100 crores (excluding size of offer for sale by selling shareholders). Also, Regulation 164A of SEBI ICDR requires engagement of a monitoring agency to monitor the proceeds of preferential issue in case of preferential issue of shares of companies having stressed assets. There was no mandatory requirement under SEBI ICDR for listed companies, other than those having stressed assets, making a preferential issue or Qualified Institutional Placement (‘QIP’) to appoint monitoring agency to monitor the utilisation of proceeds. Regulation 163 of SEBI ICDR inter alia required the issuer to disclose objects of the preferential issue in the explanatory statement to the notice for the general meeting proposed to be convened for passing a special resolution. Regulation 175 of ICDR Regulations stated that the qualified institutions placement shall be made on the basis of a preliminary placement document and placement document, which shall contain all material information, including those specified in the Act, if any and disclosures as specified in Schedule VII of SEBI ICDR. Schedule VII among other things inter alia requires issuer to disclose:

“………Use of proceeds:

(a) purpose of the placement;

(b) break-up of the cost of the project for which the money is being raised;

(c) means of financing for the project;

(d) proposed deployment status of the proceeds at each stage of the project…….”

Further Regulation 32(1) of SEBI LODR mandates submission of a quarterly statement (a) indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or explanatory statement to the notice for the general meeting, as applicable and (b) indicating category wise variation (capital expenditure, sales and marketing, working capital etc.) between projected utilisation of funds made by it in its offer document or explanatory statement to the notice for the general meeting, as applicable and the actual utilisation of funds. This provision is applicable for public issue, rights issue, preferential issue etc., i.e., the provision in SEBI LODR is applicable for all types of issues.

2. Need for Change: It can be seen from SEBI board note pertaining to this agenda item that data pertaining to Preferential Issue and QIP Issue was analyzed by SEBI for last one financial year and current financial year till May, 2022, which revealed that the issuer companies have raised as much as Rs. 91,517 crores through Preferential Issue and Rs. 32,397 crores through QIP Issue, during the said period. Further it was observed that issue proceeds raised through preferential issue and QIP issue were for various objects such as investment in the company / project, capital expenditure (capex), working capital, repay / retire debt etc. These objects were found to be similar to those observed in offer documents for public issue and rights issue as well. Therefore, given that objects for which funds are generally raised by the issuer companies, in case of preferential issue and QIPs, are observed to be of similar nature as in case of public issues and due to the reason that issuer companies are raising large amounts of money from contested investors through preferential issue and QIPs (as observed from the above cited data), it was felt appropriate by SEBI that appointment of monitoring agency for monitoring of issue proceeds may also be mandated for preferential and QIP issues of size exceeding Rs. 100 crore, in the same manner as applicable for public issues (IPOs and Rights Issue).

It was discussed by SEBI that shareholders of the company have a right to know the status of the deployment/ utilization of the funds raised by the company as against the disclosure of the objective of the fund raise. Monitoring of 100% of the issue proceeds by Credit Rating Agencies (CRA) is required for all public and rights issue above Rs. 100 crore. Therefore, a need was felt for introducing a framework for monitoring of issue proceeds for Preferential Issue and QIP Issue by CRAs on similar lines as in the case of IPO and rights issue so that all form of fund mobilization is monitored for transparency and accountability. Accordingly, SEBI in its board meeting held on September 30, 2022 has given approval for amendment to SEBI ICDR and SEBI LODR to give effect to the above discussed amendment. SEBI LODR has amended by SEBI and amendment to SEBI ICDR is effected from November 21, 2022.  However, Regulation 32(6) and 32(7) of SEBI LODR have been amended to include ‘preferential issue and QIP issue’ in the actionable on the part of monitoring agency.

3. Impact: As per Section 42 of the Act, 2013 read with Rule 14 of Companies (Prospectus & Allotment of Securities) Rules, 2014 – A company shall take approval of shareholders by way of special resolutions along with explanatory statement containing items viz., particulars of the offer including the date of passing of Board resolution, basis or justification for the price, objects of issue etc. Also as discussed above Regulation 162 and Regulation 175 of SEBI ICDR requires disclosure of objects of preferential issue and QIP.  Now, with this amendment to SEBI LODR and proposed amendment to SEBI ICDR, bifurcation of usage of funds as in the case of public issue or rights issue as per SEBI ICDR will need to be given to ensure proper monitoring by the monitoring agency.

Also, as per SEBI board note it is mentioned that appointment of monitoring agency will have to done for all QIPs and Preferential issues exceeding issue size of Rs. 100 crore that will be approved by the Board of Directors after ICDR amendment is notified in official gazette.

4. Critical Points: In case of listed companies which have done preferential issue OR QIP, any of which having issue size exceeding Rs. 100 crore and have some part of funds pending for utilization as at the end of financial year, the timeline for conducting of Board Meeting for last quarter (and the financial year) will have to be done within 45 days from end of quarter (and not within 60 days from end of quarter), so that statement of deviation & variation can be placed before the audit committee for review and thereafter be filed with the stock exchanges, as required under Regulation 32(3) of SEBI LODR or a separate meeting of audit committee would have to be called for considering this agenda

If a monitoring report is received from monitoring agency, without comments, then question arises is whether such report is still required to be submitted to stock exchanges as per Regulation 32(6) and 32(7) of SEBI LODR?, there are existing formats and specified criteria’s to be monitoring agency as notified by SEBI, but a question arises that whether the same formats will the same apply to preferential issue or Qualified Institutional placement?

Further under Audit Committee Terms of Reference, Audit Committee’s role would have earlier been that of reviewing the monitoring report submitted by the monitoring agency for monitoring the utilization of proceeds of a public issue or rights issue. Now, such review will extend to preferential issue & Qualified Institutional placement also if the issue size exceeds Rs. 100 crores. So now listed entities (both equity and high value debt listed entity) will have to amend terms of reference of audit committee to cover the additional scope.

Further SEBI has clarified in the Board note, approving amendment to SEBI ICDR dt: September 30, 2022 that, monitoring agency appointment for proceeds of preferential issue or qualified institutional placement exceeding
Rs 100 crores will be applicable to all preferential issues and QIP that will be approved by the Board of Directors after November 21, 2022 the date on which amendments to SEBI ICDR were notified in the official gazette.   

Anamolies with respect to High Value Debt Listed Entity listed out below:

1. What if Qualified Institutional Placement is made of NCDs without warrants (proposed to be listed) by an already equity and high value debt listed entity? In such case, whether it would be mandatory for such entities to comply with Regulation 32 and Regulation 52?
2. Provisions of Regulation 32 i.e. Statement of utilization of proceeds is not applicable to High Value Debt Listed entity. As per Regulation 15(1A) of SEBI LODR provisions of Regulation 16 to 27 is applicable to High Value Debt Listed Entities. Further, second proviso to Regulation 15(1A) of SEBI LODR these compliances are on ‘comply or explain basis’ until March 31, 2023.
3. Further, for High Value Debt Listed Entity scenario would be such that terms of reference of audit committee asks to monitor utilization of QIP by appointing monitoring agency but Regulation 32 is not applicable. So, monitoring as per Regulation 32 will not be required? Compliance with Regulation 52 (7) i.e. statement of utilization of issue proceeds and Regulation 52(7A) i.e. a statement of material deviations, if any only be required even when Regulation 171 of SEBI ICDR is not applicable for raising funds through issue of NCDs without warrants?
4. Can audit committee will be held liable for failing to comply with its duties?  

C. Amendments relevant to entities that have listed their Non-Convertible Securities

1. Financial Results for last Quarter – Regulation 52 of SEBI LODR: Regulation 52(1) of SEBI LODR provides for timelines for submission of financial results for three quarters. As per Regulation 52(2)(d) of SEBI LODR debt listed entities will have to submit standalone or consolidated financial results within sixty days of end of quarter. Further it was found that debt listed entities that are subject to audit by Comptroller and Auditor General of India (‘CAG’) were finding it difficult to submit audited financial results for last quarter of the financial year within sixty days. Now SEBI has inserted a proviso under Regulation 52(1) of the SEBI LODR that an entity with listed non-convertible securities shall submit the audited financial results or un-audited financial results for the last quarter accompanied by Limited Review Report, for the last quarter of the financial year, within sixty days from the end of the quarter, along with the annual audited standalone and consolidated financial results for the financial year within sixty days of end of financial year along with audit report. This amendment to Regulation 52(1) is to be read with Point (i) to 1^st proviso to Reg. 52(2)(d) which now allows debt listed entities who are subject to CAG to submit unaudited financial results for last quarter alongwith limited review report. So, it can be understood that entities that are subject to audit by CAG will now be able to submit unaudited results for last quarter alongwith limited review report and then submit financial results audited by CAG within nine months from the end of financial year. All debt other listed entities will have to continue submit audited standalone or consolidated financial results within sixth days of end of quarter. 
2. Disclosures by entities whose accounts are subject to audit by CAG: As per proviso to Regulation 52(2)(d) of the SEBI LODR, issuers which are required to be audited by the CAG, are required to submit financials audited by the auditor appointed by Comptroller and Auditor General of India, to the Stock Exchange(s) within sixty days from the end of the financial year and after the completion of audit by the Comptroller and Auditor General of India, submit the financial results to the Stock exchange(s) within nine months from the end of the financial year. Certain listed issuers which are required to be audited by the Comptroller and Auditor General of India made representations to SEBI, as mentioned in board note of SEBI Board Meeting pertaining to this agenda item stating that, the statute(s) by which they are governed does not provide for appointment of auditor by either the entity or the Comptroller and Auditor General of India and/ or audit to be undertaken by the auditor so appointed. It was also represented that in view of the above, the proviso to Regulation 52(2)(d) of the SEBI LODR may be amended to allow issuers which are required to be audited by the Comptroller and Auditor General of India to submit un-audited financial results with Limited Review Report by the Comptroller and Auditor General of India or an auditor appointed by the Comptroller and Auditor General of India or a Practising Chartered Accountant, within sixty days from the end of the financial year. The requirement to submit the annual audited financials to the stock exchanges(s), after the completion of audit by the Comptroller and Auditor General of India, within nine months from the end of the financial year, shall continue. Accordingly, SEBI approved the amendment and the words, “Provided that issuers, who are being audited by the Comptroller and Auditor General of India, shall adopt the following two step process for disclosure of the annual audited financial results:” was replaced with words, “Provided that issuers, which are required to be audited by the Comptroller and Auditor General of India under applicable law, shall submit…:” under second proviso to Regulation 52(2)(d) of SEBI LODR.
3. Shuffling of Regulations: Under Regulation 52(2) of SEBI LODR, disclosure requirements for the listed entities have been specified for quarterly and annual basis. However, clause (f) to the said Regulation 52(2) in particular, prescribes requirement to submit Statement of Assets and Liabilities and Statement of Cash Flows, on half-yearly basis. Hence, for clarity, the clause for submission of Statement of Assets and Liabilities and Statement of Cash Flows (on half yearly basis) was culled out of Regulation 52(2) and issued as a separate sub-regulation 52(2A).
4. Disclosure of line items now mandatory alongwith quarterly and half yearly financials too: It was observed that some listed entities were not disclosing line items alongwith half yearly financial results. This was due to following language, “(4) The listed entity, while submitting [quarterly] / annual financial results, shall disclose the following line items along with the financial results:” Due to this language, a view was being taken by some listed entities that disclosure of line items was optional while disclosing half yearly financial results. So, there was a need to clarify that disclosure of line items is mandated even while disclosing half-yearly financial results. In order to give effect to this SEBI has now amended the language of Regulation 52(4) of SEBI LODR as follows, “(4) The listed entity, while submitting quarterly and annual financial results, shall disclose the following line items along with the financial results:” So, going forward for half year ended March 2023 listed entities will have to mention line items as per Regulation 52(4). Further, SEBI had received representations from listed entities that Banks and NBFCs that some ratios are not applicable to them, the disclosure of the line items/ ratios may be mandated as per applicability. It was further suggested that listed entities shall be given discretion to disclose all ratios/ equivalent financial information mandated under applicable laws, if any. Accordingly, SEBI has now stated that if information mentioned in sub-regulation (4) (i.e. list of ratios) mentioned in Regulation 52(4) is not applicable to the listed entity, it shall disclose such other ratio/equivalent financial information, as may be required to be maintained under applicable laws, if any
5. Timeline for statement indicating the utilization of the issue proceeds of nonconvertible securities and statement disclosing material deviation(s) (if any) in the use of issue proceeds of non-convertible securities from the objects of the issue: Pursuant to Regulation 52(7) & 52(7A) of SEBI LODR, a statement indicating the utilization of the issue proceeds of non-convertible securities and statement disclosing material deviation(s) (if any) in the use of issue proceeds of non-convertible securities from the objects of the issue had to be submitted to the stock exchange within 45 days of end of quarter. Now it has been amended and statement of utilization of the issue proceeds of nonconvertible securities and statement disclosing material deviation(s) (if any) will have to be submitted alongwith quarterly financial results to the stock exchange.\
6. Publication of Financial Results – Regulation 52(8) of SEBI LODR: As per Regulation 52(8) of SEBI LODR listed entity shall within two working days of conclusion of meeting, publish the financial results. There was no clarity as to whether consolidated or standalone financial results shall be published in newspapers if the same are disclosed to stock exchange? Now SEBI has clarified that consolidated financial results have to be submitted in the newspaper for financial results along with line items mentioned in Regulation 52(4) of SEBI LODR, if the company has submitted the standalone & consolidated financial results to the stock exchange.
7. Dealing with unclaimed non-convertible securities and benefits accrued thereon: Regulation 61A (3) of the SEBI LODR, inter-alia, provides that amounts pertaining to non-convertible securities and benefits thereon which remain unclaimed for a period of 7 years shall be transferred to the Investor Education and Protection Fund (IEPF) constituted in terms of section 125 of the Act.  Section 125 of the Act, details the amounts that can be credited to the IEPF and the purposes for which the same can be utilised. The Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 lay down the procedure for transferring the unclaimed amount to the IEPF by companies. In this regard, SEBI received representations from Development Financial Institutions, which have listed non-convertible securities, stating that they are not constituted as ‘companies’ under the provisions of the Act, and are governed by separate statutes. Due to this, the aforementioned provisions of the SEBI LODR pertaining to transfer of unclaimed amounts to the IEPF and claiming back from the IEPF, in the event of any claim by the bond holders are not applicable to them. To address this situation there is no specific provision in the SEBI LODR with respect to dealing with unclaimed non-convertible securities issued by statutory bodies, developmental financial institutions and/ or other similar organizations which do not fall within the definition of ‘company’ under the Act. Hence, there was a need to insert a suitable provision in the SEBI LODR to provide for the same. Accordingly SEBI has now amended Regulation 61A(3) of SEBI LODR to provide that listed entities that do not fall within the definition of ‘company’ and rules made thereunder, any amount in the escrow account that remains unclaimed for seven years shall be transferred to the Investor Protection and Education Fund created by SEBI in terms of section 11 of the SEBI Act, 1992.
8. Insertion of provision relating to Draft Scheme of Arrangement for entities that listed their NCDs / NCRPS: Chapter XV of the Act deals with compromises, arrangements and amalgamations for any entity that is desirous of entering into a compromise or arrangement with its members or creditors. Regulation 37 of the SEBI LODR, inter-alia, provides that entities that have listed specified securities and are desirous of undertaking schemes of arrangement or are involved in schemes of arrangement, shall file the draft schemes of arrangement with Stock Exchange(s) for obtaining the No-objection Letter, before filing them with any court or National Company Law Tribunal (NCLT). Regulation 2 (eee) of SEBI ICDR  defines “specified securities” as equity shares and convertible securities. Regulation 94 of the SEBI LODR, inter-alia, requires Stock Exchanges to forward such draft schemes to SEBI for comments before issuing final No-objection letter to the listed entity. it is observed that Regulations 37 and 94 of SEBI LODR provide for specifics regarding filing of draft schemes /schemes of arrangement by entities with listed specified securities involved in scheme of arrangement as well as the consequent issue of No-objection letter by the stock exchanges on the schemes of arrangement. However, the definition of listed specified securities as per Regulation 2 (eee) of SEBI ICDR does not include NCDs and NCRPS. While Regulation 59 of the SEBI LODR provides requirements pertaining to restructuring of listed NCDs/ NCRPS, it does not specifically provide measures where restructuring of NCDs/ NCRPS is undertaken through a scheme of arrangement as per Chapter XV of the Act.

Hence, there was no explicit provision under the SEBI LODR for entities which have listed only NCDs/ NCRPS and are involved in scheme of arrangement. In order to garner the views of the stakeholders that may be involved in any scheme of arrangement viz. issuers with listed NCDs/ NCRPS, debenture trustees, the stock exchanges, etc. a consultation paper seeking public comments was issued. On considering the comments received from public, SEBI in its board meeting held on September 30, 2022 approved amendment to SEBI LODR by insertion of provision of Reg 59A and 94A. Further, exemption is not given to scheme of arrangement between Holding and Wholly Owned Subsidiary company as is provided for entities who have listed their equity shares. This is because the debenture holders may not be same in case of Wholly Owned Subsidiary. Further consequential amendments are also made to Schedule XI of the SEBI LODR prescribing the relevant fees payable by the listed entity. SEBI has also issued operational circular in this regard dt: November 17, 2022.

SEBI LODR Sixth amendment can be accessed at this link: https://www.sebi.gov.in/legal/regulations/nov-2022/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-sixth-amendment-regulations-2022_65048.html

 Operational circular can be accessed at this link:

https://www.sebi.gov.in/legal/circulars/nov-2022/scheme-s-of-arrangement-by-entities-who-have-listed-their-non-convertible-debt-securities-ncds-non-convertible-redeemable-preference-shares-ncrps-_65220.html