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Understanding SEBI’s Material Event Thresholds: Enhancing Disclosure Standards for Market Integrity - MMJC
Background:
Regulation 30(1) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), Regulations, 2015 [‘LODR Regulations’] requires listed entities to disclose material information to stock exchanges. Regulation 30(4) states the criteria that listed entities should see to determine what would be considered as material information /event. Earlier barring certain events / information which were deemed to be material, determination of whether an information is material or not was left to the listed companies. There was no specified threshold provided for considering information or event as material. Listed Companies were guided by provisions of Clause (i) of sub-regulation 30 (4) of LODR Regulations for determining what was considered as material information.
The Rationale of Amendment:
In November 2022, SEBI issued a Consultation Paper for bringing transparency, objectivity and uniformity while disclosing material events or information specified under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”).
The Consultation Paper underlined the issue(s) observed by SEBI while disclosing the events specified in Para B of Part A of Schedule III upon applying guidelines of materiality. It underlined the fact that many listed entities do not disclose events specified under Para B on the ground that they are not considered as material as per their Materiality Policy framed in terms of the criteria prescribed in regulation 30(4) of LODR Regulations.
Therefore, to bring uniformity in the Materiality Policy of Listed entities, SEBI proposed to introduce a quantitative criterion of minimum threshold for determining the materiality of information events for disclosure specified under Para B of Part A of Schedule III based on the value or the expected quantitative impact of the event.
The proposal was accepted and incorporated in LODR Regulations by way of SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (“the Amendment”). This Amendment shall be effective from July 14, 2023.
The Amendment:
Now pursuant to amended Reg. 30(4)(i) of LODR Regulations, SEBI has prescribed new thresholds as clause (c) in Regulation 30(4)(i) as to what would be considered as material information. Pursuant to Reg. 30(4) of LODR Regulations listed companies 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 information already available publicly; [existing clause] or
- the omission of an event or information is likely to result in significant market reaction if the said omission came into light at a later date; [existing clause]
- omission of an event or information, whose threshold value, or the expected impact in terms of value exceeds the lower of the following: [newly added clause]
- two percent of turnover, as per the last audited Consolidated financial statements of the listed entity;
- 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;
- five percent of the three-year average of the absolute value of profit/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), and (b) and (c)are not applicable, an event/information may be treated as being material if in the opinion of the board of directors of listed entity, the event/information is considered material. [existing clause]
Thus, an additional criterion for classifying any event/information as material is introduced in Regulation 30 (4). It may be noted that the events specified in Para A of Part A of Schedule III are deemed to be material, irrespective of the value. Hence it can be observed that the above-mentioned criteria are relevant for the determination of materiality for the events/information specified in Para B of Part A of Schedule III. Accordingly, listed entities shall consider any event or information specified under Para B as material, if omission of an event or information, whose threshold value, or the expected impact in terms of value exceeds the specified limits of turnover or net worth or profit/loss after tax on a consolidated basis (and not on a standalone basis). Even if anyone’s threshold is getting crossed, then it appears that it shall be deemed to be material.
Fluctuation in materiality thresholds on an annual basis:
Since the new quantitative criteria for determination of materiality thresholds are based on previous years’ audited consolidated financials, these thresholds would now change every year. Accordingly, the magnitude of events or information to be disclosed to the stock exchange would also change every year. Generally Audited Financial Results would be ready by the end of 60 days after completion every year. So, a question can arise whether till that date, the criteria of materiality would be made on the basis of the previous year’s consolidated audited financials. It appears so and hence on the date when the annual audited consolidated financial results are approved by the board of directors, the materiality thresholds will change every year.
Further, every year these thresholds would have to be disseminated to the relevant employees in order to help them identify material events.
Materiality Policy:
Listed Companies are required to have a policy for determination of materiality as per Reg. 30(4)(ii) of LODR Regulations based on criteria specified in Reg. 30(4)(i), duly approved by its board of directors, and then disclosed on its website. LODR Regulations further states that such policy for determination of materiality shall not dilute any requirements specified under this Regulation 30(4) of LODR Regulation. Now as Reg. 30(4)(i) is amended and additional quantitative criteria are prescribed, it is recommended that policy for determination of materiality of event / information also be amended and updated on website on or before July 14, 2023.
As per newly inserted second proviso in Regulation 30(4)(ii), policy for determination of materiality shall be framed in a manner to assist relevant employees in identifying potential material events or information which shall be escalated and reported to the relevant Key Managerial Personnel for determining materiality of the event or information and for making a disclosure to stock exchange(s). Now SEBI has mandated to make it a part of policy to help employees identify what is material and what is not. This would require percolating materiality thresholds in the organization. This would require extensive and continuous dialogue and engagement with employees.
Conclusion
This amendment in Regulation 30 of LODR Regulations has triggered a lot of actionable on the part of listed entities. Hence although, at this point in time, a lot of listed entities may be busy with annual reports finalization and making preparations for forthcoming annual general meetings, this compliance under Regulation 30 also need to be taken care of and systems be put in place to ensure compliance of these Regulations within the prescribed time frame.
The article is written by –
CS Vallabh M Joshi, Senior Manager, vallabhjoshi@mmjc.in
CS Deepti Joshi, Partner, deeptijoshi@mmjc.in
The article is published in Taxmann –