The story so far: Markets regulator Securities and Exchange Board of India (SEBI) on November 12 floated a consultation paper proposing measures to effectively tackle market rumours and reviewing disclosure requirements for material events and information under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The paper puts forth certain enhanced quantitative thresholds for disclosures from listed entities as well as revised timelines to respond to market rumours.
As per the regulator, the proposed measures endeavour to “keep pace with the changing market dynamics”. It adds, “In today’s digital age where information is readily available, it is expected that the listed entities adopt technology-based solutions for ease of compliance.”
What was the need for review?
The central premise of the proposal is to ensure timely disclosure of significant events that may have a bearing on the price of a scrip. SEBI notes that while regulatory actions against non-disclosure of events doact as a deterrent for listed entities to withhold details of material events or information, timely disclosure is still very important. SEBI also seeks to ensure that unverified rumours do not shake investor confidence and affect decision-making.
Listed entities too have sought that the regulator institute a certain uniformity in its guidance for disclosures, to help them better determine what constitutes a material event or information.
In a related context, the markets regulator pointed to provisions that require companies to put forth specific and adequate replies to all rumour verification queries raised by the exchanges. This could be with respect to certain ‘information’ circulating on social media or any other platform. It proposes that entities, taking initiative, should confirm or deny any such reported event or information.
What are the proposed revisions in materiality thresholds?
The idea is to tackle ambiguity by provisioning room for relevant disclosures. Proposals include lowering disclosure thresholds and a better illustration of what constitutes a material event.
SEBI proposes quantitative thresholds to replace the current process of assessment of the materiality of an event, which is done by the company’s board. Provisions which deal with disseminating information about the discontinuity or alteration of an event (or operation) as well as the urgent tackling of potentially noteworthy news (with implications in the present or future) remain unchanged.
The paper proposes that listed entities disclose all events or information whose threshold value or expected impact in terms of value exceeds 2% of either its turnover or net-worth as per the last audited standalone financial statement, or 5% of the three-year average of absolute value of profit/loss after tax as per the last three audited standalone financial statements of the entity.
Separately, the regulator has argued that thresholds based on an individual item may not capture the impact of a material event. For example, in a loan agreement, the impact would be on the company’s balance sheet whereas in a default, it would be recorded in its statement of profit and loss. Thus, the paper proposes a combination of the above-mentioned metrics. Additionally, companies should also disclose their loan agreements as a lender and not just as a borrower, it says.
Further, the regulator has proposed that the disclosure thresholds should be framed such that the company’s employees are able to easily identify a potentially material event and report it to the relevant key managerial personnel for disclosure by the company.
What disclosures are being proposed?
The proposed measures are directed towards preventing any false market sentiment or impact on the securities of a company. Recognising the “growing influence” of print, television and digital news media, it argues that companies need to keep pace and ensure that any rumours are verified or refuted. Thus, it is proposed that the top 250 listed entities, based on market capitalisation at the end of the previous assessment year, would have to clearly deny or refute such rumours.
In order to avoid information asymmetry, SEBI has proposed that the listed entities need to disseminate any communication with regards to the company made by its directors, promoters, key managerial personnel or senior management individually and not through the company. It recognises that it is difficult for an investor to keep track of multiple newsworthy announcements from diverse avenues. To this effect, it proposes that companies inform about any ratings actions, even if it was not requested by the company or if a request was withdrawn.
Further, companies also need to disclose any actions initiated by a regulatory, statutory, enforcement or judicial authority against any of its directors, key managerial personnel, promoter or subsidiary in relation to the entity. These may include investigation, suspension, imposition of penalty or fine, settlement of proceedings, debarment, sanctions, warnings, search, seizure, and default on the payment of fines, penalties and dues among others.
The mentioned measure too would prevent information asymmetry as it would streamline access to verified information, which may emanate from multiple disparate sources.
Other than this, the proposals also recognise the material importance of key personnel, senior management and directors to investors. They instil confidence in the functioning and affairs of the company. To this effect, it proposes that entities inform the exchange about their resignation(s) within seven days. Along similar lines, companies must also disclose should the MD/CEO not be available to discharge their duties for greater than a month.
What timelines are being proposed for revision?
The regulator observed that there was a need for quicker disclosure of material events since ‘information’ permeates very fast on social media and digital media. It makes a note of several instances where the disclosures were made only after the news had already circulated in the media. At times, the information was disclosed only after the exchange raised a query to the company.
This did not ensure that investors had access to verified information in a time-bound manner, so they could make informed choices.
Therefore, SEBI proposes that disclosures pertaining to events or information emanating from within the company be made within twelve hours instead of the existing mandate of twenty-four hours. The cut-off remains unchanged for events emanating from external occurrences.
Moreover, all decisions taken in a Board of Directors meeting are to be disclosed within thirty minutes from when it concludes. Companies must also inform two days in advance if any investor or analyst meet is scheduled.
What about acquisitions?
Broadly, besides removing ambiguity by lowering quantitative thresholds, the consultation paper seeks to introduce definitions as to what constitutes ‘sale’ or ‘disposal’.
SEBI proposes revising the 5% threshold to 2% for companies to disclose acquiring shares or voting rights in a company. It states that there may be situations wherein a listed entity may acquire shares in a company without materially affecting its shareholding. This may be because the other shareholders of the company made an equal investment in it. It proposes viewing these transactions from the lens of the (previously mentioned) materiality thresholds.
Other than revising the quantitative thresholds, the paper deems the sale of a stake in an associate company ordisposal, either wholly or substantially in an undertaking, to require mandatory disclosure. The regulator also proposes according 12 hours for the disclosure of all such transactions.
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