Introduction
Towards the end of March 2021, the SEBI Board had approved of several amendments to the SEBI (LODR) Regulations, 2015. Pursuant thereto, SEBI has notified on May, 5, 2021, in exercise of its powers under the SEBI Act,1992,amendments to the above Regulations.
These Regulations have been christened as the SEBI (LODR) (Second Amendment) Regulations, 2021 and the changes brought above have become enforceable from the date of publication of the Notification in the Official Gazette.
Readers will recall that the last occasion where there was a major overhaul to the Regulations was in the year 2018 when many of the recommendations made by the Uday Kotak committee found their place in the Statute Book . Any Regulation which has the primary objective of elevating the standards of corporate governance as is the case with the LODR Regulations ,cannot remain static and stagnate in the backdrop of a constantly evolving and dynamic business environment. It is therefore appropriate that SEBI should tinker with the Regulations further to make them contemporaneous.
An overview of the changes rung in suggest a mixed bag-Whilst some of the routine procedural reporting requirements have been eased to the benefit of the listed companies, at the same time more companies have been brought in within the ambit of the requirements such as setting up the Risk Management Committee of the Board, formulation of the Dividend distribution policy etc. In addition additional information would need to be provided to the shareholders under the Corporate Governance Section of the Board's Report.
The need for Business Responsibility Reporting in the conventional format is being done away with a renewed focus on Reporting by the Board primarily from the standpoint of the Environment, Society and Governance. Given the vicissitudes of the amendments made, in this exposition we shall only cherry pick on some of the changes made and analyze the implications thereof. There is a need for further clarity from SEBI on some of the amendments and we shall raise some pertinent questions on this score.
Are the Amendments to be considered for incorporation in the financial year 2021-22
Considering that the amendments have taken effect from May 5, 2021, the first question that comes to mind is whether these are to be considered in respect of the financial year ended March 31, 2021 or whether they are prospective. The changes made lead to the disclosure of additional information in the Board's Report and in view of the pandemic, many companies may not have yet finalized their financials and Board's report for the above year.
In our view, the amendments are only prospective and are not to be considered applicable for the financial year 2020-21.It is a settled principle that every statute is prima facie, prospective unless it is expressly or by necessary implications, made to have retrospective operation.(Keshav Madhavan Menon v State of Bombay (AIR 1951 SC 128). Unless there is a clear intention expressed that the Statute would apply retrospectively, it cannot be given retrospective force and would always operate prospectively.(Union of India &Another v Kartick Chandra Mondal and another (2010 AIR SCW 743).
It is also pertinent to note that a new proviso is being introduced by the Notification under Regulation 15(2)(a) in substitution of the existing proviso to the effect that where the provisions under Regulations 17 to 27, clauses (b) to (i)and (t) of sub-regulation (2) of regulation 46 and Para C, D and E of Schedule V become applicable to a company on a later date, it shall ensure compliance with the same within six months from such date. This change also lends fortification to the above view.
Having said this, it is necessary to point out that compliances called for by the Notification need to be ensured during the course of the current financial year.
'Working day' defined
Although the expression “working days' has been used in Regulation 29 and other Regulations, it has not been defined leading to the formation of doubts in the minds of companies as to the length of the notice to be given to the Exchanges for various milestone decisions of the Board. Clause (zn) has been added under Regulation 2 to mean' working days of the Exchange where the Securities of the entity are listed'.
The above definition clarifies the position .
Easing of procedure in respect of several compliances
With a view to ensure that there is ease in the manner of ensuring certain routine compliances under the Regulations, the existing timelines and schedules have been extended as noted below:
a) Certification under Reulation7(3)
Regulation 7(3) provides that the company shall submit to the Exchanges once in every six months a certificate signed by the Compliance Officer and the Authorized Representative of the Registered Transfer Agent(RTA) in case the company has outsourced this activity in confirmation that all activities in relation to share transfer facility are being maintained in-house or by the RTA. This certificate has to be submitted at present within one month from the close of each half year.
This certificate will now become only an annual feature and will have to be filed within thirty days from the close of the financial year.
The trigger for this is obviously the fact that transfer of shares in physical mode is no long permitted in the case of listed shares and there is therefore little justification in continuing with the above as a bi-annual requirement.
b) Timeline for submission of Quarterly Corporate Governance Report-Regulation27(2)
The existing requirement is to file the above Report every quarter within fifteen days from the end of the Quarter. The time line is being extended to twenty one days from the close of the Quarter.
c) Report on transfer/transmission of shares
The requirement under Regulation 40 to obtain a certificate from a practicing Company Secretary in confirmation that all certificates have been issued within thirty days from lodgment for transfer shall become an annual requirement instead of being a bi-annual requirement at present. The certificate will have to be submitted within thirty days from the close of the financial year.
d) Submission of results of voting on resolutions passed at general meetings
Regulation 44(3) directs the company to provide the results of voting with the Report of the Scrutinizer within 48 hours from the conclusion of the general meeting in respect of resolutions passed thereat. This requirement shall now have to be ensured within two days from the conclusion of the meeting.
It follows from the above that if the general meeting is held on a Friday, the results need to be communicated latest by Tuesday next week.
e) Relaxations under Regulation 47
As per present requirements, the listed company has to publish in newspapers a notice as regards the holding of a meeting of the Board for consideration of the financial results. This requirement is being dispensed with.
Similarly the company is called upon to provide a notice as regards deviations in utilizing funds raised in a public or rights issue. Such disclosure will not be required anymore although the deviation report will continue to be provided by the monitoring agency to the Stock Exchange within 45 days from the end of the Quarter as per amended Regulation 32(6).
Meeting of Independent Directors to be held in Financial year
Regulation 25(3) provides that there shall be one meeting of the Independent directors in a year. Under the Companies Act 2013 , Schedule IV was amended with effect from 5.7.2017 to clarify that this meeting should be held once in a financial year instead of the calendar year. The above Regulation is being aligned with the Companies Act and the requirement shall be to hold one meeting in the financial year.
Time for submission of financial results approved by Board
To eliminate the possibility of leakage of financial results SEBI has mandated already that it is preferable for a company to hold the Meeting of the Audit committee and the Board on the same day. It has been also directed that in case the board were to consider the financial results midway through the course of a Board meeting the results could be communicated within thirty minutes of approval of the same by the board whilst the meeting continues for other purposes.
The amendments contemplate that in case the Board meets over the duration of two days the financial results should be disseminated within 30 minutes of the end of the Meeting for the day on which it has been considered.
Risk Management Committee(RMC) - Identification of its strategic role
Regulation 21 calls for the constitution of the RMC in the case of the top 500 companies based on its market capitalization in the immediately preceding financial year. This requirement is being extended to cover the top 1000 companies.
The following further changes have been made in the functioning of the Committee:
a) The Committee shall have a minimum of three members of which the majority shall be members of the Board with at least one independent director. Where the company has issued SR equity shares two-thirds of the Committee shall be independent directors. There was previously no stipulation as to the minimum strength of the Committee and its composition.
b)The Committee shall meet at least twice a year with the gap between two meetings not exceeding 180 days. The previous requirement was to hold at least one meeting.
c)The quorum for the Committee shall be one third of its total strength with a minimum of two members .No quorum requirement applied earlier.
d ) The Committee shall be empowered to seek information from any employee and can seek professional advice / legal or other guidance and can also invite outside professionals to participate at the meetings as considered necessary.
e) Certain functions of the Committee as incorporated in Part D of Schedule II are mandatory as stated below:
i) drawing up the Risk Management Policy which will provide the framework of internal and external risks covering financial, operational , sectoral issues, matters relating to sustainability including the impact on environment, society and governance(ESG), cyber security or other functions as identified by the Committee. The Policy shall be subject to review once in two years.
ii) measures taken for mitigation of risks including review of the system, processes for internal control of identified risks.
iii) business continuity plan
iv) Where a Chief Risk Officer has been appointed, his appointment, terms and conditions of his appointment, removal shall be subject to review by the Committee.
The RMC has been therefore provided its rightful place in the Board, given that risk identification and its mitigation has a very crucial role to play in the context of the complexities of modern day business.
Dividend Distribution policy - Regulation 43A
At present the top 500 companies are mandated to formulate a policy on the above and the same has to be appended to the board's Report.
This requirement shall now extend to the top 1000 companies.
Further, the policy shall be hosted on the company's web site .It would not however be necessary to attach the policy as part of the Board's Report. It would be adequate if the web-link to the policy is provided by way of disclosure in the Board's Report.
Business Responsibility Reporting (BRR)-Regulation 34(2)
The requirement of the above Report as part of the Board's Report shall continue in the case of the top 1000 companies. However, the present format will be discontinued and SEBI will prescribe the revised format of the Report .
The focus of the Report shall be on the initiatives taken by the company from an environmental, social and governance perspective and the Report will be known as the Business Responsibility and Sustainability Report .The requirement of submitting the BRR in its present form shall be discontinued after the financial year 2021-22 and effective from 2022-23 the Report shall be in the format to be prescribed.
As far as financial year 2021-22 is concerned, the submission of the Report by companies in the revised format shall be voluntary .
Companies which do not come within the top 1000 including those that have listed their securities in the SME segment may submit the above Reports voluntarily.
Advance intimation regarding Board meeting for considering proposal for a bonus issue-Regulation 29(1)(f)
At present the requirement to provide notice in advance two working days prior to the meeting of the Board arises in the case of a proposal for declaration of bonus securities only if the proposal forms a part of the Board Agenda with suitable communication having already been provided to the Board members.
The amendment made to the above clause makes it necessary for the company to provide the advance intimation to the Stock exchange whenever the bonus proposal is to be considered by the Board.
In this process the chink in the existing regulation which enabled a company to take the market by surprise through an unscheduled bonus announcement which would cause volatility and turbulence to the scrip has been eliminated, providing the much needed insulation to the market.
Gender neutrality in provisions relating to Independent directors
In a lighter vein, the existing Regulations relating to independent directors are chauvinistic in the sense that they make use of only the masculine gender. To restore neutrality in this area, amendments have been made to include the feminine gender where it comes to independent directors due to the requirement of appointing women independent directors.
This change in the Regulation is only cosmetic and indeed unnecessary considering that section 13 of the General Clause Act, 1897 provides, inter alia, that in all Central Acts and Regulations unless there is anything repugnant in the subject or context words importing the masculine gender shall be taken to include the feminine gender as well.
Disposal of investment in material subsidiary-Regulation 24(5)
The approval of the shareholders by special resolution shall be required where the listed company proposes to reduce either by itself or through its subsidiaries, its holding in its material subsidiary to less than fifty percent of its total holding. In such an eventuality the investee subsidiary ceases to be the company's Subsidiary.
The existing threshold is being reduced to fifty instead of “less than fifty percent' with the result even if a disposal up to fifty percent of the equity is contemplated , it will trigger off the need for shareholder approval .
The existing exemption from the above rigor will continue as before if such divestment is under a scheme of arrangement or under a resolution plan.
Requirement of submitting Secretarial Compliance Report to the Exchanges-Regulation 24A
The requirement of a Secretarial Audit shall continue as before for listed companies and their material subsidiaries. In addition, companies will be called upon to submit to the Stock Exchanges, the Secretarial Compliance Report in the format as specified within sixty days from the end of the financial year.
Further , the Secretarial compliance report shall also form a part of the Board's Report in the Section relating to Corporate Governance.
Presentations/transcripts of calls made to Analysts /Institutional investors relating to earnings-changes and need for clarity
As per the present requirements, the schedule of the Analyst or Institutional Investor meet and presentation on financial results made to them has to be disclosed to the Exchanges as specified in Schedule III in Part A which corresponds to Regulation 30.
In addition , as per Regulation 46 the company's website shall provide information on such meets together with the presentation made simultaneously with the provision of such information to the Stock Exchanges.
It will now be required as before to provide to the Exchanges the schedule of meetings with analysts or institutional investors along with the presentations made to them .
The term “Meet' has been defined for the above purposes to mean group meetings or group conference calls conducted physically or through digital means.
The above definition gives rise to a doubt as to whether it would be necessary to ensure compliance with the above requirements only when there is a presentation to a group of analysts or investors. What if the presentation / information is shared on a one to one basis with a single analyst/Investor .
Considering that there is a need for ensuring symmetry in sharing information particularly on price sensitive matters ,our view on this is that even if the interaction is on a one to one basis ,the same should be disseminated to the Exchanges as otherwise this will lead to asymmetry which is entirely undesirable. SEBI, however, would do well to clarify the issue.
Audio or video recordings and transcripts of post earnings/quarterly calls should be shared with the Stock Exchanges and the presentation shall also be hosted on the company's web site promptly and in any case before the next trading day or within twenty four hours of such calls whichever is earlier. The transcripts of the calls shall be made available at the website within five working days from the conclusion of the calls.
The requirement for disclosure of audio/video recordings and transcript shall be voluntary for the financial year 2021-22 and mandatory from April,1, 2022.
Information which has to be loaded on the website on the above shall remain hosted for a period of five years and thereafter preserved as per the company's archival policy as per Regulation 9.
Companies complying with Regulations based on their paid up capital or net worth criteria shall continue to ensure compliance for next three years even if the thresholds do not apply any longer-Second Proviso under Regulation 15(2)(a)
Proviso under Regulation 15(2)(a) as amended provides that where the requirements in the Regulations relating to corporate governance as provided in Regulations 17 to 27 , clauses (b)to (i) and (t)of sub-regulation (2) of Regulation 46 (requirements relating to disclosure in company's web site) and paragraphs C, D and E of Schedule V (relating to Annual Report) become applicable to the company at a later date when the paid up capital and net worth exceed respectively rupees ten crores and twenty five crores, the company shall be given a period of six months within which to comply with the above regulations.
A second proviso has been added to Regulation 15(2)(a)in the Notification which stipulates that once the above Regulations become applicable to a company ,they shall continue to remain applicable till such time the equity share capital or the net worth of the company falls below the above thresholds for a period of three consecutive financial years.
It therefore follows from the above proviso that the company would continue to be bound by the requirements of the above regulations for a period of three consecutive financial years even after the prescribed thresholds become inapplicable to it.
The introduction of the above proviso gives rise to an important question. Where a company enters the list of top 1000 companies based on its market cap for the first time after the applicability of the above amendments and hence is obliged to draw up the Business Responsibility and sustainability Report as per the format to be prescribed, has to draw up a Dividend distribution policy as per Regulation 43A , has to constitute a Risk Management Committee under Regulation 21, what would be the fall out once it ceases to be a part of the elite group of companies. Should it forthwith discontinue with the above specified requirements or should it, as postulated by the second proviso under Regulation 15(2)(a) articulated above continue with the status quo for a further period of three consecutive financial years. If one takes a cue from the above proviso, the answer to the question would be obviously yes. However, it would be appropriate for SEBI to step in and clear the cobwebs of doubt.
Conclusion
Given the constraints of space in a discussion paper, we have articulated the quintessence of the amendments put through by SEBI. What is conspicuous from the notification is that many of the recommendations made by the Kotak Committee which were not considered in the 2018 slew of amendments continue to be given a pass over. The amendments, by and large, walk the tightrope of balancing the requirements of ensuring that the bar of governance is not lowered in any manner to the detriment of the stakeholders and at the same time, the rigours of procedure have been eased in particular in the matter of ensuring rudimentary compliances.
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