Sebi's tougher disclosure regime may be a challenge for India Inc

Compliance burden could go up manifold if new proposals get implemented, say legal experts

India Inc’s compliance burden could go up manifold if the Securities and Exchange Board of India’s (Sebi’s) proposal for a new disclosure regime gets introduced, say legal experts.

The capital markets regulator has proposed to give a fillip to disclosure rules followed by listed companies introducing thresholds to indicate material impact, halving the time allowed to make disclosures, and prescribing corroboration of reports circulating in the media.

It has been proposed that the top 250 listed companies will have to confirm or deny rumours floating in any form of media if they have material impact.

“This may be challenging since most companies routinely engage in activities that may not have crystallised into a disclosure requirement. Any such confirmation or denial could be premature,” says Akila Agrawal, partner and head-mergers & acquisitions, Cyril Amarchand Mangaldas.

In a discussion paper floated on November 12, Sebi has suggested measures to reduce the discretionary element relating to disclosures of any regulatory action like the imposition of fines, inspection or investigation.

Under this, any regulatory action against a company could warrant a disclosure. Experts say this could lead to a tsunami of disclosures.

“Most regulatory action, irrespective of materiality, involves penalties and fines. It is not clear if investor interest will be served by disclosing such matters, regardless of materiality,” adds Agrawal.

India Inc is of the sentiment that the new proposed changes will lead to wide disclosure requirements, even if they don’t meet the materiality threshold. The suggested changes will blur the lines between mandatory disclosures and discretionary disclosures, fear many.

Although the move is to foster greater transparency, whether making public every such event or information will help investors remains purely subjective, observe legal experts.

“Public disclosure of any such event/information that is contingent in nature, albeit meeting the threshold test as proposed (thus may or may not eventually affect the company’s business), may not serve the intended purpose. Rather it may affect public sentiment, which, in turn, may affect stock prices,” says Harish Kumar, partner, Luthra and Luthra Law Offices India.

Kumar adds that the proposed materialistic threshold may also cause listed entities to disseminate redundant information to stock exchanges, which may otherwise cause investors to miss relevant information from listed entities.

Moreover, in the case of resignation of key managerial personnel, senior management or directors, the letter of resignation, along with detailed reasoning, is required to be disclosed. Among other major changes, Sebi has suggested reducing the time provided to companies for disclosure from 24 hours to 12 hours. In the case of decisions taken at board meetings, it has been proposed to disclose the information within 30 minutes. 

Industry players say the move will require listed companies to beef up their compliance and investor relations department. It could even cause some companies to seriously reconsider their listing plans.

It has been suggested that if an event is expected to impact at least 2 per cent of a company’s turnover, 2 per cent of networth or 5 per cent of the three-year average profit or loss after tax will be seen as ‘material disclosure’.

Listed companies may also be required to disclose instances of cybersecurity breaches and loss of data or documents from such cases in the quarterly corporate governance report. The consultation paper by Sebi is open to comments from the public until November 27. 

Sebi will only formalise the new disclosure framework after taking on board public feedback.