 "Farewell listing agreement, welcome new regulation")
Starting December 1, listing agreements between listed entities and exchanges will become redundant, as the contractual agreements between the two will be replaced by a listing regulation. The Securities and Exchange Board of India (Sebi) had in November last year cleared the listing regulation and companies would need to be compliant with these from the beginning of next month.
These regulations propose to give more power to shareholders and converts contractual obligations into statutory requirements.
"Not only does this increases the legal force behind provisions, prescribing post-listing obligations and disclosure requirements, but also opens up new avenues for shareholders to enforce post-listing requirements," said Sandeep Parekh, founder, Finsec Law Advisors. This, say legal experts, is a major step towards bringing up the quality of post-listing disclosures to match primary market disclosures, and will lead to better corporate governance practice.
In the set of regulations what really stands out for corporate India and the legal fraternity is the policy on disclosure of material information. There are certain aspects that Sebi expects companies to disclose to stock exchanges without exception. However, for certain other items, the regulator has left it to the companies to determine whether these are material or not.
The new listing regulations require listed companies to make disclosures of material events and information based on the policy framed by them for determination of materiality. The policy has to be based on the two criteria for materiality provided in the regulations. "The new regulations, therefore, only provide for the criteria. The listed company has to frame its own policy around those criteria," said Lalit Kumar, partner, J Sagar Associates.
"In cases where the criteria specified in the regulations do not apply, any information which is material in the opinion of the board of directors will have to be disclosed," he added. Sebi rather than spelling out for the companies what should be the policy has rather provided a guidance note.
"Given the principle-based approach, materiality standards and subjective disclosure requirements are bound to oscillate for a while after the regulations come into force. It might initially make life difficult for a corporate, however, moving away from bright line tests is a necessary move," said Parekh.
According to experts, majority of companies have replicated Sebi's guidance principle as their policy on disclosures, as they want to avoid uncertainty.
"Adopting a materiality standard is a globally accepted practice and does away with dumping on investors hundreds of irrelevant disclosures, in effect hiding the most material ones. Thus this will in fact enhance the quality and readability of disclosures to the investors," said Parekh.
According to the Sebi regulation, the material nature of the information can be determined by key managerial personnel and need to be disclosed within 24 hours of the event. However, certain board outcomes would need to be disclosed within 30 minutes of the conclusion of the board meeting. This information needs to remain on the company website for at least five years.
Lawyers advising corporates on drafting the policy on disclosure are considering aspects which will impact the revenue of the company, its share price and the company performance.
"Any information which will have an impact on the credit worthiness of a company, will affect its goodwill. The cash flow position would need to be disclosed to stock exchanges and be part of company's policy of disclosure," said Kumar.
With the new regulations, companies would also need to draft a policy on preservation of documents. Among these documents, there would be some that would need to be preserved for eight years, while others will be required to be kept for the entire lifetime. These documents would typically include the ones related to financial statements, tax and legal matters.
These regulations propose to give more power to shareholders and converts contractual obligations into statutory requirements.
"Not only does this increases the legal force behind provisions, prescribing post-listing obligations and disclosure requirements, but also opens up new avenues for shareholders to enforce post-listing requirements," said Sandeep Parekh, founder, Finsec Law Advisors. This, say legal experts, is a major step towards bringing up the quality of post-listing disclosures to match primary market disclosures, and will lead to better corporate governance practice.
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The regulation will consolidate all securities - equity, debt, non-convertible debt securities and preferential shares, depository receipts and mutual fund units - under one regulation that lays emphasis on corporate governance and enhanced disclosures.
In the set of regulations what really stands out for corporate India and the legal fraternity is the policy on disclosure of material information. There are certain aspects that Sebi expects companies to disclose to stock exchanges without exception. However, for certain other items, the regulator has left it to the companies to determine whether these are material or not.
The new listing regulations require listed companies to make disclosures of material events and information based on the policy framed by them for determination of materiality. The policy has to be based on the two criteria for materiality provided in the regulations. "The new regulations, therefore, only provide for the criteria. The listed company has to frame its own policy around those criteria," said Lalit Kumar, partner, J Sagar Associates.
"In cases where the criteria specified in the regulations do not apply, any information which is material in the opinion of the board of directors will have to be disclosed," he added. Sebi rather than spelling out for the companies what should be the policy has rather provided a guidance note.
"Given the principle-based approach, materiality standards and subjective disclosure requirements are bound to oscillate for a while after the regulations come into force. It might initially make life difficult for a corporate, however, moving away from bright line tests is a necessary move," said Parekh.
According to experts, majority of companies have replicated Sebi's guidance principle as their policy on disclosures, as they want to avoid uncertainty.
"Adopting a materiality standard is a globally accepted practice and does away with dumping on investors hundreds of irrelevant disclosures, in effect hiding the most material ones. Thus this will in fact enhance the quality and readability of disclosures to the investors," said Parekh.
According to the Sebi regulation, the material nature of the information can be determined by key managerial personnel and need to be disclosed within 24 hours of the event. However, certain board outcomes would need to be disclosed within 30 minutes of the conclusion of the board meeting. This information needs to remain on the company website for at least five years.
Lawyers advising corporates on drafting the policy on disclosure are considering aspects which will impact the revenue of the company, its share price and the company performance.
"Any information which will have an impact on the credit worthiness of a company, will affect its goodwill. The cash flow position would need to be disclosed to stock exchanges and be part of company's policy of disclosure," said Kumar.
With the new regulations, companies would also need to draft a policy on preservation of documents. Among these documents, there would be some that would need to be preserved for eight years, while others will be required to be kept for the entire lifetime. These documents would typically include the ones related to financial statements, tax and legal matters.