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SEBI's New Listing Regulations

Published on Sat, Sep 19,2015 | 09:42, Updated at Mon, Sep 21 at 18:05Source : CNBC-TV18 |   Watch Video :

Disclosures, disclosures, disclosures! SEBI wants India Inc. To reveal more details on key material events such as acquisitions, amalgamations and even family agreements! That seems to be the main focus of SEBI’s new listing regulations. The new regulations, issued last week, replace the listing agreement including Clause 49 and 128 allied SEBI circulars. They apply to all entities that have listed equity shares, convertible securities, a variety of debt securities and preference shares, Indian depository receipts, securitised debt instruments and mutual fund units. Do the listing regulations promise to usher in a new era of transparency? Joining CNBC TV18’s Menaka Doshi are 3 of India’s best known capital market lawyers – JSA’s Somasekhar Sundaresan, Yash Ashar of Cyril Amarchand Mangaldas and Sandip Bhagat of S&R.

Somasekhar Sundaresan, Head - Securities Law Practice, JSA

Yash Ashar, Partner, Cyril Amarchand Mangaldas

Sandip Bhagat, Partner, S&R

Doshi: The conversion of what was the listing agreement including the dreaded clause 49 and about 128 other circulars into now a better enforceable regulation just means better enforcement, right?

Sundaresan: Yes, in terms of instrument a law a regulation is a known instrument pursuant to an act of parliament. This gets tabled in parliament for 30 days. So, enforcement quality wise is a more binding instrument of law as compared to a circular or guidelines.

Ashar: It makes an important change. Earlier if the enforcement of any provision had to be made under the listing agreement which was a contract between the stock exchanges and issuer companies SEBI had to go through the stock exchanges. SEBI could not directly access the issuer company unless there was a breach of some other regulation. Now with the regulation it sort of allows, I would think SEBI direct taxes and of course this has also increased the responsibility of the stock exchanges which otherwise was not clear you could argue within the existing provisions. So, therefore it is important.

The second thing which it does which is very important is we had a series of detailed requirements for companies when they went public but after they went public it was silence. Very rarely do you get quality disclosure. So, with this new sort of regulation the detail that companies now have to follow post listing is almost as much as they have to do during listing. So, that is again a great change which will improve disclosure.

SEBI Listing Regs: Mandatory Disclosures
(including acquisition of 5% or more equity, 2% or more incremental equity)
-Sale or disposal of any unit/division/subsidiary
-Restriction on transferability of securities

SEBI Listing Regs: Mandatory Disclosures
-Alteration of Calls
-Rating Revisions
-Shareholder Agreements
-Joint Venture Agreements
-Family Settlement Agreements

SEBI Listing Regs: Mandatory Disclosures
-Fraud/defaults by promoter or KMP
-Corporate Debt Restructuring
-One-time Settlement with a Bank

Doshi: I loved what I read. I didn't read all 111 pages but at least whatever pertained to equity because simply as Yash pointed out. The extensive disclosures required by companies pre and post listing, and I am just going to list or talk about some of the mandatory disclosures to give viewers a sense of really how far this set of regulations goes. For instance not only do you have to disclose all your acquisitions but even an acquisition which is five percent in any entity has to be disclosed. So, essentially anything that you acquire five percent and more has to be disclosed as an acquisition. The sale of a unit, division, subsidiary, doesn't matter how big or small needs to be disclosed. Any restriction on transferability of securities needs disclosures. Alteration of calls, disclosures, rating revisions, companies are fabulously lax and not putting out that information, disclosures. Shareholder agreements, well that was expected, joint venture agreements, sort of expected, family settlement agreements, totally not expected, they have said now relevant portions of that, relevant to the listed entity must be disclosed. Corporate debt restructuring, you need disclosures. One time settlements for banks, my heart is singing as a journalist, I am delighted. My only question is are companies really going to be able to do all of this, is this going to mean more transparency or are they just going to dump fine print on us.

Sundaresan: Most market participants' heart will sing looking at this but one should also worry about the cacophony. If you don't really orchestrate the multiple the multiple noises that come out it can lead to a very noisy environment. Personally one element that I feel is a bit of a step back is removing materiality for disclosures such as acquisitions. So, you don't want Rs 5,000 crore company having to disclose Rs 5 crore asset acquisition because it is fits within the term acquisition. So, I do think that in that element it has been a bit of step back.

Doshi: What is the harm though?

Sundaresan: When you are talking of an Initial Public Offering (IPO) or disclosure reform we are talking about the need to bring materiality. When you are looking at rebuttable presumption of price sensitive information under insider trading we are talking about materiality and then to say during the life of a listed company regardless of materiality some things have to be disclosed. That is conceptually a little bit of a step back.

Doshi: I can't see what the harm is. Though I understand that it is going to mean lot more paperwork, lot more information out there. Investors will have to sift through it, but why should a Rs 5,000 crore company not disclose a Rs 5 crore acquisition or an investment of five percent and more. It is only a disclosure, what is the problem?

Asher: Let us step back where we were. So, the existing clause 36 prior to these regulations was bare bone and most CFOs and managing directors would fight with you saying disclosure is not required, doesn't fit in within the framework. We want to complete the other extreme where it is not just the Rs 5 crore bit. If you look at the disclosure requirement you have to give a lot more detail. So, for example if there is a pharma company in India which has a subsidiary in Brazil, Portugal and it does a small acquisition in say, Nigeria, there is going to be a lot more disclosure. So, that at least to the cacophony that Som referred to and then people will not be able to understand what is the impact, whether it makes any sense or not. If you held 10 percent in a company and acquire another 10 percent again you have to make disclosure. Even if it is a really small amount.

Doshi: But what again is a problem there?

Sundaresan: You have excessive disclosure, you end up risking, making market participants think inconsequential events as consequential and we also have cases of SEBI being very upset with companies for disclosing all sorts of contracts on a regular basis and using it as a tool for upward price manipulation.

Doshi: You mean like interest bagging in the infrastructure order kind of thing?

Sundaresan: Yes, and equally there have been people punished for not reporting bagging a contract or losing a contract. So, materiality is the key to resolve this problem and to then say materiality will not matter is not conceptually a right thing to do.

SEBI Listing Regs: Disclosure Details
- Any default on paying the FCCB coupon
- Corrective measures undertaken

SEBI Listing Regs: Disclosure Details
Debt Securities
- Any special right/interest/privileges attached to securities
Share Transferability
-    Reasons for restriction on transferability of shares

SEBI Listing Regs: Disclosure Details

- Shareholder agreements, JV agreements & Family agreements
- Names of parties to the agreement, purpose, affirmative rights
- Relation to promoter…

Doshi: I am going to take this question on step further. Not only has SEBI mandated what you need to disclose, they have in a subsequent circular also put out details on what details you must provide in that disclosure. Again my heart sings, they have said for instance a company must disclose if it has defaulted on paying the foreign currency convertible bond (FCCB) coupon and not only FCCB coupon and not only disclose that if you have defaulted but also what corrective measures you are taking. These are not things we heard from companies before. Companies would rarely tell you - I could list a whole bunch of other details, any special refights, privileges, interest attached to debt securities, and restrictions on transferability you have to explain why there is a restriction. Affirmative rights being granted to shareholders in a joint venture agreement, you need to disclose that in detail and SEBI has provided what detail and how much detail. These are things that shareholders never got to see.

Bhagat: This is a reform in the ongoing secondary market disclosure we have. It was needed. There the general perception is that while there was good amount of disclosure at the time of the IPO ongoing secondary market disclosure in India is average to poor. So, there was a need for the regulator to come out with a set of regulations which tightened the framework currently. We can debate on materiality. The US for example took it one step further and in 2002 for example said, you not only do all this you actually file your acquisition agreement. You file your material agreement with the regulator. Before they implemented that there was a lot of resistance, by corporates, by industry and now those agreements are pretty good to look at for any particular understanding of a listed company. I don't think our regulator has taken it that far. They have certainly removed the element of discretion with certain companies. After December 1 listed companies have to seriously look at their disclosure obligation and have to seriously look and say, this is what is mandatory, what this is not.

I don't disagree with Som and Yash that maybe we could have had a bit of materiality play more. The regulator itself has said if you can't disclose for example something in these items you need to tell why. So, maybe part of the analysis which listed companies will do is they will say, okay, we need to disclose the following ten items, let us consider why we don't need to disclose one or two and give the reasons for that and disclose that publically.

Doshi: And let us see what SEBI reacts to that.

Bhagat: Yes, right, but to me overall this is strengthening secondary market disclosure. At least to me this is an important step forward. We can debate on whether they have gone too far or not.

Sundaresan: The acquisition part is a problematic part and you will end up having a fair bit of cacophony.

Doshi: But is that your only objection?

Sundaresan: It is noise. It is a lot of noise and noise drowns out analysis.

Asher: Sometimes it could be confidentiality clause issues but again that also one can…

Doshi: I am so sorry to interrupt you. I have seen companies hide behind that for even material investments of sort.

Asher: I agree because the test I use at least is confidentiality balanced with insider trading and what is price sensitive. Many a times senior employees etc may be trading. Therefore this can't be confidentiality because there is some people trading but that could be one of the arguments, I agree with it.

Doshi: Indian companies, I am so sorry to generalise this, I don't often do this but Indian companies suck at disclosures and this is a huge step forward in at least asking them to start reviewing their disclosure policies and making more information available despite the minor discomfort on the fringe that it is causing in that sense. I don't think any of you principally disagree with the fact that we need more disclosures.

Bhagat: Don't principally disagree, it is good that for certain events discretion is no longer there.

SEBI Listing Regs: Optional Disclosures

Capacity Addition
Product Launch
Loan Agreements
Effect of changes in Regulatory Framework
Reasons for offering Guarantees/Indemnity to 3rd party

Doshi: To be fair they have left something to a company's materiality policy. They have said that for a variety of issues for instance like impact of regulations or product launches, loan agreements, capacity additions we are asking the companies to device their own materiality policy and then determine whether these events are material as per your policy and therefore have to be disclosed or not. So, they have left some of it to the company's discretion.

Sundaresan: There are two parts. One is their materiality is irrelevant, the other is materiality is relevant and there too the good is part is they have given about three qualitative criteria on how do you determine materiality and all those are excellent.

Doshi: There is also some guidance they provided in the subsequent circular on when an event or information is occurred and therefore when it needs to be disclosed, I was a little confused by this. So, I am just going to put up an illustration out there. This is something we run into very commonly in the media. We hear of negotiations of an acquisition, you want to report it, you report it. A company will come back with a fairly motherhood statement saying we don't comment on speculative issues. Does this guidance compel them to share more information at that stage of negotiation or does this guidance say, you don't need to share any information at all until you have taken the acquisition to your board. How have you interpreted this?

Bhagat: The way we are currently doing any transaction until it reaches a binding definitive agreement stage the advice today is it is still speculative and you should not be telling the market that you have a transaction. Once you have a definitive agreement then you will disclose that. This is simply adding to that particular guidance and saying that if there are certain types of events which require board or shareholder approval disclose it at that time. Certain types of events, you have an earthquake, you have fire in your facility you should be disclosing that as soon as you come to know.

SEBI Listing Regs: When To Disclose
On Board Approval
-Events that depend on stage of negotiation/approval
Example: Rights Issue
When They Happen
- Events that don’t involve negotiation/approval
Example: Natural calamities

Doshi: So, an acquisition would fall into the former.

Bhagat: Into the first category which is that at the point there is a decision made on the acquisition by the board.

Sundaresan: Decision on a binding agreement. You may decide to scout for targets, you may decide to entertain an acquirer, but there is many a slip between the cup and the lip. You may not really take it to fruition. So, the issue of when do you talk about it goes back to again it mirrors making true statements under your FUTP regulations. So, you can't be giving information as if it were true when it is not really firm and binding. So, that space remains the same, nothing has really changed there.

Doshi: So, have we covered disclosures in the detail that we ought to have on this discussion.

SEBI Listing Regs: Subsidiaries
Corporate Governance Requirements include
- Atleast 1 parent co Independent Director on its Board
- Parent co Board should receive statement of all significant transactions
- Special resolution approval for certain asset sales/share sales of material subsidiary

Asher: The addition is they have added a level of disclosure to material subs. So, earlier they have added material subsidiaries and they have given you guidance on procedural aspects, the independent director on the board of the listed company has to be nominated on the material subsidiary. Now they have given you detailed requirements of what you have to comply with relation to material subsidiaries. So, that again is a good step in disclosure. It forces companies now to give what is happening below the company which many companies still now are perhaps avoiding.

SEBI Listing Regs: Company Website
All events or information disclosed to Stock Exchange
To be hosted on website for minimum 5 years
Detailed guidance on basic information to be available on website

Bhagat: Only one other point was listed companies should now start looking at their websites a little more carefully. In what they disclose on their websites there are specific regulations now on what should be disclosed on their website including the fact that the website needs to be updated within two days of any change in event and what you disclose to the stock exchanges you got to disclose it on your website and leave it there for five years or longer if you have a document retention policy.

Doshi: They have also put a time limit now saying board decisions have to be communicated to the exchange within 30 minutes.

SEBI Listing Regs: Board Decisions
Disclose to Stock Exchanges within 30 minutes
- Dividends/Bonus
- Buyback
- Fundraising
- Financial Results
- Voluntary de-listing
- Agreements…

Sundaresan: Yes, it used to be 15 earlier.

Asher: The only thing on that board part, the only thing which I have an issue with is earlier if you were doing an issuance of equity you did not have an obligation to intermittent exchanges prior to the board meeting and I thought that was a correct position. It allowed the board to disclose it and independent directors to give in their thoughts, whether there was a requirement for dilution or not. They have changed that in the new regulation. So, now you need to give prior intimation of two working days even if you are going to do an issuance of equity of any sort.

Doshi: Or if it is on your agenda?

Asher: If it is on the agenda which means in simple terms if I am an independent director on a company, if I am going to go there and counter the existing management and say I don't think this company should do a dilution now, it should probably wait six months, it is not going to count for much because the whole world knows and expects there is going to be a dilution and for two working days it has already been out there on the exchanges to see. So, it is a bit unfortunate. Globally it is not required. This is a matter which the board has to discuss and once the board has discussed then you intimate it. So, that I thought was unnecessary but that is probably the only sort of issue where I have deferred with the thoughts.

SEBI Listing Regs: Related Party Transactions
Ordinary Resolution (same as amended Companies Act, 2013)                                               
No Related Party can vote (differs from amended Companies Act, 2013)

Doshi: One of the other things I was looking forward to in these regulations is what SEBI decides to do with regards to related party transaction and whether it aligns itself with the amended companies act. Well, it has partly aligned itself. So, the companies act says special resolution not required any more, only ordinary resolution. SEBI has stored that line but the companies act says only that related party which has an interest in that transaction cannot vote. SEBI has maintained its previous position and said no related party can vote on that particular related party transaction when it goes to shareholder approval. It is a part alignment. It is a good alignment unless you see operational issues in the fact that the two don't speak the same language.

Sundaresan: It is part alignment but there is still a bit of dissonance between the two. For example the listing regulations deal only with material related party transaction, companies act regardless of materiality says if it is arms length and in the ordinary course you don't need to go to shareholders. So, it is not completely aligned, there is still dichotomy. Also what is a related party transaction, this is an amalgamation. So it isn't completely in line.

Doshi: So, those differences existed earlier as well.

Bhagat: The advice to clients is if you are a listed company doing a related party transaction you need to look carefully at the companies act, look carefully at the listing regulations and each one you need to look at it almost separately make sure you comply with both.

Doshi: There is only one area of doubt I have here. In 2013 SEBI had put out two circulars regarding schemes that involved transaction with promoters or arrangements with the promoters and in that they have said in such schemes you would need a minority or majority of public shareholders to approve it and they had also put in some other requirements such as you need an independent valuer's report etc. There is no explicit reference to any of that in this listing regulation. So what happens, do the RPT provisions apply to schemes as well?

Sundaresan: So, the circulars repeat. So, everything that is not now in the regulation is out. So, the reference to valuation report is out. But clearly you could argue that the scheme with the related party is a material related party transaction and one could argue it is not very clear as you highlight but it could be argued that the consent of the public shareholders, the non related party shareholders is still a requirement.

Doshi: So majority of minority still applies for schemes as well?

Sundaresan: At some point the regulator will have to reveal its mind and clarify it further because earlier you could take a view that a special law overrides a general law when there was a special explicit circular dealing with it you didn't have to look at the listing agreement for that. Now it has all come into regulation and the circular has gone. So, if the intention was to treat a scheme like a related party contract and therefore take approval then again you have got to build this dynamic between a court meeting which is actually a court convened meeting as opposed to a shareholder resolution under companies law where you have got to take a vote of the shareholders, how do you align the two process.

Doshi: That is why I asked. This would not strictly fall under an RPT transaction definition and yet they have risen to that circular.

Asher: You will have to read together with the earlier bits of sale of assets etc. So a lot of disclosure would any way come in there.

Bhagat: I don't know if this listing regulations itself are the end of it or they are going to issuer more regulations or circulars.

Doshi: So, 111 pages plus another 111 pages.

Bhagat: They have already issued a circular for example and for example they have said there is this annual disclosure requirement and even in this scheme of thing there is something under regulation 37(4) which says anything else which SEBI may prescribe from time to time. So, we don't know if it is the end of it or if the regulator comes up with something.

Doshi: So my answer will lie in some future.

Bhagat: We don't know.

Doshi: Final point. They have included in these regulations the new board approvals, that is the SEBI board approvals to creating a framework for reclassification of promoters. This is the first time we have it in the country, therefore it is the first time that it is in these new regulations and it makes for the third new thing that I wanted to talk about. It is great we have a framework but their do seem to be some very restrictive clauses in this framework and I wanted to ask all three of you whether this is a viable framework or not.

SEBI Listing Regs: Re-classification Of Promoter

Entity becomes professionally managed only if
- No person holds more than 1% (exemption for Banks, Insurances, FIs, MFs & FPIs)
- Former promoter is KMP for only 3 years
- No special rights for former promoter

For instance it goes on to say that an entity may be considered professional as long as no person or a group of person holds more than one percent of the equity of that company. I don't know too many companies where nobody will hold one percent or more and High Net Worth individual (HNI) many hold two - four percent. So, I am just curious to know whether this is a viable framework or not.

Asher: The important point is and one could argue separately whether the listing regulation was a correct place to put this entire framework but there was a gap in this entire sort of issue and lots of companies have this peculiar issue where promoters had sold. For example in Satyam when the incident happened Ramalingam Raju held 1.8 percent as shareholding. So, from that perspective bad example.

Doshi: So, not professionally managed under this?

Asher: Good or bad example but separately this now has a framework. What you pointed out was one particular clause but that clause itself excludes mutual fund and other criteria.

Doshi: But does it exclude private equity, it doesn't include HNI?

Asher: It does include private equity but it would read it with 6(1) and there is an argument and separately the same regulation provides that if you have any issue you can go to SEBI. SEBI itself had a difficulty up to now on how to entertain these requests. Companies said we don't have a promoter or I am nameless promoter but I don't hold a single share, I don't have a board sheet, I have no rights. Why am I being called a promoter of this company. SEBI said I can't help you because I don't have regulation. At least now there is a regulation.

Doshi: It is also very confusingly written. So, I am not sure what you make of it. It is viable, is it workable, does it really create space for let us say companies like Infosys or other professionally run companies where there is no identifiable promoter anymore?

Sundaresan: We will have to take a step back. This whole promoter overhang over corporate India is a legacy of many decades and we have not yet been able to shrug ourselves of this legacy and look at potentially listing companies with no promoters. This whole craving to identify a promoter, put him up there, lenders asking them to give personal guarantees, all that continues in society today. So, you see a bit of a concept note in this regulation rather than a hard rule or a provision of law. At least it articulates a concept that a company needn't have a promoter or the same promoter all its life. So, it looks at two scenarios, one is where there is new incoming promoter who buys the existing guy out and the other is where the existing guy just dissolves, like the example Yash gave where the promoter's holding gets diluted over time and then you apply the barometer of whether it is professionally managed or not. So, at least it is a start.

SEBI Listing Regs: Re-classification Of Promoter

Outgoing promoter shall not
-          hold more than 10%
-          have any special rights
-          hold not act as KMP for more than 3 years

Doshi: For instance the first instance you pointed out where you said a current promoter is replaced by a new incoming promoter because of an acquisition. The current promoter should not have more than 10 percent.

Sundaresan: No, the outgoing promoter.

Doshi: Well it doesn't specify that as we discussed earlier.

Sundaresan: 10 percent is a very material holding. Under company law you can force

Doshi: He should not have any special rights. I don't know, I could ask how does it matter? Somebody is coming in, he is choosing to become promoter.

Sundaresan: Yes, but the outgoing guy is more than 10 and he can choose to call a shareholder meeting at will or he can take the company to pressure and mismanagement proceedings, it is a material threshold, it is a decent bright line to apply.

Asher: If there are companies where I want to continue to appoint a director or I want to continue to do other activities, I want to continue to be an MD of the board, then you stay as promoter.

Sundaresan: And there are some good criteria like saying you can have a three year transition employment contract to run it, get it approved.

Doshi: Yes, so the outgoing promoter can continue to be a key managerial person for three years.

Sundaresan: So, at least it is a path in the right direction.

Doshi: So, the problem lies in the second instance which is that if the current promoters stake has diminished to an extend where the company wants to call itself now a professionally managed company and nobody wants to be classified as promoter, that is where you run into stickiness because a one percent threshold there…

SEBI Listing Regs: Re-classification Of Promoter

Entity becomes professionally managed only if
- No person holds more than 1% (exemption for Banks, Insurances, FIs, MFs & FPIs)
- Former promoter is KMP for only 3 years
- No special rights for former promoter

Sundaresan: That is right, you may fall between this because somebody is above one and then you start dragging him in.

Doshi: And forcing him to become a promoter in that sense.

Bhagat: Both five and six could do changes. In five which they have talked about 10 percent my view is if there is a new guy coming in he controls the company, he is saying I am the promoter, he has made an open offer why does it matter if somebody holds 10 or 15 percent. That to me does give some - and maybe the answer to that is what Yash and Som are saying, go to the regulator and give us an exemption. One percent is a fairly low threshold in that particular thing. Maybe that could have been a little higher and maybe the one and five…

Doshi: So work in progress?

Bhagat: Maybe.

Sundaresan: It is a good start.

Asher: It is a great start and we will see a lot of companies go under this and test this very soon.That said companies now have more clarity than before on what to disclose and how…and shareholders will benefit from the transparency.

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