Securities and Exchange Board of India (SEBI) is also called the capital market regulator of India. It is a statutory body that wields power to control the securities markets in India. SEBI is responsible for the protection of the investor’s interest in securities and is authorised to promulgate and regulate the securities market. The board members are responsible for the running of SEBI. It is noteworthy that, before SEBI came into effect, the regulatory authority in function was the Controller of Capital Issues that had its authority under the Capital Issues (Control) Act of 1997.
Genesis of SEBI
The Securities and Exchange Board of India (SEBI) was founded in 1988 to regulate India’s capital markets. It began as a non-statutory entity with no statutory authority. It was granted autonomous and legislative authority following the passage of the SEBI Act by Parliament in 1992.
The Recent Amendment
On 6th May 2021 SEBI had notified through its notification, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2021. These amendment regulations were approved by the SEBI Board Meeting that was held on March 25, 2021. In the year 2020, the majority of the amendments that had taken place were released as “consultation papers”. These amendments had then taken effect from May 6th, 2021.
The Listing Regulations and its Applicability
The listing regulations in accordance with Regulation 3, apply to the entities or organisations that list designated securities on recognised stock exchange. The amended regulation clearly specifies that certain clauses of the listing regulations contingent on “Market capitalisation” will continue to enforce even though, the entities’ market capitalisation falls below the required point. Though market capitalisation can be calculated on any given day, the recognised stock exchanges, such as the BSE Limited and also the National Stock Exchange of India Limited, publish a list of listed entities based on market capitalisation on a regular basis. The terms of the Listing Regulations, on the other hand, apply based on market capitalisation at the end of the previous financial year.
It is significant to note that, the current amendment regulation regarding the applicability of the provisions after a listed entity has ceased to constitute among the top 500, 1000, and 2000 seems a bit shaky. The implementation of these provisions was initially adopted in light of the scale of the listed companies/entities with significant market capitalisation. The fact that the rules will continue to apply indefinitely despite the listed entity’s market capitalisation falling is more of a “compliance” burden.
SEBI must amend the provision in accordance with the timeline set out in Reg. 15, namely, if a listed entity does not appear in the top 100, 500, 1000, or 2000 for three consecutive financial years, the “compliance requirement” should be lifted. As a result, a combined reading of both clauses could allow for a more reasonable interpretation of the newly-inserted Regulation 3(2), easing compliance requirements after a three-year look-back period.
Changes in the Risk Management Committee
The constitution of the Risk Management Committee is provided under Regulation 21 of the Listing Regulations. There have been a significant number of changes that have been brought about by the amendment. Earlier Risk Management Committee was applicable on the top 500 listed entities, post amendment it applies on top 1000 listed entities based on the market capitalisation. The Amendment has now mandated the presence of 3 members, the majority being a part of the Board of Directors and having 1 Independent Director (ID) in the composition of the Risk Management Committee. In the case of SR Equity Shares, it would be 2/3rd IDs. The minimum number of meetings has been increased to two from one. The New Amendment has introduced the provision of a quorum constituting 2 or 1/3rd of the total members of the Risk Management Committee, whichever is higher. The quorum should mandatorily include at least one member from the BOD. It has now been mandated that the maximum gap between two consecutive meetings should be 180 days. Earlier the primary roles and responsibilities of the Risk Management Committee were to define the role and responsibility and delegate monitoring and reviewing of the risk management plan and such other functions, including cybersecurity. Post amendment, the Part D of Schedule II includes formulating the risk management policy, overseeing its implementation, monitoring, evaluating risk basis appropriate methodology, processes and systems and the appointment, removal and remuneration terms of the CRO. The Amendment has increased the RMC’s power to conduct an inquiry, obtain outside legal or other professional advice and secure attendance of outsiders with relevant expertise, if considers necessary.
The RMC’s functions and duties, which were previously left to the Board’s discretion, are now defined in the Regulations themselves. The RMC has also been entrusted with the development of Risk Management Policy, with the specific contents of the policy being stated in the Schedule.
The Audit Committee is also tasked with risk control. As a result, the functions of the two committees can overlap. As a result, several organisations prefer to form a single joint committee that combines the functions of the Audit Committee and the RMC.
While the Amendment Regulations go into effect right away, the changes won’t happen overnight. As a result, it is recommended that the listed entities discuss the RMC’s constitution/re-constitution at the next Board Meeting. The RMC would then take on the task of changing the Risk Management Policy, which should be completed within a reasonable amount of time.
LODR Regulations – Overriding powers
Previously, the proviso to Regulation 15(2)(b) stated that in the event of a dispute, there shall be an overriding effect of a specific law. The said proviso will be removed by the Amendment Regulations from September 1, 2021. Following September 1, 2021, these entities will be considered non-compliant with the Listing Regulations and may face penalties under the SEBI Circular dated January 2020.
Promoters reclassifying into public in relation to exemptions and procedural changes
Specific conditions and approvals post which the promoters can be re-classified into public shareholders is specified under Regulation 31A of the LODR Regulations.
Provisions that align with the Companies Act of 2013
It strived to eliminate the gap that existed between the Listing Obligations and Disclosure Requirements with that of the Companies Act, 2013. Firstly, both the Companies Act, 2013 and the LODR Regulations impose the obligation of holding a separate meeting of independent directors without the participation of any other member of the company’s Board of Directors. Unlike the Companies Act, which requires only one meeting per financial year, the LODR Regulations required only one meeting per year (calendar year). As a result, it has been replaced with a “financial year” in order to align the criteria of both governing laws. Secondly, companies with a website are required by Section 92 and related rules to duly post their Annual Return on the website. A new provision has been added to Regulation 46 of the LODR Regulations, requiring the Annual Return to be posted on the company’s website. Another noteworthy change is that, prior to the Amendment Regulations, it was requisite that each subsidiary’s audited financial statements were to be posted on the website. Novel provisos have been added to the same in order to prevent the preparation of separate financial statements for the subsidiary entity where the Companies Act, 2013 criteria are fulfilled if combined financial statements are placed rather than separate ones.
Disclosures on the Website
The required contents to be put on a specified entity’s website are outlined in Regulation 46 of the LODR Regulations. The majority of the disclosures were already in place under the relevant legislation, such as Reg 30, 43A, and so on. Regulation 46, on the other hand, has consolidated the same. As a result of this, stock exchanges will be able to impose penalties in accordance with the SEBI circular dated January 22, 2020.
Under Regulation 46 and Schedule III, the listed entity is expected to post the schedule of Analyst or institutional investor meetings, as well as the presentations made to them, on its website and on the stock exchange’s website respectively. The word “meet” is described in the Amendment Regulations to mean group meetings and calls, whether digitally or physically. The listed entity would be required by the Amendment Regulations to upload the audio/video recordings and transcripts within the specified time frame. SEBI’s Report on disclosures relating to analyst meetings, investor meetings, and conference calls supports this. The Amendment, however, does not cover the disclosure of one-on-one investor/adviser meetings held with select investors.
SEBI Circular consolidations
The conditions under the principal LODR Regulations have been consolidated by the Amendment Regulations. Some of these are as follows- a requirement of secretarial compliance report; requirement of BRSR; timeline for the report of monitoring agency.
Its impact on Business
The Amendment Regulations are extremely important and relevant. While such provisions are consistent with the Companies Act, 2013, overarching powers have been granted to the LODR Regulations, requiring specified organisations created under a special law to comply with the LODR Regulations in their entirety. The coverage of such rules applied to listed entities based on market capitalisation would have a significant effect on the corporate governance of listed entities, and the Sidebar uniformity of timelines and relaxation of certain disclosure standards would encourage ease of doing business.
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