Analysing SEBI’s Proposals to the Disclosure Framework

Introduction

The Securities and Exchange Board of India (hereinafter referred to as “SEBI”) proposed modifications and additions to the present disclosure regime under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred to as “the LODR Regulations”) in its Consultation Paper (hereinafter referred to as “the Paper”) dated 12-11-2022.¹ The LODR Regulations are applicable on all listed entities and were formulated to ensure uniformity with regard to disclosure requirements.

The Paper reviews Regulation 30 of the current disclosure framework with the intent to streamline it due to unfavourable feedback regarding improper disclosures by the listed entities. The mentioned regulation warrants disclosure regarding “material events or information”² to the stock exchanges which are “material” or have a “material effect”. Items which shall be disclosed without considering its materiality are listed under Para A of Part A of Schedule III whereas Para B constitutes items warranting disclosures only if they are material according to the materiality policy of the entity. SEBI intends to include more items under Para A thereby reducing discretion for disclosures on the part of the entities.

Mandatory obligation to verify market rumours

The Paper proposed mandatory obligation on top 250 listed entities to “necessarily confirm or deny any event or information reported in mainstream media, whether in print or digital mode, which may have a material effect on the listed entity under this regulation”. At present, there is a discretion on this matter. The reasoning behind this inclusion is that material rumours in the market may be price sensitive to an extent which may be relied upon by sentimental shareholders. Such information may turn out to be adverse for the public shareholders.

Compromising deal transactions and enhancing directors’ liability

In March 2020, Jio Platforms Limited and Facebook were on the negotiations stage where an article was published by the Financial Times titled “Facebook eyes multibillion-dollar stake in Reliance Jio”³, following which Reliance almost gained 20%.⁴ Such transactions are price sensitive and responses to market rumours may affect deal prices. In this case, SEBI imposed a fine on Reliance for non-disclosure⁵ and said that disclosures relating to negotiations are also to be made and not only when the deal is finalised.

Moreover, the directors become liable to disclose information in case market rumour reports incomplete information. However, the obligation on the extent of information to be disclosed lies on them and they are stuck between protecting the deal in hand or risking fines by SEBI for non-disclosure.

Therefore, the following points shall be considered:

(i) Such deals are price sensitive and response to market rumours may affect deal prices.

(ii) Premature disclosures of a deal might risk the whole transaction.

(iii) Directors of the listed company may be liable for market manipulation if the deal falls through.

Adani-Hindenburg row

On 24-1-2023, a short-selling firm released “Hindenburg Report” alleging the Adani group of stock manipulation and accounting fraud. On the next day, Adani group denied the report calling it baseless on Twitter.⁶ Even after the verification, Adani stocks kept crashing and the group lost over 10 lakh crores.⁷

Now, concerning the present context of disclosures, it can be said that the above event was price sensitive and affected the entity’s net worth so much to trigger the materiality threshold. It shall be noted that the rumour/event/report was denied by the company by way of digital media the next day. Still, its stock crashed, and investors had to face losses.

Materiality thresholds

The intent behind quantitative criteria for triggering disclosure requirements originated from the findings that the entities follow a very generic materiality policy having much more discretion for disclosing an event that may have a significant effect. Therefore, SEBI has proposed the following criteria for disclosure in case an event impact:

(i) 2% of the turnover;

(ii) 2% of the net worth; and

(iii) 5% of the three-year average of profit or loss after tax.

Pros and cons of the proposal

Therefore, the proposed changes by SEBI can have following pros and cons:

1. Uniformity— This is also the main objective behind the modifications proposed. The proposal makes the materiality criteria uniform for all the companies, reducing the scope of discretion.

2. Access to material information— Investors have all the rights to be informed about material information. It would help the investor to make the right decision at the right time on the basis of the verified disclosure.

3. Awareness— Again, investors would be aware of all the material events happening in a company. Their decisions would be free from assumptions and predictions. As a result, there may be less volatility in the market.

4. Hinder company’s plans— Companies would be forced to reveal something they do not want to which might affect their future plans. Some key decisions are kept within the company to ensure its smooth functioning.

5. Material but not warranting disclosure— There may be such events which may actually be material but do not trigger the materiality thresholds.

6. More burden on companies— The proposal increases company’s burden to undertake more compliances and to consider how much disclosures to be made.

Other proposed changes

Timeline

“In certain instances, it was observed that the disclosure of an event by the listed entity was made at the last hour, by which time the information about the said event had already been circulated publicly in the media. At times, the information had to be disclosed by the listed entities only after queries were raised by stock exchanges based on media reports”, SEBI stated in the Paper.

In response, the proposal tightens the time-limit for disclosure from 24 hours to 12 hours. SEBI, in the Paper, identifies the advancement in media communication and proposes the need for quicker disclosure of material information. The decisions arrived at a Board meeting shall be disclosed within 30 minutes.

This modification is proposed so that public receives the material information before the media reports/publicises it. Truncation of timeline is to keep up with the growing media and to ensure timely disclosure.

Other disclosures

Cybersecurity breaches shall be disclosed in detail in the compliance report under Regulation 27 of the LODR Regulations. Any material information relating to the key managerial personnel, directors, senior management ― their availability or resignation or regulatory actions against them shall be disclosed within the prescribed timeline. Any revision in financial statements of the entity shall be disclosed mandatorily.

Ambiguities in the proposal

1. Arbitrary criteria ― It is unclear as to how the objective/quantitative thresholds are arrived at.

2. Verification ― The proposal seeks “verification of market rumours” by either confirming or denying. But it is not clear that how much verification is required and whether a confirmation or denial be enough to avoid SEBI’s penalty for non-disclosure.

3. Mainstream media ― What construes mainstream media is not stated and not clear that if it includes all types of media for mass communication.

Conclusion

It can be concluded that the proposal will have a strong impact on the disclosure framework followed currently as the companies will have an additional compliance burden. The companies will have to modify their internal policies accordingly to avoid any kind of hinderance in the undergoing transactions. On the other hand, with this proposal SEBI undertakes to increase transparency and quick resolution of presumptions made due to market rumours, by making the disclosures mandatory. This way, companies would have no discretion and will have to mandatorily disclose/verify such information.