[Analysis] Decoding the SEBI LODR (Second Amendment) Regulations, 2023

Table of Contents

1. Introduction
2. Stricter timelines to fill the Vacancy of the Key Managerial Personnel (KMP) within 3 months from the date of the vacancy
3. Directors can’t freely enjoy permanency on the board of a listed entity
4. Introduction of threshold-based criteria for determining the materiality of events/information
5. SEBI specifies shorter timelines for the disclosure of material events/information
6. Mandatory disclosure of details w.r.t cybersecurity incidents, breaches, or loss of data along with quarterly compliance report
7. Top listed entities to verify market rumours promptly
8. Revised timelines w.r.t. intimation to stock exchanges
9. Dissemination of information on website at least 2 days in advance w.r.t. Institutional Investors meet
10. Sale, lease or disposal of an undertaking outside Scheme of Arrangement
11. Disclosure requirements for certain types of agreements binding listed entities
12. Extension on the applicability of Chapter IV on ‘high value debt listed entity’ on a ‘comply or explain’ basis
13. Conclusion

1. Introduction

The SEBI on 14.06.2023 notified the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023¹. These amendments are in line with the consultation papers that were previously released by SEBI on time to time basis. The amendments are aimed at strengthening corporate governance at listed entities by empowering shareholders, streamlining the disclosure requirements for material events or information and strengthening compliance. The amendment shall come into force from 14^th July 2023 (i.e. from the thirtieth day from the date of their publication in the Official Gazette). The major amendment includes

a) Introduction of the concept of Non-permanency of the directors on the board

b) the requirement of filling of vacancy of KMPs within 3 months of vacancy,

c) the Introduction of threshold-based parameters for identifying the materiality of events/information

d) introduction of certain agreements to be disclosed.

These reforms signify SEBI’s commitment to promoting transparency, accountability, and investor confidence in India’s capital markets.  Let’s discuss and analyse the amendment provisions in detail.

2. Stricter timelines to fill the Vacancy of the Key Managerial Personnel (KMP) within 3 months from the date of the vacancy

Regulation 6(1) of LODR Regulations requires a listed entity to appoint a qualified company secretary as the compliance officer. Further, LODR Regulations cast various responsibilities and obligations on the Compliance Officer, CEO and CFO of listed entities.

Provisions under the Companies Act, 2013

Section 203(4) of the Companies Act, 2013 requires that the vacancy of whole-time key managerial personnel (Company Secretary, CFO, and CEO/MD/WTD/Manager) shall be filled up by the company within 6 months from the date of such vacancy.

There was no such timeline was prescribed under the LODR therefore, the timeline of 6 months as provided under section 203 (4) of the Companies Act, 2013 was applicable to the listed entities also.

Amended provisions

SEBI has inserted a regulation 6(1A) which defines that any vacancy in the office of the Compliance Officer shall be filled by the listed entity at the earliest and in any case not later than 3 months from the date of such vacancy.

Further, SEBI has also inserted a new regulation 26A which states that any vacancy in the office of the Chief Executive Officer, Chief Financial Officer, Managing Director, Whole Time Director or Manager must be filled by the listed entity at the earliest and in any case not later than three months from the date of such vacancy.

Further, the listed entity shall not fill such vacancy by appointing a person in an interim capacity, unless such appointment is made in accordance with the laws applicable in case of a fresh appointment to such office and the obligations under such laws are made applicable to such person. (applicable to both regulations 6(1A) and 26A)

Need of the amendment

As in the case of the listed entities, additional functions and responsibilities are assigned to the Compliance Officer/CEO and CFO, therefore, a stricter timeline of 3 months in place of 6 months as specified under the companies act is introduced to ensure the smooth functioning of the company.

3. Directors can’t freely enjoy permanency on the board of a listed entity

Amended provisions

Newly inserted regulation 17(1D) specifies that from April 1, 2024, the continuation of directors serving on the board of directors of a listed entity shall be subject to the approval by the shareholders in a general meeting at least once in every 5 years from the date of their appointment or reappointment, as the case may be.

Further, the directors serving on the board of directors of a listed entity as on March 31, 2024, without the approval of the shareholders for the last 5 years or more shall be subject to the approval of shareholders in the first general meeting to be held after March 31, 2024.

Cases where shareholders’ approval shall not be required

The approval of shareholders shall not be required in the following cases:

• In case of the Whole-Time Director, Managing Director, Manager, Independent Director or a Director retiring as per Section 152(6) of the Companies Act, 2013, if the approval of the shareholders for the reappointment or continuation of the aforesaid directors or Manager is otherwise provided for by the provisions of these regulations or the Companies Act, 2013 and has been complied.
• Director is appointed pursuant to the order of a Court or a Tribunal
• Nominee director of the Government on the board of a listed entity, other than a public sector company.
• Nominee director of a financial sector regulator on the board of a listed entity.
• Director nominated by a financial institution registered with or regulated by the Reserve Bank of India under a lending arrangement in its normal course of business.
• Director nominated by a Debenture Trustee registered with the Board under a subscription agreement for the debentures issued by the listed entity.

Companies Act Provisions w.r.t Rotation of director

Section 152(6) of the Companies Act states that, unless the AoA provides for the retirement of all directors at every AGM, at least 2/3rd of the total number of directors shall be persons whose period of office is liable to determination by ‘retirement by rotation’ and out of the said 2/3rd, at least 1/3rd of directors shall retire from the office every year through rotation.

It thus becomes clear that not all directors serving on the board of a listed entity are subject to ‘retirement by rotation’, and there can be a director on the board of a company, who will not be liable to ‘retirement by rotation’ or subject to shareholders’ approval after his/her initial appointment.

Need for the amendment

The shareholders of listed entities do not get an opportunity to evaluate the performance of such directors appointed. This allows them to serve on the board of a listed entity as long as they desire, thereby enjoying “board permanency”, disregarding the intent of shareholders on the continuation of such directors on the board of a listed entity.

Recently, the issue of a few promoters of listed entities enjoying permanency on the board thereby giving them an undue advantage, prejudicial to the interest of the public shareholders, was highlighted in the media².

The spotlight fell on this matter when Diageo plc (Diageo) sought to remove Vijay Mallya from the board following its acquisition of control over United Spirits Limited (USL). However, Mallya contested the decision, claiming his legal entitlement to remain on the board. Complicating matters further, USL’s Articles of Association (AoA) granted Mallya the position of board chairman, a claim he maintained even as he evaded India’s law enforcement authorities.

Therefore in the interest of good corporate governance at listed entities, all directors appointed to the board of a listed entity need to go through periodic shareholders’ approval process, thereby providing legitimacy to the director to continue to serve on the board. This shall substantially address the concerns around grant of board permanency by listed entities to certain selected persons (mostly promoter-directors or related persons) by invoking the rights conferred on it by the AoA of a company or by virtue of such persons being appointed as directors deliberately making them not liable to ‘retirement by rotation’ and without a defined tenure.

4. Introduction of threshold-based criteria for determining the materiality of events/information

Regulation 30(1) of the LODR prescribes that

“every listed entity shall make disclosures of any events or information which, in the opinion of the board of directors of the listed company, is material.”

Further, Regulation 30(4) specifies the criteria for determining the materiality of events/information.  Earlier, there were no threshold-based criteria for judging the materiality of the events/information. It totally depends upon the will of the Board whether they consider a particular event/ information material or not.

Amended norms

Now, the SEBI has introduced the threshold criteria for determining the materiality of an event/information. According, a listed entity is required to consider the following criteria for determining the materiality.

The omission of an event or information, whose value or the expected impact in terms of value, exceeds the lower of the following thresholds.

• 2% of turnover, as per the last audited consolidated financial statements of the listed entity.
• 2% of net worth, as per the last audited consolidated financial statements of the listed entity, except in case the arithmetic value of the net worth is negative.
• 5% of the average of the absolute value of profit or loss after tax, as per the last three audited consolidated financial statements of the listed entity.

Further, a new proviso has been added which states that policy for determination of materiality shall not dilute any requirement specified under the provisions of these regulations. Also, such a policy for the determination of materiality shall assist the relevant employees of the listed entity in identifying any potential material event or information and reporting the same to the authorized Key Managerial Personnel.

Need for amendment

The SEBI observed that many entities do not disclose such events specified under Para B on the ground that they are not considered material by them as per their Materiality Policy framed in terms of the criteria prescribed in regulation 30(4) of LODR Regulations.

Moreover, most entities are seen to be following a very generic Materiality Policy, simply reproducing therein merely the regulatory provisions under LODR Regulations, affording them a lot of discretion to decide whether or not to disclose an event specified under Para B.

Consequently, to make the provision of regulation 30(4) of LODR Regulations more objective and non-discretionary, the SEBI has decided to insert therein a quantitative criterion of minimum threshold for disclosure of events specified under Para B based on the value or the expected quantitative impact of the event.

5. SEBI specifies shorter timelines for the disclosure of material events/information

As per Regulation 30(6), a listed entity is required to disclose to stock exchanges all the material events/information as soon as possible and not later than 24 hours from the occurrence of the event or information.

Further, in case disclosure is made after 24 hours of the occurrence of an event or information, a listed entity must provide an explanation for the delay along with such disclosures. Also, disclosures are to be made within the specified timelines.

Amended norms

Now, SEBI has specified clear timelines for the disclosure of material events or information. The disclosure must be made as soon as reasonably possible and within specific timeframes depending on the nature and origin of the event or information. The specified time limits for disclosure are as follows –

• Within 30 minutes from the closure of the meeting of the board of directors in which the decision pertaining to the event or information has been taken.
• Within 12 hours from the occurrence of the event or information if it originates from within the listed entity.
• Within 24 hours from the occurrence of the event or information if it does not originate from within the listed entity.

Need for the amendment

SEBI observed that in the present age of digital communication and widespread usage of social media, information permeates very fast. Hence, there is a need for ensuring quicker disclosure of material events or information by listed entities. 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.

Therefore, the revised timelines are prescribed.

6. Mandatory disclosure of details w.r.t cybersecurity incidents, breaches, or loss of data along with quarterly compliance report

As per regulation 27 of the LODR a listed entity shall submit a quarterly compliance report on corporate governance to the stock exchange(s) within 21 days from the end of each quarter. There are certain disclosures to be made like details of material transactions with related parties, board composition, meeting details, etc.

Amended norms

A new sub-regulation (ba) has been inserted in regulation 27 which mandates the disclosure of details regarding cyber security incidents or breaches or loss of data or documents in the quarterly compliance report.

Need for the amendment

With the advancements in technology and the companies adopting such newer technologies, cyber security incidents or breaches and loss of data/documents have become a major concern. Such incidents may impact the operations and/or performance of the listed entity. Disclosure of such events are necessary for investors to understand the associated risks and impact.

7. Top listed entities to verify market rumours promptly

As per regulation 30(11), a listed entity may on its own initiative also, confirm or deny any reported event or information to stock exchange(s).

Amended norms

A new proviso has been inserted which states that the top 100 listed entities (with effect from October 1, 2023) and subsequently the top 250 listed entities (with effect from April 1, 2024) are required to promptly confirm, deny or provide any clarification regarding reported events or information in the “mainstream media”. Further, the entities must fulfil this obligation as soon as reasonably possible, within a maximum timeframe of 24 hours from the reporting of the event or information.

Meaning of the term Mainstream Media

The SEBI has inserted a new clause ‘ra’ in regulation 2. Regulation 2(ra) defines the term “Mainstream Media”. It shall include print or electronic mode of the following:

• Newspapers registered with the Registrar of Newspapers for India
• News channels permitted by the Ministry of Information and Broadcasting under the Government of India
• Content published by the publisher of news and current affairs content as defined under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021; and
• Newspapers or news channels or news and current affairs content similarly registered or permitted or regulated, as the case may be, in jurisdictions outside India.

Need for amendment

SEBI has observed that in recent years, a growing influence is being noticed in not just print media, but also television and digital media. In order to stay contemporary, companies need to keep pace and ensure the verification of such rumours in a timely manner.

8. Revised timelines w.r.t. intimation to stock exchanges

SEBI has removed the requirement for listed entities to provide details within 5 working days for all non-convertible securities for which interest/dividend/principal obligations shall be payable during the quarter.

Also, the requirement of providing the following items within 7 working days from end of the quarter has also been done away with

1. a certificate confirming the payment of interest/dividend/principal obligations for non-convertible securities which were due in that quarter; and
2. the details of all unpaid interest/dividend/principal obligations in relation to non-convertible securities at the end of the quarter.

As per the revised norms the listed entity shall be required to submit a certificate to the stock exchange regarding the status of payment of interest or dividend or repayment or redemption of the principal of non-convertible securities, within 1 working day of it becoming due, in the manner and format as specified by the Board from time to time.

Need for amendment

Earlier, the listed entity was required to submit a certificate to the stock exchange within one working day of the interest or dividend or principal becoming due regarding the status of the payment in case of non-convertible securities.

Also, the entity was required to provide details within five working days prior to the beginning of the quarter for all the non-convertible securities for which interest/dividend/principal obligations shall be payable during the quarter.

Now, with an intent to streamline & segregate the timeline of the disclosure process, the SEBI directed the listed entity to submit a certificate to the stock exchange regarding status of payment of interest or dividend or repayment or redemption of principal of non-convertible securities, within one working day of it becoming due. The expedited disclosure process can contribute to improving overall market efficiency.

9. Dissemination of information on website at least 2 days in advance w.r.t. Institutional Investors meet

The sub-para 15 of Para A requires disclosure of the schedule of analysts or institutional investors’ meet. This disclosure is required to be made prior to the investors’ meet.

Amended norms

As per the amended norms the listed entities shall be required to disclose in their website under the separate section the schedule of analysts or institutional investors meeting at least 2 working days in advance (excluding the date of the intimation and the date of the meet) and presentations made by the listed entity to analysts or institutional investors.

Need of the amendment

Earlier, pursuant to LODR Regulations, disclosure was required to be made prior to the investors’ meeting. However, no timeline has been specified for making such disclosures which created ambiguity and also do not provide enough time for the investors to register or attend such meetings.

Consequently, with an intent to eliminate the above-mentioned ambiguity, the SEBI has directed to disclose the meeting at least two working days in advance and presentations made by the listed entity to analysts or institutional investors.

10. Sale, lease or disposal of an undertaking outside Scheme of Arrangement

Listed entity carrying out sale, lease or otherwise disposal of the whole or substantially the whole of the undertaking of such entity or where it owns more than one undertaking, of the whole or substantially the whole of any of such undertakings, shall –

• take prior approval of shareholders by way of a special resolution;
• disclose the object of and commercial rationale for carrying out such sale, lease or otherwise disposal of the whole or substantially the whole of the undertaking of the entity, and the use of proceeds arising therefrom, in the statement annexed to the notice to be sent to the shareholders:

The special resolution shall be acted upon only if the votes cast by the public shareholders in favour of the resolution exceed the votes cast by such public shareholders against the resolution.

Also, no public shareholder shall vote on the resolution if he is a party, directly or indirectly, to such sale, lease or otherwise disposal of the whole or substantially the whole of the undertaking of the listed entity.

Provisions under the Companies Act

Section 180(1) of the Companies Act, 2013 imposes certain restrictions on the powers of the Board which can only be exercised with the consent of the shareholders by a special resolution.

One of the restrictions is ‘to sell, lease or otherwise dispose of any of such undertakings’, only with prior approval of shareholders through a special resolution.

Earlier, such sale, disposal or lease happens either through a Scheme of Arrangement (as prescribed in the Companies Act and/or the LODR Regulations and the circulars issued by SEBI) or outside the Scheme of Arrangement framework, generally referred to as Business Transfer Agreement.

Hence, presently there is no explicit framework for protecting the interest of minority shareholders which in effect results in the sale of the business undertaking without taking such shareholders into confidence.

Need for the amendment

In order to strengthen the extant framework of slump sale executed outside the scheme of arrangement framework to safeguard the interest of minority shareholders and to align with the requirement, under scheme of the arrangement, the requirement for special resolution where votes cast by the public shareholders in favour of the resolution exceed the votes cast by such public shareholders against the resolution, has been notified

11. Disclosure requirements for certain types of agreements binding listed entities

SEB has inserted a new Regulation 30A. which requires all the shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel and employees of a listed entity or of its holding, subsidiary and associate company, who are parties to the agreements specified, to inform the listed entity about the agreement to which such a listed entity is not a party, within 2 working days of entering into such agreements or signing an agreement to enter into such agreements.

Further, for the agreements that are subsisting as of the date of notification of the present amendment, the parties to the agreements shall inform the listed entity, about the agreement to which such a listed entity is not a party and the listed entity shall in turn disclose all such subsisting agreements to the Stock Exchanges and on its website within the timelines as specified by the Board.

Also, the listed entity shall disclose the number of agreements that subsist as on the date of notification of the present amendment, their salient features, including the link to the webpage where the complete details of such agreements are available, in the Annual Report for the financial year 2022-23 or for the financial year 2023-24.

What are the specified agreements?

A new clause 5A of para A of part A of Schedule III of the LODR Regulations has been notified. The Agreements specified for the applicability of Regulation 30A is:

Agreements entered into by the shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel, employees of the listed entity or of its holding, subsidiary or associate company, among themselves or with the listed entity or with a third party, solely or jointly, whose purpose and effect is to, impact the management or control of the listed entity or impose any restriction or create any liability.

Need for the amendment

The aforesaid requirement includes disclosure of shareholder agreements, joint venture agreements, family settlement agreements (to the extent that it impacts management and control of the listed entity), agreements with media companies etc. Revisions or amendments and termination of such agreements too have to be disclosed.

There have been instances wherein promoters have entered into binding agreements with third parties having an impact on the management or control of a listed entity or such agreements have placed certain restrictions on the listed entity, however, these facts were not disclosed to the listed entity and its shareholders.

Since, non-disclosure of material information creates information asymmetry and results in significant market reaction when it is known to the public at large at a later stage, the SEBI has decided to introduce the present amendment.

12. Extension on the applicability of Chapter IV on ‘high value debt listed entity’ on a ‘comply or explain’ basis

Chapter IV enlist the Obligations of the listed entity which has listed its specified securities and non-convertible debt securities. Earlier the provisions of chapter iv was applicable to the high value debt listed entity on a comply or explain basis until March 31, 2023. Now the same has been extended till one more financial year i.e. till March 31, 2024. Thereafter, the chapter IV shall be applicable on the mandatory basis.

13. Conclusion

In conclusion, the SEBI’s (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023, mark a significant step towards strengthening corporate governance in listed entities. These reforms reflect SEBI’s commitment to promoting investor confidence and creating a more robust regulatory framework in India’s capital markets. Addressing crucial aspects of corporate governance, SEBI seeks to foster an environment conducive to sustainable growth and fair practices. These changes will enhance the overall functioning and integrity of listed entities, benefitting both stakeholders and the broader economy.

1.  Notification No. SEBI/LAD-NRO/GN/2023/131, Dated 14.06.2023
2. https://www.moneycontrol.com/news/opinion/board-permanency-gives-promoters-leverage-against-investors-8950811.html