Transparency, accountability, and fairness in decision-making are the basic tenets of good governance. Entities that enjoy public funds should remain accountable to its stakeholders and disclose material events as soon as possible. These principles are enshrined in the Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015. The listing regulations, as they are known, are primarily designed for a principle-based regime, supplemented by rule-based requirements. In June, Sebi made some changes to the disclosure norms applicable for listed entities. One major change relates to disclosure of material events under ‘regulation 30’ of the listing regulations.
Apart from prescribing materiality thresholds, Sebi has added certain additional matters to the list of events that need to be disclosed. This list, in a way, calls for mandatory disclosures of events that are deemed material, irrespective of thresholds. One of the additions here is disclosure on actions taken or orders passed by any regulatory, statutory, enforcement authority or judicial body against the listed entity or its directors, key management personnel, senior management, promoter, or subsidiary, in respect of, among others, imposition of fine or penalty. However, this deeming provision seems to have given rise to certain unintended consequences. For instance, one listed entity reported that a local authority had imposed a fine of ₹10,000 for non-availability of a dustbin outside its store. While disclosures are important and it is also understandable that penal action taken by regulatory authorities need to be taken seriously, the non-application of materiality threshold here could lead to a deluge of disclosures where events that do not have a material impact may also get reported under the clause together with those which are actually material in the name of technical compliance.
Stakeholders may get lost in a sea of data and even the regulator may end up in a data-rich, information-poor situation. Sebi may consider specifying the legislations (classified under corporate laws including Companies Act, Sebi regulations and Fema; direct and indirect tax laws, prevailing sectoral laws applicable to the specific listed entities) under which any adverse action taken may be seen as early warning signals of lower levels of governance and hence, which should be reported without application of materiality, and by specifying that action taken under other legislations may be subject to application of materiality thresholds.
For business to be sustainable, strategy and governance should be balanced and go hand-in-hand. There is no doubt about the need for business strategies to conform to the laid down governance parameters. From a materiality perspective, not all instances of non-compliances should be perceived as governance issues. Sebi is entrusted with the task of prescribing the compliance framework through regulations such that there is a fine balance between strategy and governance. Some recent disclosures with respect to materiality indicate a possible scenario of disclosures purely for compliance of ‘regulation 30’ regardless of material impact on finance or operations, merely because regulations mandate such disclosures. This also poses great challenges not only to the compliance officer of the listed entity but also to the secretarial auditor as well as the practising company secretary who may be issuing the annual compliance report under ‘regulation 24A’ to confirm and certify that the listed entity has made all disclosures required under Regulation 30. It will also be interesting to see what guidance the Institute of Company Secretaries of India (ICSI) would be giving to its members with respect to such micro-disclosures.
The lack of thresholds for fines, penalties etc., particularly in ‘regulation 30’ dealing with materiality, appears to be an attempt to micro-manage compliances for reasons best known to the regulator. “To catch one black sheep, you cannot sweep the entire flock”. Sebi may perhaps like to review the substance of its own regulations. An intellectual principle-based regulatory framework is likely to work better when dealing with materiality which is a subjective concept rather than resorting to prescriptive rules which create more confusion than providing clarity. Here ‘regulation 4’ of the listing regulations which deals with the “Principles governing disclosures and obligations” provides Sebi as well as the relevant stakeholders much greater purpose and clarity than micro-managed requirements relating to compliances and disclosures.
A.Sekar and Usha Ganapathy Subramanian are practising company secretaries in Chennai; and Ranjith Krishnan is an academician based in Thane, Mumbai.
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Updated: 31 Jul 2023, 09:56 PM IST