September 23, 2023
The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations introduced in 2015, brought together a streamlined and multi-dimensional corporate governance model that retained many requirements from the listing agreements, such as those related to board composition, constitution of board-level committees and intimations to stock exchanges. In addition, SEBI introduced more qualitative governance methods and disclosure requirements, such as principles governing listed entities, their common obligations, and a more structured prescriptive list of events that would trigger public disclosure obligations.
The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, prescribe a common set of obligations to be met by all listed entities and then proceeds to lay down different disclosure and compliance norms for different categories of securities, such as equity shares,debt securities, Indian depository receipts, securitized debt instruments and units of mutual funds. Another feature has been the application of certain requirements in a graded manner, depending upon the market capitalisation of the companies.
The approach of introducing changes in a graded manner was welcomed by companies that are required to comply with the requirements and gave sufficient time to other companies to prepare themselves for implementing changes in the near future. One very distinct feature of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, is that it prescribes certain overarching principles that are required to be followed by all listed entities" and the provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, are to be implemented in compliance with these principles. This measure was not previously a part of the corporate governance requirements provided in the listing agreement. It is pertinent to note here that the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, state that, in case of any ambiguity or incongruity between the principles and relevant regulations, the principles shall prevail. These principles, inter alia, include:
Kotak Committee Report and Amendments to the Listing Regulations
In June 2017, SEBI formed a committee on corporate governance (Kotak Committee) to recommend how standards of corporate governance of listed entities can be further enhanced. The report was submitted by Kotak Committee in October 2017, with a vast set of recommendations. Some of these recommendations that are now a part of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, pursuant to the amendments made in 2018 include, amongst others:
It is further pertinent the Companies Act,2013, and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, together prescribe the governance norms for companies in India. While the Companies Act, 2013, is applicable to listed and unlisted companies, the Securities and Exchange Board of India(Listing Obligations and Disclosure Requirements) Regulations, 2015,specifically regulates listed entities. The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015,prescribes a higher standard of requirements than the Companies Act, 2013, interim of board composition, committees of the board, and disclosures. Wherever the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, are silent, listed companies have to comply with the standards set in the Companies Act, 2013. However, on matters where both the Companies Act, 2013, and the Securities and Exchange Board of India(Listing Obligations and Disclosure Requirements) Regulations, 2015, overlap,listed companies have to abide by the provisions of both.
Key Facets of Corporate Governance and Provisions Related to The Same in The Sebi (LODR) Regulations, 2015
The Board is the key link between the management and the shareholders. The role and importance of a Board cannot be undermined. Over the past few years, several reforms have been introduced through the Companies Act, 2013, and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, with a view to ensuring a wholesome Board in companies.
All public companies including listed public companies are required to have a minimum of three directors, private companies are required to have a minimum of two directors, with the exception of one-person companies, which are required to have at least one director. However, the top 1000 listed companies as per market capitalisation at the end of the immediately preceding financial year are required to have a minimum of six directors on their Boards since April 1, 2019. This requirement will extend to the top 2000 companies with effect from April 1, 2020. The maximum number of directors allowed on the Board of a company is 15, which can be increased by passing a special resolution.
Both the 2013 and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, contain provisions with respect to the appointment of women directors on the Board, with a view to diversity. All listed companies and public unlisted companies having paid-up share capital of INR 1,00,00,00,000 or more or turnover of INR 3,00,00,00,000 or more are required to have at least one woman director on the Board. Further, the top 500 listed companies as per market capitalization are required to have at least one woman independent director on the Board. This requirement will be extended to the top 1000 companies after April 1, 2020.
The Board may delegate some of their duties to committees of the Board. The roles and responsibilities of the statutory committees of the Board are set out below:
a. Audit Committee
Regulation 18 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, also prescribes that the audit committee must have at least three directors.
The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, prescribe a list of responsibilities for an audit committee, which includes:
1. Overseeing the financial reporting process and disclosure of financial information to ensure that the financial statements are correct, sufficient, and credible
2. Reviewing the annual financial statements and the accompanying auditors' report with the management, prior to the submission to the Board for approval
3. Reviewing the statement of use of proceeds raised through an issue, the statement of funds utilized for purposes other than those stated in the relevant offer document or notice, and the report submitted by the agency monitoring the utilization of proceeds of a public or rights issue;
4. Reviewing findings of any internal investigations in cases of suspected fraud or irregularity or a failure of internal control systems of material nature and reporting to the Board; and
5. Approving related party transactions of the listed entity.
b. Nomination and Remuneration Committee
Under Section 178(1) of the Companies Act, 2013, every listed company and other prescribed class of companies are required to constitute a nomination and remuneration committee, having at least three non-executive directors, out of which not less than half should be independent directors. The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)Regulations, 2015, also prescribe the same requirements except that the chairperson of the nomination and remuneration committee should be an independent director. Both the Companies Act, 2013, and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)Regulations, 2015, provide that the chairperson of the board may be appointed as a member of the nomination and remuneration committee, however, the chairperson shall not chair the committee. The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015,prescribe a list of responsibilities for nomination and remuneration committees, which includes:
1. Formulating criteria to determine the qualifications, positive attributes, and independence of a director and recommending a remuneration policy to the Board
2. Formulating criteria to evaluate the performance of independent directors and the entire Board
3. Formulating a policy relating to Board diversity
4. Identifying persons qualified to become directors and members of senior management and recommending their appointment and removal
5. Recommending extensions of independent directors' term on the Board, based on evaluation of their performance; and
6. Recommending senior management's remuneration to the Board.
c. Stakeholders Relationship Committee
Regulation 20 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015,prescribes that the stakeholders' relationship committee should have a minimum of three directors, with at least one being an independent director.
d. Risk Management Committee
Regulation 21 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015,requires that Board of top 500 listed companies by market capitalisation should constitute a risk management committee. The majority of members of the risk management committee and the chairperson should be members of the Board. Senior executives of the company may also be members of the committee. The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)Regulations, 2015, have given the power to the Board of a company to define the roles and responsibilities of the risk management committee to the Board of a company and it should specifically cover cyber-security functions.
Pursuant to the amendment made to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, in 2018, Section 17(1B) was inserted. It provides that, effective April 1, 2020, the Chairperson of the Board of the top 500 listed companies as per market capitalisation shall be a non- executive director and shall not be related to the MD or the CEO as per the definition of the term 'relative defined under the Companies Act, 2013.However, this provision is not applicable to companies which do not have identifiable promoters as per their shareholding pattern filed with the stock exchanges. By a notification dated January 10, 2020, SEBI has deferred the timeline for separation of the role of chairman and managing director by two years. The provision shall now come into effect from April 1, 2022.
Across the world, related party transactions have attracted a great deal of attention.In India particularly, related party transactions are under the radar because of the pre-dominance of large promoter stake/family run businesses. Often, related party transactions may become a vehicle of abuse of the resources of the listed entity, thus diminishing the value to investors. To restrict such abuse, the Indian corporate governance regime has installed various safeguards. For purposes of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, 'material related party transactions' are transactions that are “entered into individually or taken together with previous transactions during a financial year, exceeds 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity”. In addition, a transaction involving payments made to a related party, with respect to brand usage or royalty is considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed 2% of the annual consolidated turnover of the listed entity as per its last audited financial statements. The Securities and Exchange Board of India(Listing Obligations and Disclosure Requirements) Regulations, 2015, require that listed entities shall formulate a policy on material related party transactions. Further, all related party transactions require the approval of the audit committee of a listed entity, which may be through an omnibus approval. All material related party transactions require the approval of the shareholders of such a listed entity. None of the related parties are entitled to vote to approve any material related party transactions, irrespective of whether or not they are related parties for purposes of the particular related party transaction. This concept of approval by a majority of minority shareholders is an important deterrent against the misuse of related party transactions.
The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, envisages that the key function of the board is to oversee the process of disclosures and communication. The Companies Act,2013, and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, provide a sound framework to ensure adequate disclosures by companies. The disclosure norms are more stringent for listed companies which are required to make periodic disclosures to stock exchanges and maintenance of a functional website, displaying basic information about the company as well as other mandatory disclosures, such as terms and conditions of appointment of independent directors, details of establishment of vigil mechanism/whistle blower policy, policy on dealing with related party transactions and for determining material' subsidiaries, etc. All disclosures made to the stock exchanges are also required to be disclosed on the listed company's website for at least five years. The top 500 listed companies are also 100 required to publish Business Responsibility Reports, stating the steps taken by them to advance environmental, social, and governance objectives.Primarily, the Companies Act, 2013, together with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations,2015, prescribe a framework for periodic disclosures to be made by companies.Additionally, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, also prescribe provisions with respect to the disclosure of material events or information to the stock exchanges.
A. Mandatory Periodic Disclosures
Other than disclosure of financial results on a quarterly and annual basis, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, also prescribe various mandatory periodic disclosures. These include quarterly disclosure of the listed entity's shareholding pattern, furnishing of a compliance report on corporate governance and furnishing a statement of deviation from the stated use of proceeds in an offer document, and on an annual basis, preparing and disseminating an annual report, furnishing a secretarial audit report along with its annual report and furnishing an annual statement of deviation from the stated use of proceeds in an offer document. The annual report to be published by companies is required to contain the corporate governance report, audited financial statements,report of the directors, management discussions and analysis, business responsibility report, among other matters. The corporate governance report is required to contain disclosures in relation to the philosophy on code of governance, details of the Board of the listed company (including composition,attendance at Board and shareholder meetings, relationship between directors,and number of shares held by directors), details of skill, expertise and competence of directors, confirmation regarding the independence of independent directors, detailed reasons for the resignation of an independent director,composition and terms of reference of key Board committees (including the stakeholders'grievance committee), etc.
B. Disclosure of Material Events
The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, empower Boards of listed entities to decide the relevance of information for disclosure of certain events (as discussed below). Subliminal in this approach is the understanding that over-information does not always make for efficient capital markets and Boards are best placed to evaluate whether the information is material for public disclosure.
Under Regulation 30 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)Regulations, 2015, listed entities are required to disclose:
1. Events or information deemed to be material
2. Information or events that are determined to be material upon application of the materiality policy by the Board
3. Events of information that are material in the opinion of the Board.
Certain events are deemed to be material, which include acquisitions, sale or disposals of units, schemes of amalgamation or arrangement, issuance, forfeiture or other corporate actions relating to securities, outcome of meetings of the Board,entering into binding agreements that are not in the normal course of business or any modifications to such agreements, instances of fraud or defaults by promoters or key managerial personnel or by the listed entity, resignation of auditors, proceedings of annual general meetings and extra-ordinary general meetings and amendments to constitutional documents, All listed companies are required to frame a materiality policy duly approved by the Board and disclosed on its website. The policy should be based on whether not disclosing these events could result in
(i) 'discontinuity or alteration' of previously disclosed events, or
(ii) could cause significant market reaction if omission to disclose is discovered subsequently or the events are considered by the Board to be material. Certain events which are to be disclosed on a discretionary basis after application of the materiality policy include commencement of commercial production or commercial operations of any unit or division, capacity addition or product launch, receipt of awards or certifications not in the ordinary course of business, disruption of business operations due to industrial action or force majeure events, litigation or dispute resolution with impact, granting indemnities or guarantees or securing obligations for a third party, grant,surrender or revocation of key licences or regulatory approvals and other events which the Board deems material for disclosure.
All events deemed to be material, as well as those that are determined to be material upon application of the materiality policy or upon determination by the board, are required to be disclosed to the stock exchanges as soon as reasonably possible and not later than 24 hours of occurrence of the event or information. In case the disclosure is made beyond the prescribed period of 24 hours, the listed entity is required to provide explanation for such delay.However, the outcome of the meeting of the Board with respect to decisions on dividends and/or cash bonuses recommended or declared; any cancellation of dividend; buyback of securities; fund raising proposed to be under- taken;increase in capital by issue of bonus shares through capitalisation; reissue of forfeited shares or securities, or the issue of shares or securities held in reserve for a future issue or the creation of new shares or securities; short particulars of any other alterations of capital, including calls; financial results; decision on voluntary delisting by the listed company, should be informed to the stock exchanges within 30 minutes from the closure of the meeting.
