Corporate Law Daily
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Today’s newsletter analytically summarizes the top Corporate Law stories reported at taxmann.com .
SC declines to transfer Adani-Hindenburg probe from SEBI to SIT and to revoke SEBI’s amendments to FPI & LODR norms
In the instant case, the Supreme Court declined to initiate an investigation through a Special Investigation Team (SIT) or the Central Bureau of Investigation (CBI) into the accusations outlined in the Hindenburg Research report concerning stock price manipulations attributed to the Adani group of companies.
The SC outlined that the facts of this case do not warrant a transfer of investigation from SEBI. In an appropriate case, the Supreme Court does have the power to transfer an investigation being carried out by the authorized agency to an SIT or CBI. Such a power is exercised in extraordinary circumstances when the competent authority portrays a glaring, willful and deliberate inaction in carrying out the investigation. The threshold for the transfer of investigation has not been demonstrated to exist.
Further, the Supreme Court also held that no valid grounds have been raised to direct the SEBI to revoke its amendments to the FPI Regulations and the LODR Regulations which were made in the exercise of its delegated legislative power. The procedure followed in arriving at the current shape of the regulations does not suffer from irregularity or illegality. The FPI Regulations and LODR Regulations have been tightened by the amendments in question.
SEBI has completed 22 out of the 24 investigations into the allegations levelled against the Adani group. SC directed the SEBI to complete the two pending investigations expeditiously preferably within 3 months.
The Court directed the Union Government and SEBI to constructively consider the suggestions of the Expert Committee in its report detailed in Part F of the judgment. The Court said that these may be treated as a non-exhaustive list of recommendations and the Government of India and SEBI will peruse the report of the Expert Committee and take any further actions as necessary to strengthen the regulatory framework, protect investors and ensure the orderly functioning of the securities market; and
The Apex Court further directed the SEBI and the investigative agencies of the Union Government to probe into whether the loss suffered by Indian investors due to the conduct of Hindenburg Research and any other entities in taking short positions involved any infraction of the law and if so, suitable action shall be taken.
Background of the Case
Earlier, a report was published on 24 January 2023 by an “activist short seller”, Hindenburg Research about the financial transactions of the Adani group. The report inter alia alleged that the Adani group manipulated its share prices and failed to disclose transactions with related parties and other relevant information in violation of the regulations framed by the SEBI and provisions of securities.
Following this, a set of Public Interest Litigations (PILs) was filed in the Supreme Court Vishal Tiwari v. Union of India - [2023] 148 taxmann.com 48 (SC) These PILs sought a Court-monitored investigation into the matter. On March 2, the Supreme Court established a committee to examine whether there was any regulatory failure in the case. The Securities and Exchange Board of India (SEBI) was also directed to investigate the accusations against the Adani Group.
The initial two-month period granted by the Supreme Court for the SEBI to conclude its investigation, as per the March 2, 2023 order, ended on May 2, 2023.
However, in May, the SEBI applied to the Supreme Court, requesting a six-month extension to complete its probe. In the affidavit, the SEBI explained that the transactions in question were intricate and necessitated more time for examination. The SEBI also disclosed that it had approached eleven overseas regulators under the Multilateral Memorandum of Understanding (MMOU) with the International Organisation of Securities Commissions (IOSCO) concerning its investigation into Minimum Public Shareholding (MPS) norms, and this outreach required additional time.
The Supreme Court extended the deadline to August 14, 2023. As the second deadline approached, the SEBI requested an additional 15 days to complete its investigation, asserting significant progress and the preparation of an interim report based on available materials. The SEBI informed the court that it had sought information from agencies and regulators in foreign jurisdictions and would evaluate this information to determine any further course of action.
SEBI Compliance Unveiled: Non-Standard disclosures of KMP Resignation amid SEBI’s Regulatory Framework
Introduction
Securities and Exchange Board of India ['SEBI'] released a consultation paper dt: November 12, 2022, inter-alia proposing to mandate disclosures pertaining to senior management. The objective behind mandating disclosures pertaining to senior management was that since the details of senior management were required to be disclosed at the time of filing of public offer documents, change in such senior management or any other event pertaining to the senior management is also material information for investors. This consultation paper came up for discussion at SEBI Board Meeting dt: March 29, 2023. On discussion and addressing public comments SEBI vide its amendment notification dt: June 14, 2023, amended Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (second amendment) 2023 ['LODR Regulations']. Amendment was effective from July 14, 2023. In this article we would deal with varied practices in disclosure pertaining to change in senior management and key managerial personnel in the context of resignation or change in profile or designation etc.
Understanding the Regulatory Landscape
I. Disclosure of change in senior management and key managerial personnel
As per Schedule III Part A, Para A point 7 of LODR Regulations listed entities were mandated to disclose change in senior management. While disclosure with respect to change in key managerial personnel has been part of LODR Regulation, change in of senior management within a listed company was considered important because it provided crucial insights into the internal dynamics of the organization. Point 7 reads as follows,
"Change in directors, key managerial personnel (Managing Director, Chief Executive Officer, Chief Financial Officer, Company Secretary etc.), senior management, Auditor and Compliance officer"
The words used here are, "change in…….". Word 'Change' would mean any change in the key managerial personnel, senior management, director etc. 'Change' here would not necessarily mean resignation or appointment only. It can mean 'promotion, demotion, giving of additional responsibilities, change in designation etc.
II. What to disclose and when to disclose?
SEBI vide Circular dated July 13, 2023 ('July circular'), provides minimum information that is required to be provided while disclosing events given in Part A of Schedule III of LODR Regulations. Annexure I of July Circular provides for specified disclosure that needs to be adhered to while disclosing
'Change in directors, key managerial personnel (Managing Director, Chief Executive Officer, Chief Financial Officer, Company Secretary etc.), senior management, auditor and compliance officer'
to stock exchange. July Circular at Point 7 states that following minimum details needs to be given while providing disclosure of change in key managerial personnel/senior management:
a.?Reasons for change:
b.?Date of appointment, re-appointment, cessation & term of appointment/re-appointment.
c.?Brief profile (in case of appointment)
d.?Disclosure of relationships between directors (in case of appointment of directors):e.?Letter of resignation along with detailed reasons for resignation as given by key managerial personnel, senior management, compliance officer or director.
Point 7C of Schedule III, Part A, Para A of LODR Regulations also talks about disclosures pertaining to 'senior management'. Point 7Cread as follows:
"In case of resignation of key managerial personnel, senior management, Compliance Officer or director other than an independent director; the letter of resignation along with detailed reasons for the resignation as given by the key managerial personnel, senior management, Compliance Officer or director shall be disclosed to the stock exchanges by the listed entities within seven days from the date that such resignation comes into effect."
It states that disclosures shall be given 'from the date when resignation comes into effect'. The terminology that 'resignation comes into effect' would mean the date when resignation becomes effective. Further Annexure II of July Circular states that
'Change in directors, key managerial personnel (Managing Director, Chief Executive Officer, Chief Financial Officer, Company Secretary etc.), senior management, Auditor and Compliance Officer'shall be disclosed within 24 hours in case of resignation and 12 hours in other cases.
It becomes pertinent here to note the background behind bringing the provisions relating to the provisions of change in senior management. SEBI board meeting dated March 29, 2023, while discussing the proposal for change in senior management mentioned that
"the date of resignation and the last working day may vary as per the mutual understanding between the employee and the company. It is also possible that the concerned employee may decide to withdraw the resignation. Also, in the case of key managerial personnel, senior management, and directors other than independent directors, the date of resignation may be different from the date of cessation (last working day). Hence, it may be specified that the disclosure is required within 7 days from the date such resignation comes into effect."
Due to this there are two ways of interpreting disclosures pertinent to changes in senior management which can be given within 24 hours from the date of resignation and resignation letter can be given within 7 days from the date when resignation becomes effective or there is another way of disclosure of change in senior management and that is by way of disclosure of change within 7 days from the date when the resignation becomes effective.
However, it is observed that market participants have interpreted this provision of LODR Regulations in a varied manner. This article specifically highlights on such Non-standard disclosures and their implications.
The Standard Format Dilemma and Practical challenges: On a study of around more than 100 disclosures made by listed entities to stock exchanges in a period of five months from July 2023 to December 2023 it is seen that varied practices are seen in the context of change in senior management and key managerial personnel. Following are the observations based on the study of disclosure:
(a)?Absence of minimum information as required by July Circular: July Circular provides for minimum items that are required to be disclosed when there is a change. It was observed that certain companies provided all the minimum items as is required by July Circular while there were some companies who failed to provide requisite details viz. from when resignation or in senior management the change is effective, what is the date of resignation.
(b)?Date of disclosure of resignation: Further a different trend was also noticed with respect to date of disclosure of change in senior management. While some listed entities disclosed resignation when the KMP or senior management had served the notice period and certain listed entities disclosed resignation as soon as the senior management or key managerial personnel resigned additionally also stating what would be the notice period, last day of serving the listed entity etc. It needs to be highlighted here that as per Point 7C of Schedule III, Part A, Para A of LODR Regulations disclosure of resignation in senior management or key managerial personnel shall be disclosed within 24 hours and 12 hours in other cases. Further it is mentioned that resignation letter along with detailed reasons for resignation shall be disclosed within seven days of resignation becoming effective. But it is seen that resignation letter or email is not attached in case of disclosure of resignation in certain circumstances.
(c)?Resignation of senior management or key managerial personnel as UPSI: Question arises as to whether key managerial personnel or senior management personnel resigning amid fraud or due to some allegations against him/her will be considered as UPSI? Whether resignation by key managerial personnel or senior management or director (other than independent director) for better opportunity would be a price sensitive information? Determination of a particular event or information as price sensitive information or not would depend on that particular situation. But if it is a price sensitive information then it becomes crucial to deal with its disclosure judiciously.
(d)?Name of individual replacing KMP or senior management: Some companies had given the name of resigning key managerial personnel/senior management as well as name of new key managerial personnel/senior management replacing coming in place of the resigning individual. This was observed in very listed entities. Many listed entities only mentioned details of resigning KMP, and no further disclosures are given as to appointment of new KMP.
(e)?Disclosures of change in designation or providing of additional charge to a KMP or senior management: Certain listed entities made disclosure even with respect to senior management personnel who have been given further additional responsibilities in the organization. It was also seen that certain listed entities have made disclosure of change in the designation of senior management. It was also observed that a few listed entities have made disclosure of change in role/designation/providing additional responsibility to senior management personnel of subsidiary company.
(f)?Disclosures on approval of audit committee or nomination and remuneration committee: It was observed that certain listed entities had disclosed resignation of chief financial officer only on approval of same by audit committee.
Conclusion
LODR Regulations provides a structured format for disclosing material events, including resignations. The intention was to ensure uniformity, completeness, and clarity in the information shared with stakeholders and the broader market. Securities Appellate Tribunal has vide its order dt: 24.03.2021 in the matter of Mr B Ranganathan vs SEBI has mentioned that
"A disclosure-based regulatory regime is founded on timely and adequate disclosure of all events material to a company or to its securities in any manner. Further hair-splitting will result in confusion; so, the best way to deal with the event is to disclose without doing further analysis."
Shareholders, regulators, and the broader market rely on timely and accurate information to make informed decisions. A non-standard format of material event disclosure erodes trust and may lead to adverse consequences for the company's market standing. As instances of non-standard disclosures multiply, there is a growing urgency for companies to revisit their practices and align with SEBI's guidelines. Adopting standardized formats not only ensures compliance but also reflects a commitment to transparency and openness. Aligning with SEBI's guidelines is not merely a regulatory obligation; it is a strategic move toward building robust corporate governance practices that stand the test of scrutiny and contribute to the long-term success of the business.
That’s it from us for today! Stay Tuned for more updates from Taxmann.com .
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