About Listing Obligations
The Listing Agreement prescribes various initial and continuous disclosure norms to be made by the listed companies with the stock exchanges. SEBI is empowered to specify the requirements for listing and transfer of securities and matters incidental thereto and to issue directions to any company whose securities are listed or proposed to be listed in a recognized stock exchange in the interest of investors, or orderly development of securities market. The modifications to provisions of Listing Agreement are prescribed by SEBI. The Listing Agreement has been modified from time to time to align with the regulatory requirements arising out of the dynamic changes in the capital market.
SEBI has prescribed separate Listing Agreements for different segments of the capital market. All the agreements have different requirements depending on the nature of security. Given the number of disclosure requirements specified in each of these Listing Agreement(s), a need was felt for laying down a regulatory framework for consolidating the listing obligations and disclosure requirements for listed entities across all these securities at one place. With a view to consolidate and streamline the provisions of existing listing agreements for different segments of the capital market and to align the provision relating to listed entities with the Companies Act 2013, SEBI has notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 herein after referred as ‘Listing Regulations’.
Salient Features and Framework of the Regulations
The Listing Regulations provide principles for disclosures by listed entities and also include corporate governance principles. Following is a brief outlay of the regulatory framework for listing. The regulations start by providing broad principles (in line with IOSCO Principles) for periodic disclosures by listed entities and also have incorporated the principles for corporate governance (in line with OECD principles
1. Disclosure Principles
Regulation 4 of the Listing Regulations, 2015 provides for broad principles for periodic disclosures and for corporate governance by listed entities. The principles for periodic disclosures are based on the principles given by International Organization of Securities Commissions (IOSCO). IOSCO has framed certain principles of disclosures recognizing that disclosure of reliable, timely information contributes to liquid and efficient markets by enabling investors to make investment decisions based on all the information that would be material to their decisions. The essence of these regulations is to ensure a timely disclosure of information, enabling investors to take informed decisions.
2. Corporate Governance Principles
Principles of corporate governance are based on the OECD Principles of Corporate Governance. OECD has set out a framework for good practice which was agreed by the governments of 30 countries that are members of the OECD. They were designed to assist governments and regulatory bodies in both OECD countries and elsewhere in drawing up and enforcing effective rules, regulations and codes of corporate governance. They also provide guidance for stock-exchanges, investors, companies and others that have a role in the process of developing good corporate governance.
The principles are followed by general obligations applicable to all listed entities. These include general obligation of compliance of listed entity, appointment of common compliance officer, filings on electronic platform. Obligations which are applicable to specific types of securities have been incorporated in separate chapters.
Regulatory Complication created due to enactment of Insolvency and Bankruptcy Code,2016
Under the framework outlined in IBC, in case of a company undergoing corporate insolvency resolution process(CIRP), the management of affairs of the company vests in a Resolution Professional (“RP”). Powers of the board of directors of the company stand suspended and are exercised by the RP. The officers and managers of the company report to the RP and the personnel of the company, its promoters or any other person associated with the management of the company extend all assistance and cooperation to the RP in managing the affairs of the company.
Further, in terms of Section 28 of IBC, the RP is subject to supervision of the Committee of Creditors in as much as it cannot take certain actions listed there under without obtaining prior approval of the said Committee. Thus, activities of a listed entity which otherwise would have been undertaken with the approval of board of directors, would require action by RP or the approval of a Committee of Creditors (“CoC”) in a CIRP scenario.
Due to the aforementioned changes in the governance structure of the listed entities undergoing CIRP, SEBI issued a discussion paper on compliance with SEBI Regulations by listed entities undergoing CIRP. The noted that
“There is a fundamental change in management and governance of a listed entity during CIRP as well as pursuant to approval of resolution plan. The securities laws have cast several obligations on listed entities in the interest of investors. Keeping in view the interests of investors, the modified governance structure of the listed corporate debtor and the need for ensuring revival of the corporate debtor pursuant to resolution plan, there is a necessity of providing a suitable framework of compliance with securities laws by listed entities which are subject to CIRP”
Need For Amendments
Prior to the amendment, the suspension of the board coupled with no disclosure requirements resulted in the creation of a severe information asymmetry, especially with respect to minority shareholders. Minority shareholders had little or no knowledge about any of the various steps in the resolution process or how far along the resolution process is. Ideally, there should be access to material information such as conditions imposed on the company, capital restructuring being undertaken and the status of the insolvency resolution process, amongst other things, with the caveat that the same is subject to further orders by the NCLT. Further, disclosure of the decisions of the committee of creditors, and other information that is not a commercial secret can only help improve the conditions and protect the rights of minority shareholders. Accordingly, SEBI’s move to amend the LODR Regulations shall certainly balance the existing asymmetry to an extent, and promote greater transparency towards shareholders.
Amendments to the LODR Regulation for reconcilement with CIRP
SEBI via circular SEBI/LAD-NRO/GN/2018/21 dated 31st May ,2018 Introduced the following amendments to LODR Regulations.
I. In regulation 2, in sub-regulation (1), after clause (n) and before clause (o), the following clause shall be inserted, namely,-2 “(na) “Insolvency Code” means the Insolvency and Bankruptcy Code, 2016 No.31 of 2016.
This amendment primarily aims at introducing CIRP within the scope of LODR Regulations
II. In regulation 15, after sub-regulation (2) and before sub-regulation (3), the following sub-regulations shall be inserted, namely,-
“(2A) The provisions as specified in regulation 17 shall not be applicable during the insolvency resolution process period in respect of a listed entity which is undergoing corporate insolvency resolution process under the Insolvency Code:
Provided that the role and responsibilities of the board of directors as specified under regulation 17 shall be fulfilled by the interim resolution professional or resolution professional in accordance with sections 17 and 23 of the Insolvency Code.
(The amendment provides foe exemption of the entity undergoing CIRP from restrictions imposed by section 17 on composition of the board of directors. This is in line with the CIRP , whereby the power of board of directors stands suspended and is vested in the RP)
(2B) The provisions as specified in regulations 18, 19, 20 and 21 shall not be applicable during the insolvency resolution process period in respect of a listed entity which is undergoing corporate insolvency resolution process under the Insolvency Code:
Provided that the roles and responsibilities of the committees specified in the respective regulations shall be fulfilled by the interim resolution professional or resolution professional.”
As RP is vested with sole responsibility of managing the affairs of the corporate debtor, constitution of committees such as Audit committee, Remuneration committee, risk management committee and stakeholder relations stand suspended.
III. in regulation 23, in sub-regulation (4), the following proviso shall be inserted, namely,- “Provided that the requirements specified under this sub-regulation shall not apply in respect of a resolution plan approved under section 31 of the Insolvency Code, subject to the event being disclosed to the recognized stock exchanges within one day of the resolution plan being approved
In terms of regulation 23(4) of LODR Regulations, all material related party transactions require approval of the shareholders through resolution and the related parties are required to abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not. However following the amendment, shareholders’ approval will not be required if a listed corporate debtor undertakes material RPTs as part of a resolution plan approved by NCLT.
IV. In regulation 24, in sub-regulation (5), after the word, “court/Tribunal” and before the symbol “.”, the following words shall be added, namely,”, or under a resolution plan duly approved under section 31 of the Insolvency Code and such an event is disclosed to the recognized stock exchanges within one day of the resolution plan being approved”
In terms of Pre-amendment regulation 24(5) of LODR Regulations, a listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than fifty percent or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal. Following amendment, the exemption from passing a special resolution which is currently available to ‘schemes of arrangement’ duly approved by a Court/ Tribunal will also be extended to resolution plans approved by NCLT.
V. in regulation 24, in sub-regulation (6), after the word, “court/Tribunal” and before the symbol “.”, the following words shall be added, namely,- or under a resolution plan duly approved under section 31 of the Insolvency Code and such an event is disclosed to the recognized stock exchanges within one day of the resolution plan being approved”
In terms of regulation 24(6) of LODR Regulations; selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal. The exemption from passing a special resolution which is currently available to ‘schemes of arrangement’ duly approved by a Court/ Tribunal will also be extended to resolution plans approved by NCLT.
VI. In regulation 31A, after sub-regulation (8), the following sub-regulation shall be inserted, namely,- “(9) The provisions of sub-regulations (5), (6) and clause (b) of sub regulation (7) of this regulation shall not apply, if re-classification of existing promoter or promoter group of the listed entity is as per the resolution plan approved under section 31 of the Insolvency Code, subject to the following conditions:
(i) the existing promoter and promoter group seeking re-classification shall not remain in control of the listed entity; and
(ii) such re-classification along with the underlying rationale shall be disclosed to the stock exchanges within one day of the resolution plan being approved.”
Regulation 31A of LODR Regulations has laid down the conditions on fulfillment of which the promoter of a listed entity may be re-classified as a public shareholder. Regulation 31A(7)(b) also stipulates that increase in the level of public shareholding pursuant to re-classification of promoter shall not be counted towards achieving compliance with minimum public shareholding requirement under rule 19A of the Securities Contracts (Regulation) Rules, 1957.
In terms of resolution plan approved by NCLT, the existing promoters may be diluted to an extent that they may not be left with any significant shareholding and/or control in the listed corporate debtor. In respect of such cases, relaxation of the conditions prescribed under Regulation 31A of LODR Regulations has been provided for re-classifying such promoters as public shareholders. The amendment imposes the caveat that existing promoter shall not remain in control of the listed entity. Secondly, an obligation related to disclosure of rationale behind re-classification of such promoter shareholdings has also been imposed. Additionally, reclassified shareholding has been to be counted towards achieving compliance with minimum public shareholding requirement stipulated under the Securities Contracts (Regulation) Rules, 1957.
VII. In regulation 37, after sub-regulation (6), the following sub-regulation shall be inserted, namely, – “(7) The requirements as specified under this regulation and under regulation 94 of these regulations shall not apply to a restructuring proposal approved as part of a resolution plan by the Tribunal under section 31 of the Insolvency Code, subject to the details being disclosed to the recognized stock exchanges within one day of the resolution plan being approved.”
As per regulation 37, The listed entity shall not file any scheme of arrangement under sections 391-394 and 101 of the Companies Act, 1956 or under Sections 230-234 and Section 66 of Companies Act, 2013 , with any Court or Tribunal unless it has obtained observation letter or No-objection letter from the stock exchange(s). Regulation 94 stipulates that The stock exchange(s) shall submit to the Board its Objection Letter or No-Objection Letter on the draft scheme of arrangement after inter-alia ascertaining whether the draft scheme of arrangement is in compliance with securities laws within thirty days of receipt of draft scheme of arrangement or within seven days of date of receipt of satisfactory reply on clarifications from the listed entity and/or opinion from independent chartered accountant. The amendment exempts the condition of getting the restructuring plan approved by the NCLT and also forgoes the obligation of receiving a no objection certificate from the stock exchange, when a resolution plan under section 31 of the code provides for such a restructuring.
VIII. In schedule III, in part A, in clause A, after sub-clause 15, the following sub-clause shall be inserted, namely,-
“16. The following events in relation to the corporate insolvency resolution process (CIRP) of a listed corporate debtor under the Insolvency Code:
a) Filing of application by the corporate applicant for initiation of CIRP, also specifying the amount of default;
b) Filing of application by financial creditors for initiation of CIRP against the corporate debtor, also specifying the amount of default;
c) Admission of application by the Tribunal, along with amount of default or rejection or withdrawal, as applicable;
d) Public announcement made pursuant to order passed by the Tribunal under section 13 of Insolvency Code;
e) List of creditors as required to be displayed by the corporate debtor under regulation 13(2)(c) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016; f) Appointment/ Replacement of the Resolution Professional;
g) Prior or post-facto intimation of the meetings of Committee of Creditors;
h) Brief particulars of invitation of resolution plans under section 25(2)(h) of Insolvency Code in the Form specified under regulation 36A(5) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016;
i)Number of resolution plans received by Resolution Professional;
j) Filing of resolution plan with the Tribunal;
k) Salient features, not involving commercial secrets, of the resolution plan approved by the Tribunal, in such form as may be specified;
l) Any other material information not involving commercial secrets.
m) Approval of resolution plan by the Tribunal or rejection, if applicable;
As per Regulation 30, 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. Events specified in Para A of Part A of Schedule III are deemed to be material events and listed entity shall make disclosure of such events. Amendment has introduced several disclosure requirements that listed corporate entities undergoing CIRP would be subject to. The amendment specifies disclosures with respect to the pre-CIRP stage; such as the filing of the CIRP application and the admission of the said application by the NCLT. Similarly, the amendments provide for disclosure of all the stages in the process, including the number of bids and the content and approval of the resolution plan.
1. Amendments to Schedule III
Prior to the amendment, lack of information available has resulted in shareholders having to rely upon speculative news reports, creating rampant speculation and uncertainty amongst minority shareholders regarding the future of their stockholdings. Introduction of sub-clause 16 in Schedule 3 provides the various events associated with CIRP a deemed ‘material’ status which warrants disclosure. The importance of such an amendment can be seen from Electrosteel’s disclosure to the BSE that creditors have initiated the insolvency process. This was a largely discretionary act. With such disclosures now mandatory both the corporate debtor, its creditors and shareholders will be better placed to gauge the accountability of the debtor, facilitating greater transparency.
Though introduction in Para A provides the events introduced by the amendment a deemed material status, it is vital to undertake an objective analysis of each an every event added to Schedule A via amendment. As per LODR Regulation 30(4), an event is considered material if
: (a)The omission of an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; or
(b)The omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date;
1. Filing of application
The event of filing of application for initiation of corporate insolvency resolution process, whether under Section 7, 9 or 10 should be regarded as a disclosure event. Admission of application is followed by moratorium and will lead to halt on many activities, for e.g., a secured creditor will not be able to invoke his security interest on the company undergoing insolvency process. Thus, it will be appropriate if the stakeholders are informed about the very initiation of application. The amount of default is also an important constituent in determining the financial condition of the corporate debtor, and as such will be a material disclosure.
2. Admission of Application
Once the application for initiation of corporate insolvency resolution process is admitted, the same triggers moratorium, and other sequential events such as appointment of an interim resolution professional, constitution of the committee of creditors etc. Admission of the application is, thus, of prime importance and is definitely a “material” event, requiring disclosure. While admission of application is a material event and must be disclosed, if the application is rejected or withdrawn, the same should also be disclosed, to avoid gaps in the information.
3. Admission of Claims
The Public Announcement made by IRP contains the invitation for submission of claims and hence, cannot be treated as two separate events. Though admission of application for corporate insolvency resolution process by the adjudicating authority is itself a material disclosure, the fact that public announcement of the same has been made and that claims have been invited by the interim resolution professional is of significance to the stakeholders, and the same should also be considered to be an event of disclosure under Regulation 30 of LODR Regulations.
4. Appointment of RP
The COC in its first meeting appoints a resolution professional, who may either be the exiting interim resolution professional or another insolvency professional. Since resolution professional is the most important pillar in the framework of corporate insolvency resolution process, the event of appointment of resolution professional must be disclosed to stock exchanges, and such disclosure should also state whether the interim resolution professional continues to be the resolution professional or has been replaced.
5. COC Approved Actions
During CIRP, the COC in a manner takes over the control of the corporate debtor and even Section 28 of the Insolvency and Bankruptcy Code, 2016 stipulates several significant matters for which the resolution professional is required to seek concurrence of the COC members. If there is any significant event as per Section 28, then the same should also be considered as “material” requiring disclosure and the outcome of such meeting should be made available to the stakeholders
6. Information Pertaining to Bids
The analytics relating to the bids received by the resolution professional will reveal whether there is at all a possibility of revival of the corporate debtor. Therefore, the same shall be disclosed
7. Resolution Plan approval by NCLT
A resolution plan once approved by the COC is filed with the NCLT for its approval. Pursuant to Section 33 of the Insolvency and Bankruptcy Code, 2016, the resolution plan once approved by the Adjudicating Authority becomes binding on all the stakeholders involved. Will it be not be against the principles of natural justice, if the plan is to bind the stakeholders, without even providing an opportunity of being heard? It will only be considered in the best interest of equity, justice and good conscience, if the stakeholders are given a notice of such resolution plan being submitted before the NCLT, and are given an opportunity to submit their objections, if any. Thus, it will be pertinent to consider this event as a material event, requiring disclosure. The approved resolution plan should also be submitted to the stock exchanges, along with the disclosure.
2. Exemption from Special Resolution.
Certain transactions like disposal of shares in material subsidiary, material related party transactions, selling substantial amount of assets and reclassification of promoter shareholdings are so consequential with respect of the rights of small shareholders that proceeding with such transactions without their consent will severely prejudice their rights with no prospective remedy. Resolution plans, which envisage such consequential transactions, should confirm to the requirement of shareholders? approval. Some examples may be as follows:
i. Demerger providing for shift of the assets of the company to another entity and taking the transferor down the liquidation path.
ii. Write-off of the capital of shareholders. Resolution plans generally write-off the entire existing shareholding at a negligible value, say at Re. 1. The resolution applicant may propose to acquire the shares of the promoter or promoter group, involved in the day-today management and administration of the company, but is it tenable to reduce the share value of the minority shareholders to zero, without even providing any opportunity to the holders of such shares? This is against the basic principles of natural justice. Further, the intention of resolution plan is to revive the company so that it earns profit, but a shareholder whose shareholding was written off will not be entitled to such future profits.
iii. Compromises or arrangements which impinge on the rights of minority shareholders, in any manner whatsoever.
Section 238 confers overriding status to the code and the resolution plan formulated in accordance with the code. However, the provision doesn’t provide supreme status to the Code in general parlance. Only where any provision of another Act is inconsistent with the provisions of the Code would section 238 come into play. Moreover, in the case of Superways Enterprises Pvt. Ltd. v. Topworth Steel & Power Pvt. Ltd., it was held that the provisions of the Companies Act, 2013 are not inconsistent with the provisions of the Code, therefore, the provisions of the Code wouldn’t override that of Companies Act, 2013. Accordingly rights available to minority shareholders under Companies Act can be invoked in case their interest is impaired under the Code. Regulation 39(6) of the Insolvency ; Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations), specifically dispenses with the requirement of shareholders approval for finalization of a resolution plan .However, Section 30(2)(e) of the IBC clearly stipulates that any resolution plan must be in compliance with the provisions of any law in force. .In absence of any clarification regarding the interpretation of Section 30(2)(e), it cannot be construed narrowly. Consequently, Regulation 39(6) does not in any way eliminate the requirements of shareholder approvals as per the Companies Act, 2013. Accordingly, shareholders’ approvals to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company, as required under the section 180(1)(a) cannot be dispensed with. Prima facie, IBC has an overriding effect and Regulation 39(6) is an attempt to re-enforce this position. But Section 30(2)(e) is a categorical requirement of the IBC itself, which cannot be overlooked as the National Company Law Tribunal (NCLT) can reject a Resolution Plan, if the same does not comply with provisions of any law in force.
Re-Classification of Promoter Shareholdings
Under Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI has provided a mechanism for reclassification of promoters as public shareholders in cases where the role of an existing promoter changes drastically and the ordinary compliance obligations are no longer warranted. As per Regulation 31A, a promoter or the company can request the stock exchange(s) for reclassification of a promoter under three situations: a) a transmission/succession/inheritance, b) a change in the promotership after an open offer, and c) when a company becomes ‘professionally managed’. The re-classification is also contingent upon other factors such as absence of special rights, the existing shareholdings of the promoter and key managerial positions assumed.
The approach adopted by SEBI in informal guidance in Alembic Pharmaceuticals and Gujrat Ambuja Exports portrays that re-classification can be provided in conditions other than the statutorily prescribed scenarios. Validity of such a reclassification is then dependent on subjective analysis of factors such as control exercised by the promoter, presence of any special rights and quantum of shareholdings. In case of a reconstituted entity, the resolution plan approved by NCLT may dilute the promoter shareholding and decimate promoter’s control over the entity. In such a scenario, the fear regarding the reclassified promoter exercising effective control over the organization through public shareholding is unfounded. Such re-classifications will suffice the subjective requirement of “no effective control” prescribed by SEBI in the aforementioned informal clarifications. Accordingly, the amendment which provides an exemption for NCLT approved re-classification is based on sound rationale.
The contentious issue is whether such re-classified shareholding should be included while examining the compliance with Minimum public shareholding requirements. The MPS requirements for listed companies have been stipulated in regulation 38 of the Listing Regulations, which mandates that a listed entity requires the maintenance of a minimum public shareholding of 25% at all times of each class or kind of equity shares or convertible debentures issued by a listed company The LODR Regulations 31A (7)(b) categorically provide that the reclassified shareholdings shall not be included for achieving Minimum level of Public Shareholding. However, Infusion of outside capital during CIRP may reduce the public shareholding below the 25% threshold. In such a case, to avoid violation of minimum public subscription requirements, restructured entities should be provided a grace period to comply with the statutory requirements.
SEBI in its working paper recognizes that Minimum public subscription requirements are onerous obligations for a newly reconstituted company. The immediate obligation to fulfill the prescribed MPS norms is not in the interest of a newly revived company. A newly reconstituted firm might not be able to garner enough public interest to fulfill the subscription requirements. Moreover, the items listed in the SEBI circular titled “Manners for achieving MSP Compliance” involve substantial expenses and time. The author suggests that the grace period for compliance, should be increased from case to case basis, taking into consideration the prevailing public subscription levels and investor interest in the reconstituted entity.