It's show and tell time for corporate India

As Sebi's new norms prompt a transparency wave, companies grapple with the challenge of ensuring what to disclose and when to appeal to investors

The recent circular from the Securities and Exchange Board of India (Sebi), streamlining and enhancing disclosures of material events, is aimed at adding more transparency and improving the timelines of corporate disclosures. Furthermore, the disclosure requirements have been extended to encompass public shareholder agreements, including family settlements “to the extent that (these) impact management and control of the listed entity”. This notification also expects that starting from October 1, 2023, India’s top 100 listed entities will confirm, deny, or clarify market rumours on the stock exchanges.
 

Regulation 30 of Sebi’s listing regulations assigned companies the task of disclosing material events. To do so, events were either categorised as material and needed to be disclosed (Para A of the LODR 2015), or events where disclosure was at the company’s discretion and its materiality policy (Para B). Realising the lack of uniformity in market practice, Sebi, after an extensive consultation process, has updated the events in Para A, spelling out what information needs to be disclosed at the minimum. It has even provided guidance regarding when an event is considered to have occurred.
 

Further, Sebi has introduced quantitative minimum thresholds to determine materiality (2 per cent of turnover, 2 per cent of net worth, or 5 per cent of three-year average profit after tax). 
 

Sebi now expects shareholder agreements, joint venture agreements, and family settlements that impact management and control of a listed entity to be disclosed. It is hard to argue against enhanced transparency. After all, clauses in family settlements relating to non-compete directly impact public shareholders. Even so, Cyril Shroff has powerfully argued, in this newspaper, that Sebi’s amendments aimed at strengthening corporate governance fail to reconcile the virtues of public disclosure and protection of private domains.
 

Companies have begun to disclose family settlements, yet within a few weeks of the notification, we are seeing divergence in how companies are disclosing these. The current wave of disclosures is mainly by companies where the promoters are squabbling. Kirloskar Brothers has shared two memorandums of understanding in their entirety, the first from September/October 2009 and the second dating back to October 1947.  TD Power Systems, on the other hand, believes that as its shareholder agreement was terminated in January 2011 prior to the company being converted to a public limited company, and since the matter is sub judice, the agreement need not be disclosed. Hikal Ltd has divulged the extracts received that one set of its promoters believe are relevant for public shareholders. As companies are unlikely to be a party to the agreement, they must rely on what they receive from their “promoters”, implying there is no way to ensure the completeness of the disclosures. And investors must prepare themselves to deal with more than one version of settlement documents.
 

Turning now to the requirement for companies (top 100 from October 1, 2023, and top 250 from April 1, 2024) to confirm, deny, or clarify any reported events or information in the mainstream media. While the existing regulations gave the discretion to listed entities to confirm or deny any reported event or information to stock exchange(s), boards have struck a balance between the need to respond and the need to stay silent. Going forward, companies will have to confirm, deny or clarify any reported events or information, which may have a material effect on the listed entity. They are “expected to do so as soon as reasonably possible and not later than 24 hours from the reporting of the event or information.” Further, if the “listed entity confirms the reported event or information, it shall also provide the current stage of such event or information.”
 

Even in its current form, there don’t appear to be any consequences for companies denying a rumour, only to retract it later. I expect that the “Put Up or Shut Up (Pusu)” rule under the UK takeover code might foretell the direction this regulation will go, particularly in the case of M&A, where this is most relevant.   
 

In the UK, Pusu rule is triggered pursuant to a leak, following which the bidder is expected to announce a fully financed binding offer within 28 days or announce it will not be making an offer, in which case it is subject to a six-month standstill. True, the bidder can seek a four-week extension, but the power dynamics would have shifted.
 

Until case law is established, I expect that this will be a major point of friction between companies and the regulator. Companies can expect this to consume the time of their leadership teams and boards — deciding when a deal is imminent, understanding the consequences on the target company’s price of any statement, the language of a denial or even verification, the non-disclosure agreements themselves — everything will now require greater scrutiny.
 

Clearly, companies and boards have their work cut out for them. As they grapple with what to disclose and when, the best test for them to apply is whether the disclosure of any event or development will falsely make the company more or less attractive to investors.

The writer is with Institutional Investor Advisory Services India Ltd. The views are personal. @AmitTandon_In