Transparency in governance

Sebi's new rules will help minority shareholders

The Securities and Exchange Board of India (Sebi) has set significantly higher standards of transparency and corporate governance for listed stocks by amending the Listing Obligations and Disclosure Requirements (LODR) and introducing several critical changes. While these will improve transparency and disclosures by companies and help protect minority shareholder interests, some of the provisions related to how listed companies must respond to media coverage and to third-party sales of companies may be difficult to comply with in practice. After defining “mainstream media” quite broadly to cover both registered newspapers and social-media platforms defined as “intermediaries” under the information technology (IT) Rules, the regulator has asked the top 100 listed companies to confirm, deny, or clarify any rumour or information reported in such media within 24 hours, with this becoming applicable after October 1. This obligation will be extended to the top 250 companies starting next financial year (2024-25).

This would impose a large compliance burden. Companies would have to set up tracking mechanisms to flag any mentions across the entire swathe of social media, print, and TV, and then respond very quickly. In practice, it would be near-impossible to guarantee compliance with this provision, since there may be mentions on obscure platforms, or by obscure influencers that will be hard to monitor. Apart from this provision, other changes would mostly lead to tighter governance. For example, the timeline for filling vacant positions of key managerial personnel (KMP) has been tightened to three months from the earlier six months. Also, such appointments cannot be “interim”. In addition, directors being reappointed must have their appointment cleared by shareholder vote at least once every five years.

Minority shareholders will also have a say in the sale or transfer of an undertaking by a listed company through slump sales (defined as sales on a lump sum), under a new “majority of minority” rule for such transactions. This means the majority of public shareholders must vote in favour of the transaction. In addition, a special resolution must be passed at a general meeting and the object and commercial rationale for such sale, disposal or lease must be disclosed to shareholders. This does protect the interests of minority shareholders, but it would also make such deals cumbersome.

Sebi has also introduced quantitative thresholds for determining the “materiality” of events and transactions. If an event or a piece of information has a “value impact” of 2 per cent of turnover or net worth, or 5 per cent of the average absolute value of profit or loss after tax, it will be classified as “material”. Disclosures of such events and of agreements involving promoters and related parties will still involve some subjectivity.

The regulator has also enhanced disclosures for listed companies on fraud, or defaults, by a director or senior management, as well as for cybersecurity breaches, or any regulatory action affecting key managerial personnel. Sebi has also clarified the definitions of fraud and default. Indeed, corporations must disclose all communications from any authority — regulatory, statutory, enforcement, or judicial. This would surely help in terms of bringing more transparency. However, the regulator should review the directives about responding to rumours in the media and it may need to fine-tune the definition of material impact.