A lot of debate has been going on with regard to compliance with various Sebi regulations by companies undergoing corporate insolvency resolution procedure (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). Pursuant to its board meeting on March 28, the capital markets regulator had also issued a discussion paper in this regard. This paper has drawn attention to application of such laws on existing companies too (which are not undergoing CIRP).
This article will relook some of the provisions of the Sebi (Listing Regulations and Disclosure Requirements) Regulations, 2015 and emphasise the need to rewrite the same in light of the practical issues faced by the listed entities in general and also for the companies undergoing CIRP.
Disclosure of Defaults
In August 2017, Sebi issued a circular mandating companies whose securities are listed on stock exchanges to disclose every default in payment of interest and instalment obligations on debt securities or commercial loans obtained from banks or financial institutions. However, the application of this circular was deferred apparently due to resistance from other regulatory bodies and some market participants. Again, in the recent discussion paper, Sebi has recommended that receipt of demand notices under Section 8(1) of IBC should be disclosed as material information under Regulation 30.
As it involves price-sensitive information, such events should definitely be disclosed to the shareholders of the company. For an effective corporate insolvency resolution framework, identification of valid claims is a must. However, the implementation of this proposal requires some modifications.
At times, the listed corporate debtor may make due payment on receipt of such demand notice or in certain cases, genuine disputes might be involved in the claims of the operational creditors. Similarly, disclosure of every minor demand notice to the stock exchanges is not really needed as it may amount to dissemination of noise.
It would be better if such claims are classified and made subject to a materiality threshold (say, Rs 5 lakh) and time (say, default of more than three months) so that every delay of a vendor’s bill does not result in disclosures.
Similarly, the companies undergoing CIRP should disclose every event such as invitation of claims by resolution professionals (RPs), meetings of creditors, number of bids received by RPs, etc, under the head of ‘material events’, as proposed in the discussion paper. Although a company undergoing CIRP will have less information to be shared with its stakeholders, nonetheless, it would not be advisable to impose such onerous disclosure obligations on RP.
The RP follows a strictly supervised time-bound procedure from the filing of an application with the NCLT until the approval of the resolution plan by NCLT. Imposing additional disclosure requirements, ordinarily prescribed for the board of directors, board committees, compliance officers, and/or the key managerial personnel, would be unwarranted and the RP may not be able to allocate sufficient time to comply with such disclosure norms, resulting in delays and technical unintentional non-compliance. To avoid such issues, appropriate safeguards must be provided by Sebi and RPs may be required to make necessary disclosures widely on a best effort and good faith basis. This will ensure they do not misuse non-public information and are reasonably diligent with disclosure standards on best effort basis.
In its March 28 board meeting, Sebi also accepted some of the recommendations made by the Kotak Committee, imposing additional disclosure and compliance norms on listed entities. A bigger-itemised compliance checklist may not be an effective tool to improve governance. Instead, Sebi should enforce the existing provisions more rigorously and impose liability on directors for failure in performing their fiduciary duties. Sebi may provide a principle-based guidance note which elaborates the context and examples of fiduciary duties on board members, such as, duty of care, duty of loyalty etc. and their principle responsibilities while acting as directors of such companies.
The existing requirements under Regulation 31A for reclassification of promoters into public shareholders and
vice versa are very rigid and unclear due to which frequent requests for interpretative letters under Sebi’s Informal Guidance Scheme are made. The current law is so inflexible that even those people fighting legal battles with the promoters are considered promoters. With regard to the companies implementing resolution plan post-CIRP, the discussion paper proposes a threshold of 1% for declassification of promoter. However, this is very low and should be increased.
Nevertheless, this proposal is a step forward towards revamping the promoter re-classification laws and can be extended to all other listed companies. Sebi may form a flexible policy providing the criteria for classifying an entity as promoters and delegate the determination of actual declassification, on case-to-case basis, to the stock exchanges.
Similarly, for companies that are implementing resolution plan, there would be various stakeholders, sometimes acting as a group or consortium of investors, who may acquire substantial shareholding of the listed corporate debtor, replacing the erstwhile promoters. These may be in the form of strategic and financial investors who would have jointly acquired control of listed corporate debtor. Ideally, the two should not be clubbed together as they are not acting in concert except for the purpose of taking the corporate debtor out of its near-death existence.
A clear policy should be made of whether the entire acquirer group would be treated as promoters or whether subjective criteria of control or threshold of significant shareholding be provided.
Sandeep Parekh is a partner and Deepika Goyal is an associate at
Finsec Law Advisors