Regulation 30: Disclosure of Regulatory and similar Actions

– Palak Jaiswani | corplaw@vinodkothari.com

Apparently with a view to make disclosure more stringent and widen the scope of disclosures, SEBI introduced two new clauses pertaining to regulatory actions, as clause 19 and 20, in Schedule III.A.A, as a part of SEBI (Listing Regulations and Disclosure Requirements) (Second Amendment) Regulations, 2023,  with effect from July 14, 2023.

Newly inserted clauses 19 and 20 in Para A Part A of Schedule III cover the regulatory and similar actions which are required to be disclosed irrespective of the materiality thresholds prescribed.

There is a huge confusion as to what sort of regulatory actions are to be covered in item 19 and 20. Trivial fines and penalties have begun coming up on stock exchange reporting. Hence, it is very important to ascertain the type of regulatory actions that fall within the ambit of either of these two clauses. This article intends to understand the scope and coverage of the aforesaid clauses.

Need for the amendment

Prior to the amendment, the disclosure of these regulatory actions was a part of item 8 of Schedule III.A.B; these actions were, therefore, to be reported on considerations of materiality. However, SEBI Working Group was of the view that the provisions do not explicitly specify the nature of regulatory actions that need to be disclosed, as mentioned in the Consultation Paper on Review of disclosure requirements for material events or information under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Therefore, the Working Group recommended that disclosure of regulatory actions be made a part of Para A.

Hence, considerations of materiality or magnitude become unimportant; if the regulatory or similar actions are coming within the scope of either of the two clauses, they will need to be disclosed.

Below, we discuss the nature of actions that require reporting under the newly inserted clauses 19 and 20.

Scope and Comparison of Clauses 19 and 20

Both the clauses cover actions by any regulatory, statutory, enforcement authority or judicial body against the listed entity or its directors, key managerial personnel, senior management, promoter or subsidiary, in relation to the listed entity. Here emphasis is to be made on the expression, “in relation to the listed entity”, and therefore, an action against the directors, KMPs, senior management, promoter or subsidiary of a listed entity is required to be reported only when the same pertains to the conduct or operations of the listed entity, and not otherwise. For instance, actions taken against a director or KMP for their personal defaults need not be reported to the stock exchanges.

At this stage, it is important to understand the relative scope of the two clauses.

The difference, notably, is in the use of words “action initiated” and “action taken”. Clause 19 requires disclosure for initiation of any action or order passed in respect of search and seizure, reopening of accounts under section 130 of the Companies Act, 2013 or investigation under the provisions of Chapter XIV of the Companies Act, 2013.

On the other hand, clause 20 requires disclosure of any action taken or order passed in respect of suspension, imposition of fine or penalty, settlement of proceedings, debarment, disqualification, closure of operations, sanctions imposed, warning or caution or any other similar actions.

Below, we present a brief comparison on the same:

Particulars	Clause 19	Clause 20
Actions covered	Actions initiated or orders passed in respect of – (a) search or seizure; or (b) re-opening of accounts under section 130 of the Companies Act, 2013; or (c) investigation under the provisions of Chapter XIV of the Companies Act, 2013	Actions taken or orders passed in respect of – (a) suspension; (b) imposition of fine or penalty; (c)settlement of proceedings; (d) debarment; (e) disqualification; (f) closure of operations; (g) sanctions imposed; (h) warning or caution; or (i) any other similar action(s) by whatever name called;
Stage of disclosure	On the initiation of an action.   Disclosure is to be made regarding initiation of any investigation or proceedings in respect of the Company and requires continuous disclosure during the ongoing proceedings including final or interim order passed, if any. For example, A notice serving for commencement of an investigation on the Company is ‘action initiated’ which is of a continuous nature.	On the passing of appropriate orders that amount to “an action”. Each of the actions are the culmination of the proceedings. Interim orders may sometimes be given, for example, there may be an interim suspension, which is preventive. That may also need to be disclosed. However, the mere initiation of adjudication proceedings does not come under the clause.
Actions/orders by	Regulatory, statutory, enforcement authority or judicial body
Actions/orders against	Listed entity, its directors, KMP, senior management, promoter or subsidiary
Relating to	The listed entity
Information required to be disclosed [read with Reg. 30(13)]	(i) name of the authority; (ii) nature and details of the action(s) taken, initiated or order(s) passed; (iii) date of receipt of direction or order, including any ad-interim or interim orders, or any other communication from the authority; (iv) details of the violation(s)/contravention(s) committed or alleged to be committed; (v) impact on financial, operation or other activities of the listed entity, quantifiable in monetary terms to the extent possible. Reg. 30 (13) – Disclose the communication received from regulatory, statutory, enforcement or judicial authority who initiated/took actions under clause 19 or 20, unless disclosure of such communication is prohibited by the said authority.
Scope	Restricted to disclosure of 3 events.	Wider scope, covering 9 events.
Disclosure timelines	within 24 hours (since these do not emanate from within the listed entity)

Actions to be disclosed under clause 19 and 20

We have discussed a few examples below to understand the events that would or would not trigger the disclosure requirements under clause 19 or 20 of Schedule III.A.A.

Actions	Disclosure under Clause 19	Disclosure under Clause 20	No Disclosure required	Reason for classification
Levying of fines by stock exchanges		✓		Stock exchange may be considered as statutory bodies as it acts under the aegis of SEBI and has several powers being delegated by SEBI to ensure implementation of rules, regulations guidelines, circulars etc. rolled out by SEBI[1].   Hence, levying fines by stock exchanges should require disclosure.
Notice issued by ROC for u/s 206 of Companies Act, 2013			✓	Notice issued by ROC in regard to any inquiry or inspection will not require disclosure until such inquiry or inspection results in investigation.
Assessment order by Income Tax Authority			✓	Assessment order is not with regard to the items covered by either of the clauses.
Settlement of proceedings with any regulatory authorities		✓		Settlement of proceedings with regulatory authorities is covered in clause 20.
Show cause notice by Tax Authority			✓	Show cause notice is not an action initiated or taken. (Refer discussion below)
Letter Seeking Clarification by stock exchanges			✓	Clarification letter does not amount to any action taken/ initiated.
Search and seizure by a tax department against the LE or against director	✓			Search and seizure fall in the scope of clause 19
Suspension of License under Factories Act, 1948		✓		Suspension of license will construe as action taken under clause 20
Levying of additional fees for delay in filings			✓	Levying of fees is not covered in both the clauses
Appointment of Inspector by Central Government for investigation	✓			Investigation under Companies Act, 2013 is covered in clause 19

Nature of a Show Cause Notice (SCN) and its implications under Reg. 30

As per Black’s Law Dictionary (8th ed. 2004), the term “show cause” is defined as a requisition to produce a satisfactory explanation or excuse, in connection with a motion or application to a court. If issued by a court, it directs a party to appear in court and explain why the party took (or failed to take) some action or why the court should or should not grant some relief. Show cause notices are typically issued before any administrative or penal action, by way of natural justice. The whole purpose of the show cause notice is to enable the noticee to respond to the allegations on the basis of which an action can be proposed, unless the noticee successfully addresses the allegations or findings.

There are similar provisions in different laws entailing show-cause proceedings, such as:

• In SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995, the first step of holding an inquiry for the purpose of adjudging the contravention, is to issue a notice to such person requiring him to show cause within such period as may be specified in the notice (being not less than fourteen days from the date of service thereof) why an inquiry should not be held against him. Similar requirement has been provided under Depositories (Procedure for Holding Inquiry and Imposing Penalties) Rules, 2005.

• Similarly, in terms of Sections 73 and 74 of the Central Goods and Services Tax Act, 2017 as well as State Goods and Services Tax Act, 2017 read with Section 20 of Integrated Goods and Services Tax Act, 2017, the first step in determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of/ for any reason other than fraud or any wilful misstatement or suppression of facts is to serve a notice asking him to show cause why he should not pay the amount specified in the notice and a  penalty equivalent to the tax specified in the notice.

In Union of India another v. Kunisetty Satyanarayana (Judgment dated 22 Nov., 2006), the Hon’ble Supreme Court observed:

“A mere charge-sheet or show-cause notice does not give rise to any cause of action, because it does not amount to an adverse order which affects the rights of any party unless the same has been issued by a person having no jurisdiction to do so. It is quite possible that after considering the reply to the show-cause notice or after holding an enquiry the authority concerned may drop the proceedings and/or hold that the charges are not established. It is well settled that a writ lies when some right of any party is infringed. A mere show-cause notice or charge-sheet does not infringe the right of any one. It is only when a final order imposing some punishment or otherwise adversely affecting a party is passed, that the said party can be said to have any grievance.”

The observations by Hon’ble SC have  been referred to in various rulings, e.g. Rajeshbhai v. State of Gujarat (Special Civil Application no. 4141 of 2012, Judgment date 07/05/2012)

As evident from above discussions, SCN is a formal notice issued by the authority, to a person/entity, requiring the recipient to explain or justify a particular act or omission that is apparently in violation of the provisions. The SCN neither imposes any penalty upon the person/entity nor itself amounts to any action being taken against the such person/entity. Instead, it is a preliminary step taken before any action is taken or any proceedings are initiated against the person/entity and gives an opportunity to show cause as to why an action should not be taken. Hence, receipt of a show cause is not an instance of “action taken”; instead, it is the first step to be undertaken for initiating/ holding an inquiry and determining the action to be taken.

Concluding remarks

The scope of item 19 is quite limited, but that of item 20 seems quite wide. Both the clauses are put under “deemed material” provisions – therefore, if any action is clearly falling within the list given in item 20, the magnitude of the fine/penalty does not matter. Also, actions referred in both the clauses are required to be disclosed along with their impact on financial, operational or other activities of the listed entity, irrespective of the amount involved in and magnitude of such actions.

The purpose behind the amendment was to ensure enhanced transparency and specify the extent of disclosures to be made to investors. However, disclosing all the information including trivial matters pertaining to clause 19 and 20 as deemed material events might lead to the significant disclosures losing their relevance due to abundance of information. Therefore, SEBI has to come up and draw the line in terms of magnitude, impact and extent of disclosures of regulatory actions under Reg. 30.

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^[1] There are several rulings on whether a stock exchange can be regarded as a “public authority”. Many of these rulings are in the context of Art 226 or similar provisions. See, for a Delhi High Court ruling that discusses earlier rulings on the matter as well: NSE vs Central Information Commission; https://indiankanoon.org/doc/38400934/