by Smriti Wadehra & Qasim Saif
MCA considering the COVID-19 pandemic and the social distancing norms issued by the Government, realized that conducting physical AGM by companies within the prescribed timeline shall be difficult for this financial year. Accordingly, the Ministry vide its circular dated 5th May, 2020 has permitted holding of Annual General Meetings (AGM) through video conferencing for all meetings conducted during the calendar i.e. till 31st December, 2020. The said circular read with previous circulars dated 13th April, 2020 and 8th April, 2020 prescribed a detailed procedure as to how companies can conduct their general meetings virtually.
While these circulars dealt with various perplexities arising from the thought of virtual general meetings, however, there was still some clarification pending on applicability of other requirements applicable on companies, for instance, the requirement of webcasting under regulation 44(6) of SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015.
We discuss the same as below.
Webcast vs Video conferencing
The very basic differentiation in the term webcast and video conferencing is that, the former only provides one-way participation rights but the later provides for a two-way communication. In reference to providing webcasting facility during the AGM, the shareholders can only watch and listen to the proceedings of the meeting but cannot participate in voting or ask queries whereas in video conferencing the shareholders have complete participation as in case of a physical general meeting. Webcasting is merely “live streaming” of the AGM.
Intent of webcast
The requirement for providing webcast facility was recommended by Kotak Committee on Corporate Governance which provided:
“Reg 44A. Meetings of shareholders
The top 100 listed entities by market capitalization, determined as on March 31 of every financial year, shall provide one-way live webcast of the proceedings of all shareholder meetings held on or after April 1, 2018”
The aforesaid recommendation was in addition to the recommendation w.r.t. e-voting facility which as per the existing provision of law, is closed at 5 p.m. of the previous day of the meeting, however, the committee recommended to shift the closure of e-voting facility to the day of meeting itself. The intent behind the recommendation was that the e-voting timeline expires before the meeting is held, accordingly, shareholders not attending the meetings in person are unable to take into account discussions at the meeting in order to make informed decisions.
Whereas, SEBI accepted the recommendations made by the Kotak Committee on 9th May, 2018 w.r.t. webcasting facility and inserted a new sub-regulation, however, the recommendation w.r.t e-voting is still in draft form. The provisions relating to webcast were made applicable to top 100 listed entities from 1st April, 2019.
The whole intent of conducting annual general meetings is the indispensable right to the shareholders of companies to meet the directors and auditors of the Company, at least once in a year. This has been the feature of corporate laws over the decades – based on the fact that the “managers” (directors) at least face the “owners” (shareholders) once. The law therefore, mandates physical meetings. However, with the rise of technology, call it necessity or evolution, the law embraced e-voting as a recognised means of voting (but not participation). Later, SEBI introduced the concept of providing one-way webcast facility for shareholders so as to increase participation of shareholders at meeting (though one-way).
The data shows that attendance of shareholders at AGMs is even less than 5% of total number of shareholders at Meeting. Further, most of the shareholders (especially those residing in state other than where the AGM is conducted) find it more feasible to vote by way of e-voting. In the data below, we can observe that on an average 95% of members of some well reputed companies vote through e-voting while on-site voting percentage is negligible. Therefore, it can be said, that the members do not really depend on meeting discussions to take a decision. However, webcast enables them to be apprised of the conduct of the meeting, shareholder queries, concerns, etc. raised at the meeting, etc.
Globally, countries like United States of America, Canada, United Kingdom, France, China and many such countries have permitted conducting meeting through video conferencing during the crisis. Further, the concept of webcasting is new for India. However, for many foreign countries including those named above have included providing of webcasting facility in shareholder’s meeting as a requirement of law.
Webcast facility in virtual AGM, whether required?
Now, the question is, where the AGM has itself gone ‘virtual’ (as mentioned above), is there really a requirement of webcasting? Note that SEBI has not provided any relaxation from webcasting as such.
It may be noted that video conferencing is nothing but participation through electronic means by shareholders remotely i.e. other than the venue of AGM. Therefore, where the company has already provided the facility of video conferencing to shareholders, webcast may not actually be needed. The purpose which the webcast intends to serve (dissipation of conduct of meeting) is well-served by the video-conferencing. In fact, in webcast the shareholders get only participation rights i.e. to hear and view the proceedings of meeting. However, in case of virtual AGM, the shareholders are provided with two-way participation rights i.e. can speak as well. Hence, provided two options, the shareholders will mostly opt for the latter.
The webcast, however, can be of relevance where the participation capacity is limited. In this regard, MCA circular dated 8th April, 2020 has prescribed minimum capacity allowance by companies conducting virtual AGM. For companies that are required to provide e-voting facility has to arrange capacity of minimum 1000 members at virtual AGM on first come first basis. This limit is minimum 500 members for companies not required to provide e-voting facility. Hence, the platform for conducting virtual AGM should provide for aforesaid minimum.
We all know that mostly large companies have lakhs of shareholders. Therefore, if companies restrict the entry of shareholders on first come first basis i.e. does not allow participation right to all shareholders in virtual AGM (due to software limitations, etc.), in that case webcast facility should be provided (if required). However, if companies do not restrict any shareholder from participation in virtual AGM and is open for all shareholders irrespective of the number, in such cases providing separate facility for webcast may turn out to be a futile exercise.
-by Smriti Wadehra
Pursuant the proposal of Union Budget of 2019-20, the MCA vide notification dated 16th August, 2019 amended the provisions of Companies (Share Capital and Debentures) Rules, 2014 .(You may also read our analysis on the notification at Link to the article) The said amended Rules faced a lot of apprehensions, especially, from the NBFCs as the notification which was initially expected to scrap off the requirement of creation of DRR for publicly issued debentures had on the contrary, rejuvenated a somewhat settled or exempted requirement of creation of debenture redemption fund as per Rule 18(7) for NBFCs as well.
As per the notification, the Ministry imposed the requirement for parking liquid funds, in form of a debenture redemption fund (DRF) to all bond issuers except unlisted NBFCs, irrespective of whether they are covered by the requirement of DRR or not. In this regard, considering the ongoing liquidity crisis in the entire financial system of the Country, parking of liquid funds by NBFCs was an additional hurdle for them.
Creation of DRR is somewhat a liberal requirement than creation of DRF, this is because, where the former is merely an accounting entry, the latter is investing of money out of the Company. Further, the fact the notification dated 16th August, 2019 casted exemption from the former and not from the latter, created confusion amidst companies. The whole intent of amending the Rule was to motivate NBFCs to explore bond markets, however, the requirement of parking liquid funds outside the Company as high as 15% of the amount of debentures of the Company was acting as a deterrent for raising funds by the NBFCs.
Considering the representations received from various NBFCs and the ongoing liquidity crunch in the economy of the Country along with added impact of COVID disruption, the Ministry of Corporate Affairs has amended the provisions of Rule 18 of Companies (Share Capital and Debenture) Rules, 2014 vide notification dated 5th June, 2020 to exempt listed companies coming up with private placement of debt securities from the requirement of creation of DRF.
What is DRR and DRF?
Section 71(4) read with Rule 18(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014 requires every company issuing redeemable debentures to create a debenture redemption reserve (“referred to as DRR”) of at least 25%/10% (as the case maybe) of outstanding value of debentures for the purpose of redemption of such debentures.
Some class of companies as prescribed, has to either deposit, before April 30th each year, in a scheduled bank account, a sum of at least 15% of the amount of its debentures maturing during the year ending on 31st March of next year or invest in one or more securities enlisted in Rule 18(1)(c) of Debenture Rules (‘referred to as DRF’).
The notification has mainly exempted two class of companies from the requirement of creation of DRF:
- Listed NBFCs registered with RBI under section 45-IA of the RBI Act, 1934 and for Housing Finance Companies registered with National Housing Bank and coming up with issuance of debt securities on private placement basis.
- Other listed companies coming up with issuance of debt securities on private placement basis.
However, the unlisted non-financial sector entities have been left out. In a private placement, the securities are issued to pre-selected investors. Raising debt through private placement is a midway between raising funds through loan and debt issuances to public. Like in case of bilateral loan arrangements, but unlike in case of public issue, the investors get sufficient time to assess the credibility of the issuer in private placements, since the investors are pre-identified.
The intent behind DRF is to protect the interests of the investors, usually when retail investors are involved, with respect to their claims on maturity falling due within a span of 1 year. This is not the case for investors who have invested in privately placed securities, where the investments are made mostly by institutional investors.
Further, companies chose issuance through private placement for allotment of securities privately to pre-identified bunch of persons with less hassle and compliances. Hence, the requirement of parking funds outside the Company frustrates the whole intent.
Further, it is a very common practice to roll-over the bond issuances, hence, it is not that commonly bonds are repaid out of profits; the funds are raised from issuance of another series of securities. This is a corporate treasury function, and it seems very unreasonable to convert this internal treasury function to a statutory requirement.
Though, in our view, the relaxation provided in case of private issuance of debt securities is definitely a relief, especially during this hour of crisis, but we are not clear about the logic behind excluding unlisted non-financial sector entities.
Even though, the financial sector (76%) entities dominate the issuance of corporate bonds, however, the share of the non-financial sector entities (24%) is not insignificant. Therefore, ideally, the exemption in case of private placements should be extended to unlisted non-financial sector entities as well.
A brief analysis of the amendments is presented below:
Pursuant to the MCA notification dated 16th August, 2019, the below mentioned class of companies were required to either deposit or invest atleast 15% of amount of debentures maturing during the year ending on 31st March, 2020 by 30th April, 2020. This has been extended till 30th September, 2020 for this FY 2019-20 by MCA due to the COVID-19 outbreak. However, pursuant to the amendment introduced by MCA notification dated 5th June, 2020 the status of DRF requirement stands as amended as follows:
|Particulars||DRF requirement as MCA circular dated 16th August, 2019||DRF requirement as per MCA circular dated 5th June, 2020|
|Listed NBFCs which have issued debt securities by way of public issue||Yes.||Yes. Deposit or invest before 30th September, 2020|
|Listed NBFCs which have issued debt securities by way of private placement||Yes||Not required as exempted.|
|Listed entities other than NBFC which have issued debt securities by way of private placement||Yes||Not required as exempted|
|Listed entities other than NBFC which have issued debt securities by way of public issue||Yes||Yes. Deposit or invest before 30th September, 2020|
|Unlisted companies other than NBFC||Yes.||Yes. Deposit or invest before 30th September, 2020|
Please note that the aforesaid shall be applicable from 12th June, 2020 i.e. the date of publication of the notification in the official gazette. In this regard, if for instance companies which have been specifically exempted pursuant to the recent notification, have already invested or deposited their funds to fulfil the DRF requirement may liquidated the funds as they are no longer statutorily require to invest in such securities.
Synopsis of DRR and DRF provisions
A brief analysis of the DRR and DRF provisions as amended by the MCA notification dated 16th August, 2019 and 5th June, 2020 has been presented below:
|Sl. No.||Particulars||Type of Issuance||DRR as per erstwhile provisions||DRR as per amended provisions||DRF as per erstwhile provisions||DRF as per amended provisions|
|1.||All India Financial Institutions||Public issue/private placement||×||×||×||×|
|2.||Banking Companies||Public issue/private placement||×||×||×||×|
|Listed NBFCs registered with RBI under section 45-IA of the RBI Act, 1934 and HFC registered with National Housing Bank||Public issue||√
25% of value of outstanding debentures
|4.||Unlisted NBFCs registered with RBI under section 45-IA of the RBI Act, 1934 and HFC registered with National Housing Bank||Private Placement||
|Other listed companies||Public Issue||√
25% of value of outstanding debentures
25% of value of outstanding debentures
|6.||Other unlisted companies||Private Placement||√
25% of value of outstanding debentures
10% of the value of outstanding debentures
 This table includes analysis of provisions of DRR and DRF as per CA, 2013 and amendments introduced vide MCA notification dated 16th August, 2019 and 5th June, 2020.
Erstwhile provisions- Provisions before amendment vide MCA circular dated 16th August, 2019
Amended provisions- Provisions after including amendments introduced vide MCA circular 5th June, 2020
Timothy Lopes, Executive, Vinod Kothari Consultants
In the Union Budget of 2019-2020 the Hon’ble Finance Minister proposed “to initiate steps towards creating an electronic fund raising platform – a Social Stock Exchange (‘SSE’) – under the regulatory ambit of Securities and Exchange Board of India (‘SEBI’) for listing social enterprises and voluntary organizations working for the realization of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund.”
A Working Group was subsequently formed on 19th September, 2019 to recommend possible structures and mechanisms for the SSE. We have tried to analyse and examine what the framework would look like based on global SSEs already prevalent in a separate write up.
On 1st June, 2020, the Working Group on Social Stock Exchange published its report for public comments. In this write up we intend to analyse the recommendations made by the working group along with its impact.
The idea of a Social Stock Exchange
Social enterprises in India exist in large numbers and in several legal forms, for e.g. trusts, societies, section 8 companies, companies, partnership firms, sole proprietorships, etc. Further, a social enterprise can be either a For-Profit Enterprise (‘FPE’) or a Non-Profit Enterprise (‘NPO’). The ultimate objective of these enterprises is to create a social impact by carrying out philanthropic or sustainable development activities.
Certain gaps exist for social enterprises in terms of funding, having a common repository able to track these entities and their performance. The sources of funding for social enterprises have been philanthropic funding, CSR, impact investing, government agencies, etc.
Funding is important in terms of the effectiveness of NPOs in creating an impact. The funding, however, is contingent upon demonstration of impact or outcomes.
Here comes the idea and role of a social stock exchange. An SSE proposed to be set up is intended to fill the gaps not only in terms of funding, but also to put in place a comprehensive framework that creates standards for measuring and reporting social impact.
Who is eligible to be listed on the SSE?
The SSE is intended for listing of social enterprises, whether for-profit or non-profit. Listing would unlock the funds from donors, philanthropists, CSR spenders and other foundations into social enterprises.
There is no new legal form recommended by the working group which a social enterprise will have to establish in order to get listed. Rather, the existing legal forms (trusts, societies, section 8 companies, etc.) will enable a NPO or FPE to get listed through more than one mode.
Is there any minimum criteria for listing on the SSE?
In case of NPOs, the minimum reporting standards recommended to be implemented, require the NPO to report that it has received donations/contributions of at least INR 10,00,000 in the last financial year.
Further, in case of FPEs, it must have received funding from any one or more of the impact investors who are members of the Impact Investors Council. Certain eligibility conditions for equity listings would also apply in case of FPEs, as per the SEBI’s Issue of Capital, Disclosure Requirements (ICDR).
The working group has requested SEBI to look into the following aspects of eligibility and recalibrate the existing thresholds in the ICDR:
- Minimum Net Worth;
- Average Operating Profit;
- Prior Holding by QIBs, and;
- Criteria for Accredited Investor (if a role for such investors is envisaged).
Listing, compliance and penalty provisions must be aptly stringent to prevent any misuse of SSE platform by FPEs.
What is a social enterprise? Is the term defined?
Social enterprises broadly fall under two forms – A For-Profit Enterprise and a Non-Profit Enterprise.
For-Profit Enterprise – A FPE generally has a business model made to earn profits but does so with the intent of creating a social impact. An example would be creating innovative and environmental friendly products. FPEs are generally in the form of Companies.
Non-Profit Enterprise – NPOs have the intention of creating a social impact for the better good without expecting any return on investment. These are generally in the form of trusts, societies and Section 8 companies. These entities cannot issue equity. The exception to this is a section 8 company which can issue equity shares, however, there can be no dividend payment.
The working group defines a social enterprise as a class or category of enterprises that are engaging in the business of “creating positive social impact”. However, the group does not recommend a legal/regulatory definition but recommends a minimum reporting standard that brings out this aspect clearly, by requiring all social enterprises, whether they are FPEs or NPOs, to state an intent to create positive social impact, to describe the nature of the impact they wish to create, and to report the impact that they have created. There will be an additional requirement for FPEs to conform to the assessment mechanism to be developed by SEBI.
Therefore, an enterprise is “social” not by virtue of satisfying a legal definition but by virtue of committing to the minimum reporting standard.
Since there would be no legal definition to classify as a social enterprise, a careful screening process would be required in order to enable only genuine social enterprises to list on the exchange.
Who are the possible participants of the SSE?
What are the instruments that can be listed? What are the other funding structures? What is the criteria for listing?
In case of Section 8 companies, there is no restriction on issue of shares or debt. However, there is no dividend payment allowed on equity shares. Further, there is no real regulatory hurdle in listing shares or debt instruments of Section 8 companies. However, so far listing of Section 8 companies is a non-existent concept, as these avenues have not been utilized by Section 8 companies apparently due to their inherent inability to provide financial return on investments.
The working group recognises that trusts and societies are not body corporates under the Companies Act, and hence, in the present legal framework, any bonds or debentures issued by them cannot qualify as securities under the Securities Contracts (Regulation) Act 1956 (SCRA).
In this regard the working group suggests introducing a new “Zero Coupon Zero Principal” Bond to be issued by these entities. The features and other specifics of these bonds are discussed further on in this write up.
Further, it is recommended that FPEs can list their equity on the SSE subject to certain eligibility conditions for equity listings as per the SEBI’s Issue of Capital, Disclosure Requirements (ICDR) and social impact reporting.
Funding structures and other instruments are discussed further on in the write up.
What are the minimum reporting standards?
One of the important pre-requisites to listing on the SSE is to commit to the minimum reporting standards prescribed. The working group has laid down minimum reporting standards for the immediate term to be implemented as soon as the SSE goes live. The minimum reporting standards broadly cover the areas shown in the figure below –
The details of the minimum reporting standard are stated in Annexure 2 to the working group report. The working group states in its report that over time, the reporting requirements can begin to incorporate more rigour in a graded and deliberate manner.
Overall, it seems as though the reporting framework at the present stage is sufficient to measure performance and identify truly genuine social enterprises. The framework sets a benchmark for reporting by NPOs and FPEs and will provide the requisite comfort to investors.
Innovative bonds and funding structures
The SSE’s role is clearly not limited to only listing of securities and trading therein. The working group has recommended several innovative funding mechanisms for NPOs that may or even may not end up in creation of a listable security. Following are the highlights of the proposed structures –
1. Zero coupon zero principal bonds –
The exact modalities of this instrument are yet to be worked out by SEBI.
2. Mutual Fund Structure –
- Under this structure, a conventional closed-ended fund structure is proposed wherein the Mutual Fund acts as the intermediary and aggregates capital from various individual and institutional investors to invest in market-based instruments;
- The returns generated out of such fund is will be channelled to the NPOs who in turn will utilise the funds for its stated project;
- The principal component will be repaid back to the investors, while the returns would be considered as donations made by them;
- There could also be a specific tax benefit arising out of this structure;
- The other benefit of this structure is that the role of the intermediary can be played by existing AMCs.
3. The Social/ Development Impact Bond/ Lending Partner Structure –
These bonds are unique in a way that they returns on the bonds are linked to the success of the project being funded. This is similar to a structured finance framework involving the following –
- Risk Investors/ Lenders (Banks/ NBFCs) – Provide the initial capital investment for the project;
- Intermediary – Acts as the intermediating body between all parties. The intermediary will pass on the funds to the NPO;
- NPO (Implementing Agency) – will use the funds for achieving the social outcomes promised;
- 3rd party evaluator – An independent evaluator who will measure and validate the outcomes of the project;
- Outcome Funder – Based on the third party evaluation the outcome funders will pay the Principal and Interest to the risk investors/ lending partners in case the outcome of the project is successful. In case the outcome is not successful the outcome funders have the option to not pay the risk investors/ lending partners.
Although banks may not be looking into risky lending, the structure provides incentive to the bank in the form of Priority Sector Lending (PSL) qualification. In order to meet their PSL targets, banks may choose to lend under this structure.
4. Pay-for-success through grants –
This structure is where a new CSR aspect comes in. The working group recommends a structure which is similar to the pay-for-success structures stated earlier however, this required the CSR arm of a Company to select the NPO for implementation of the project. The CSR funds are then kept in an escrow account earmarked for pay-for-success, for a pre-defined time period over which the impact is expected to be created (say 3 years).
The initial capital required by the NPO to achieve the outcomes, will be provided by an interim funding partner (typically a domestic philanthropic organization, and distinct from the third-party evaluator).
If the CSR funder finds that the NPO has achieved the outcomes, then it pays out the CSR capital from the escrow account partly to the interim funding partner (similar to the earlier mentioned pay-for success structures), and partly to the NPO in the form of an accelerator grant up to 10% of the program cost in case the NPO exceeds the pre-defined outcome targets. The grant to the NPO is designed to provide additional support for non-programmatic areas such as research, capacity building, etc.
If the CSR funder finds that the NPO has not achieved the outcomes, then it either rolls over the CSR capital in the escrow account (if the pre-defined time period is not yet over), or routes the CSR capital to items provided under Schedule 7 of the Companies Act such as the PM’s Relief Fund (if the pre-defined time period is over).
An avenue for Corporate Social Responsibility
The implementation of the SSE will provide a new platform, not just for CSR spending but also a trading platform for trading in a “CSR certificates” between corporates with excess CSR expenditure and those with a deficit in a particular year.
Investment in securities listed on the SSE are likely to qualify as CSR expenditure. However, necessary amendments in the Companies Act, 2013 will also be required to permit the same to qualify as CSR expenditure. The working group has made the necessary policy recommendations in its report.
Trading platform for CSR spending –
India is one of the only countries that has mandated CSR spending. In a particular year, a Company may fail to meet its required spending obligations owing to several reasons. The High Level Committee on CSR had recommended the transfer of unspent CSR funds to a separate account and the said amount should be spent within 3 years from the transfer failing which the funds would be transferred to a fund specified in Schedule VII. The necessary provisions were inserted by the Companies (Amendment) Act, 2019, however, the same is yet to be notified.
The working group has proposed a new model that could solve the issue of unspent CSR funds. It is recommended that CSR Certificates [may be negotiable instruments, somewhat similar to Priority Sector Lending Certificates (PSLCs)], be enabled to be bought and sold on a separate trading platform. This will allow Companies which have unspent CSR funds to transfer these funds to those Companies that have spent excess for CSR in a particular year. This in turn motivates Companies to spend more than the minimum required CSR amount in a particular year.
The certificates are recommended to have a validity of 3-5 years but may be used only once. In order to avoid any profit making on excess CSR spends, it is recommended that these transactions must involve only a flat transaction fee that gets charged to the platform and involves actual transfer of funds.
Further, the working group has recommended that If the platform as described above succeeds in facilitating the trading of CSR certificates, the government might then consider licensing private platforms that provide an auction mechanism for the trading of CSR certificates (similar to the RBI’s licenses for Trade Receivables Discounting Systems or TReDS). However, this would require additional clarifications on whether CSR certificates must have the status of negotiable instruments or not and on how companies are to treat any profits from the sale of such certificates.
The recommendations of the working group has given an expanded role to the SSE. The working group also attempted to address the role of the SSE in terms of COVID-19 by proposing the creation of a separate COVID-19 Aid Fund to activate solutions such as pay-for-success bonds which can be used to provide loan guarantees to NBFC-MFIs that wish to extend debt moratoriums to their customers.
Necessary changes in law have also been recommended, while several other tax incentives have been recommended by the working group.
The SSE framework seems to be interesting in the Indian context. Nevertheless, the implementation of the same is yet to be seen.
| SEBI seeks transparency from listed entities in times of COVID crises
Shaifali Sharma | Vinod Kothari and Company
The impact of COVID-19 on companies is evolving rapidly not only in India but all over the world. In times of increased volatility and uncertainty in the capital market, detailed information regarding any material impact on the company’s business will not only assist the investors in making informed investment decisions but will also be fundamental formarket integrity and functioning.
Pursuant to the requirements of Listing Regulations, many listed entities have made disclosures, primarily intimating shutdown of operations owing to the pandemic and the resultant lockdowns. However, such probable information may be relatively less relevant and investors are more interested to know where these companies stand today, what are their estimated future impacts, strategiesadopted by these companies for addressing the effects of COVID-19, etc.
Given the information gaps in the market, SEBI, highlighting the importance of timely and adequate disclosures to investors and other stakeholders, issued an advisoryon May 20, 2020 (‘Advisory’), asking all the listed entities to evaluate the impact of COVID-19 on their business, performance and financials, both qualitatively and quantitatively, and disseminated the same to the stock exchange.
This article discuss in detail the disclosure requirements under Listing Regulations and provides a quick guide for the listed entities in evaluating and disclosing impact of pandemic on their business.
Existing disclosure norms under Listing Regulations on impact of COVID-19
The existing requirements prescribed under Listing Regulations in relation to the disclosure of impact of COVID-19 on listed entities are summarized below.The same is applicable to the following entities:
- companies listed with specified securities i.e. equity shares and convertible securities
- companies listed with Non-convertible Debt Securities (NCDs) and/or Non-Convertible Redeemable Preference Shares (NCRPSs)
|Entities having specified securities listed||Entities having NCDs/NCRPS listed|
|What is the disclosure requirements prescribed under Listing Regulations?|
|The events can be divided into two broad categories a. Deemed Material Events and b. Material Events based on application of materiality criteria as provided in Regulation 30(4).
In the first category, the events specified in Para A of Part A of Schedule III get covered and requires mandatorily disclosure on the occurrence and in the second category, events under Para B are disclosed based on the application of the guidelines for materiality prescribed under sub-regulation (4) of Regulation 30.
|Unlike Regulation 30, Regulation 51 does not provide for any test of materiality.
Part B of Schedule III requires disclosure of all information either,
|Whether disclosure on COVID impact required by Listing Regulations?|
Disclosure w.r.t. disruption of operations of any one or more units or division of a listed entity due to natural calamity (earthquake, flood, fire etc.), force majeure or events such as strikes, lockouts etc. falls under second category.
Therefore, disruption of operations due to COVID-19 is required only if the same is considered material after applying the materiality guidelines.
Since disruption caused by COVID may be said to have the aforesaid effects.
|What are the actionables as per Listing Regulations?|
|In terms of sub- regulation (5) of Regulation 30, the Board of Directors (BoD) is required to authorize one or more KMPs for the purpose of determining materiality. Therefore, such authorized KMP(s) shall determine if the impact of COVID on company’s operations is material based on the criteria prescribed under sub-regulation (4) and the policy framed by company for said purpose.
On determination of the materiality, the same shall be disclosed to stock exchange and also host the disclosure on company’s website.
|For this category of companies, the law does not provide for the similar requirements as provided for companieshaving specified securities listed eg. framing of policy, determination of materiality by Board authorized person etc. Therefore, the disruption caused by COVID-19 shall be intimated to the stock exchanges(s) as per Regulation 51 of the Listing Regulations.
In this case, disclosure on website is not mandatory; however, company may do so for better reach of information to investors and stakeholders.
|When is the disclosure required?|
|Regulation 30 provides for disclosure as soon as reasonably possible, but not later than 24 hours from the occurrence of the event. The guidance on when an event is said to have occurred has been provided in SEBI Circular dated September 09, 2015. In terms of the said Circular, the same would depend upon the timing when the listed entity became aware of the event/information or as soon as, an officer of the entity has, or ought to have reasonably come into possession of the information in the course of the performance of his duties.||Regulation 51 provides for prompt dissemination i.e. as soon as practically possible and without any delay and that the information shall be given first to the stock exchange(s) before providing the same to any third party.|
|What all disclosures have been suggested by SEBI vide its Circular dated September 09, 2015?|
|As per SEBI circular dated September 09, 2015, companies shall disclose:
At the time of occurrence of disruption:
Regularly, till complete normalcy is restored
|Though the said Circular refers to only Regulation 30, however, the same requirements should apply to this category of companies also which should additionally disclose the impact on servicing of interest/ dividend/ redemption etc.|
Similar disclosure requirement are prescribed for entities which has listed its Indian Depository Receipts, Securitized Debt Instruments and Security Receipts where all information which is price sensitive or having bearing on the performance/ operation of the listed entity and other material event as prescribed under Chapter VII, VIII, VIIIA read with Schedule III of the Listing Regulations shall be disclosed
Disclosure requirements as per SEBI Advisory
As mentioned earlier, SEBI Advisory is an addition to the above requirements of Listing Regulations. Though, one may argue that the Advisory is recommendatory in nature and it does not mandate the companies to make the disclosure, however, in our view, the same is not a mere recommendation. Keeping this in mind, the probable questions that one can have with respect to SEBI Advisory have been captured below:
What is the intention of the SEBI behind issuing such Advisory?
As mentioned in the SEBI Advisory, the outbreak of COVID-19 pandemic and the consequent nationwide lockdown has lead to distortions in the market due to the gaps in information available about the operations of a listed entity and therefore, it is important for a listed entity to ensure that all available information about the impact of pandemic on the company and its operations is communicated in a timely and cogent manner to its investors and stakeholders.
These disclosures ensure transparency and will provide investors an opportunity to make an accurate assessment of the company. So, the idea behind the disclosures is to give an equal access to the information to all the stakeholders at large.
Which all entities are covered by SEBI Advisory?
Due to the COVID-19, a global pandemic, all kinds of businesses are impacted in one way or another. Unlike the Listing Regulations, SEBI Advisory does not differentiate the disclosure requirements for the companies listed with specified securities and companies listed with NCDs/NCRPS, and the Advisory is applicable to all the listed entities.
Whether the requirements of Advisory are mandatory for listed entities?
Considering the purpose of making fair and timely disclosure of any material impact on the companies, the disclosures as mentioned in the Advisory shall be treated as mandatory in nature.
Whether disclosure required if the thresholds as set out in company’s materiality policy are not met?
The materiality of an event is generally measured in terms of thresholds laid down by the companies in their ‘policy for determination of materiality’ however, such criteria should not be considered as an absolute test to determine the materiality of an event like COVID pandemic
In times of the ongoing crises, investors would be interested to know all the inside information about the impact of pandemic on the company’s business operations, financial results, future strategies, etc. i.e. every qualitative or quantitative factors.
Since every person is doing an assessment of the impact of the crisis, it is intuitive to say that the management of the companies must also have done some assessment. Considering that the idea is to provide general and equal access to the information to all the stakeholders at large, the management must disclose every positive/negative/neutral impact of the crises on the company, irrespective of the fact that it qualifies the prescribed materiality threshold or not.
What if there no impact on the business caused by the pandemic? Whether the same is also required to be disclosed?
In our view, not getting affected by the pandemic at the time when the entire world is otherwise getting affected is also material. Therefore, the disclosure shall have to be made.
Further, it is not always necessary that the pandemic will have to have a negative impact e.g. decrease in sales volume. For example, companies in pharmaceutical sector or in the sector of manufacturing of essential items such as, mask, sanitizer etc. will have a boost in sales, thereby carrying a positive impact on them.
Whether Board meeting is required to be conducted in this regard? Or will the company be required to wait till the Board decision to make the disclosure?
While an internal assessment is required at the management level, however, a Board meeting is not mandatory to be conducted. Yes, the estimates already made may be changed at a later stage which may be disclosed at that stage again.
Is it ok to say for the management to take a position that they have not analyzed the impact of the crisis?
Considering the current risk and challenges as a result of COVID-19, it is very unlikely to say that companies have not done any internal assessment to determine the current and potential impact on the company’s financial and business operations.
What are the steps involved in making the disclosure?
Step 1: Evaluate the impact of the pandemic on the business, performance and financial
Before making any disclosure to the stock exchange(s), the management of the company must properly assess the impact of COVID-19 on its business, performance and financials, both qualitative and quantitative impact.
Step 2: Dissemination of impact of pandemic to stock exchange
The following information shall be disseminated to the stock exchange:
- Impact of the pandemic on the business;
- Ability to maintain operations including factories/ units/ office spaces functioning and closed down;
- Schedule, if any for restarting the operations;
- Steps taken to ensure smooth functioning of the operations;
- Estimation of future impact on the operations;
- Details of impact on the listed entity’s
- capital and financial resources;
- liquidity position;
- ability to service debt and other financing arrangements;
- internal financial reporting and control;
- supply chain
- demand for its products/services;
- Existing contracts/agreements where non-fulfilment of the obligations byany party will have significant impact on the listed entity’s business;
- Any other information as the entity may determine to be relevant and material;
While making the above disclosure to stock exchanges, entities shall also adopt the principle of disclosure and transparency prescribed under Regulation 4(2)(e) of the Listing Regulations.
Who is responsible to evaluate and make disclosures to the stock exchange(s)? What is the role of the Board in the process of assessment and/or disclosure?
- Responsibility of KMP(s) as per Listing Regulations
Pursuant to Regulation 30 of the Listing Regulations, the KMP(s), as may be authorized by the Board, is responsible to determine the materiality of the impact of pandemic on the company based on the on the guidelines for materiality and the materiality policy of the company and disclose the same to the stock exchange
- Role of Board in the assessment of other material qualitative and quantitative impacts
Considering the language of the Advisory issued by SEBI, in addition to the KMPs authorized to test the materiality, the Board will also have a role in determining the COVID impact as the same requires disclosure in which management intervention may be necessary, e.g. future plans for business continuity, capability of running the business smoothly, material changes expected during the year, impact of the financial position etc.
However, as discussed above, a Board level discussion is not a prerequisite of making the disclosure.
Is there any timeline prescribed for making disclosers to the stock exchange(s)?
There is no specific timeline provided in the Advisory for making disclosures, however, in the present situation, the disclosure is required to be made as soon as an assessment is done on the probable impact by the management.
Whether the disclosures a one-time requirement for the listed entities?
Since the operations of the company will recommence soon, question arises if the companies should continue with its assessment and disclosure process. As stated in Advisory, to have continuous information about the impact of COVID-19, listed entities may provide regularupdates, as and when there are material developments. Further, since the disclosures will be made based on estimates, any changein those estimates or the actual position shall also be disclosed in regular intervals.
Therefore, disclosure is required not only at the time of occurrence but also on a continuous basis till the normalcy of the situation.
Whether impact on an unlisted subsidiary company shall also be disclosed?
To get an overall view of company’s performance, we always evaluate consolidated figures. Sometimes, company’s standalone performance is strong as compared to its performance at consolidated level. Accordingly, if the pandemic’s impact on unlisted subsidiary is such that it is having a material impact at the group level, the same shall be disclosed to the stock exchange.
Whether effects of COVID-19 be also reported in Financial Results?
In the coming days, companies will be disclosing their quarterly and yearly financial results. This time, however, investors will be interested inknowing the impact of COVID-19 on the company’s financial positions. Therefore, while submitting financial statements under Regulation 33 of the Listing Regulations, companies should mention about the impact of the CoVID-19 pandemic on their financial statements.
What will be the consequences for not complying with the SEBI Advisory?
Since no separate penal provisions are prescribed under the Advisory, non- compliance of the same may not lead to any penal consequences.
What is the global position as regards disclosure of COVID impact?
Market regulators worldwide have taken various steps to ensure transparency related to the impacts of the pandemic on the listed companies. In United States, the Securities Exchange Commission has issued guidance regarding disclosure and other securities law obligations that companies should consider w.r.t the COVID-19 and related business and market disruptions. Similarly, for listed companies and auditors in Hong Kong, the Securities and Futures Commission and the Stock Exchange of Hong Kong Limited issued a joint press release in relation to the disclosure requirements in response to the COVID-19 outbreak
Our write-up giving an insightful analysis on the said SEBI advisory drawing an inference from the global perspective can be viewed here
What kind of information be disclosed to the stock exchange?
The table below is a quick guide for the listed entities in determining and disclosing the impact of COVID-19 on their businesses:
|Sr. No.||Subject of Assessment and Disclosure||Broad Contents (Illustrative list)
|I.||Current status (both financial and operating status)
|II.||Steps taken to address effects of COVID||Steps taken to:
|III.||Future operational and financial status (estimates)||
|IV.||Company Specific||Focusing on the sectors in which the company deals in, the impact of crises varies from company to company and shall be assessed accordingly. For example:
The above list is illustrative but not exhaustive and each company will need to carefully assess COVID-19’s impact and related material disclosure obligations.
In light of the effects and uncertainties created by COVID-19, disclosure about shutdowns and safety measures against COVID will not help the investors in making an informed assessment about the company’s financial position. Timely and adequate information about company’s current operational and financial status with future plans to address the effects of COVID-19 will better equip the investors to make an investment decision. Therefore, the Advisory should not be considered as a mere recommendation of SEBI as a transparent communication by the companies will allow the investors and other stakeholders to evaluate current and expected impact of COVID-19 on company’s businesses, financial and operating conditions and future estimated performance.
Other reading materials on the similar topic:
- ‘Listed company disclosures of impact of the Covid Crisis: Learning from global experience’ can be viewed here
- ‘Resources on virtual AGMs’ can be viewed here
- ‘COVID-19 – Incorporated Responses | Regulatory measures in view of COVID-19’ can be viewed here
- Our other articles on various topics can be read at: http://vinodkothari.com/
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The Hon’ble National Company Law Appellate Tribunal (‘NCLAT’), vide its order dated 22nd May, 2020 set aside the directions issued by the Hon’ble Principal Bench for impleadment of Ministry of Corporate Affairs (‘MCA’) as a respondent-party to all applications filed under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016.
This comes in light of the order dated 22nd November, 2019 of the Hon’ble National Company Law Tribunal, Principal Bench of New Delhi (‘NCLT’/ ‘Principal Bench’), in the matter of Oriental Bank of Commerce v. Sikka Papers Ltd. & Ors, wherein the Hon’ble NCLT directed that “…In all cases of Insolvency and Bankruptcy Code, and Company Petition, the Union of India, Ministry of Corporate Affairs through the Secretary be impleaded as a party respondent so that authentic record is made available by the officers of the Ministry of Corporate Affairs for proper appreciation of the matters..”(‘Impugned Directions’). The said requirement was directed to be made applicable in all benches of NCLT, pan-India.
Shaifali Sharma | Vinod Kothari and Company
In March, 2019, the RBI with an objective to attract long-term and stable FPI investments into debt markets in India introduced a scheme called the ‘Voluntary Retention Route’ (VRR). Investments through this route are in addition to the FPI General Investment limits, provided FPIs voluntarily commit to retain a minimum of 75% of its allocated investments (called the Committed Portfolio Size or CPS) for a minimum period of 3 years (retention period).However, such 75% of CPS shall be invested within 3 months from the date of allotment of investment limits. Recognizing the disruption posed by the COVID-19 pandemic, RBI vide circular dated May 22, 2020, has granted additional 3-months relaxation to FPIs for making the required investments. The circular further addresses the questions as to which all FPIs are covered under this relaxation and how the retention period will be determined.
This article intends to discuss the features of the VRR scheme and the implications of RBI’s circular in brief.
What is ‘Voluntary Retention Route’?
RBI, to motivate long term investments in Indian debt markets, launched a new channel of investment for FPIs on March 01, 2019 (subsequently the scheme was amended on May 24, 2019), free from the macro-prudential and other regulatory norms applicable to FPI investment in debt markets and providing operational flexibility to manage investments by FPIs. Under this route, FPIs voluntarily commit to retain a required minimum percentage of their investments for a period of at least 3 years.
The VRR scheme was further amended on January 23, 2020, widening its scope and provides certain relaxations to FPIs.
Key features of the VRR Scheme:
- The FPI is required to retain a minimum of 75% of its Committed Portfolio Size for a minimum period of 3 years.
- The allotment of the investment amount would be through tap or auctions. FPIs (including its related FPIs) shall be allotted an investment limit maximum upto 50% of the amount offered for each allotment, in case there is a demand for more than 100% of amount offered.
- FPIs may, at their discretion, transfer their investments made under the General Investment Limit, if any, to the VRR scheme.
- FPIs may apply for investment limits online to Clearing Corporation of India Ltd. (CCIL) through their respective custodians.
- Investment under this route shall be capped at Rs. 1,50,000/- crores (erstwhile 75,000 crores) or higher, which shall be allocated among the following types of securities, as may be decided by the RBI from time to time.
- ‘VRR-Corp’: Voluntary Retention Route for FPI investment in Corporate Debt Instruments.
- ‘VRR-Govt’: Voluntary Retention Route for FPI investment in Government Securities.
- ‘VRR-Combined’: Voluntary Retention Route for FPI investment in instruments eligible under both VRR-Govt and VRR-Corp.
- Relaxation from (a) minimum residual maturity requirement, (b) Concentration limit, (c) Single/Group investor-wise limits in corporate bonds as stipulated in RBI Circular dated June 15, 2018 where exposure limit of not more than 20% of corporate bond portfolio to a single corporate (including entities related to the corporate) have been dispensed with. However, limit on investments by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of a corporate bond except for investments by Multilateral Financial Institutions and investments by FPIs in Exempted Securities.
- FPIs shall open one or more separate Special Non-Resident Rupee (SNRR) account for investment through the Route. All fund flows relating to investment through the VRR shall reflect in such account(s).
What are the eligible instruments for investments?
- Any Government Securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (T-bills) as well as State Development Loans (SDLs);
- Any instrument listed under Schedule 1 to Foreign Exchange Management (Debt Instruments) Regulations, 2019 other than those specified at 1A(a) and 1A(d) of that schedule; However, pursuant to the recent amendments, investments in Exchange Traded Funds investing only in debt instruments is permitted.
- Repo transactions, and reverse repo transactions.
What are the options available to FPIs on the expiry of retention period?
|Continue investments for an additional identical retention period|
|Liquidate its portfolio and exit; or
|Shift its investments to the ‘General Investment Limit’, subject to availability of limit under the same; or
|Hold its investments until its date of maturity or until it is sold, whichever is earlier.|
Any FPI wishing to exit its investments, fully or partly, prior to the end of the retention period may do so by selling their investments to another FPI or FPIs.
3-months investment deadline extended in view of COVID-19 disruption
As discussed above, once the allotment of the investment limit has been made, the successful allottees shall invest at least 75% of their CPS within 3 months from the date of allotment. While announcing various measures to ease the financial stress caused by the COVID-19 pandemic, RBI Governor acknowledged the fact that VRR scheme has evinced strong investor participation, with investments exceeding 90% of the limits allotted under the scheme.
Considering the difficulties in investing 75% of allotted limits, it has been decided that an additional 3 months will be allowed to FPIs to fulfill this requirement.
Which all FPIs shall be considered eligible to claim the relaxation?
FPIs that have been allotted investment limits, between January 24, 2020 (the date of reopening of allotment of investment limits) and April 30, 2020 are eligible to claim the relaxation of additional 3 months.
When does the retention period commence? What will be the implication of extension on retention period?
The retention period of 3 years commence from the date of allotment of investment limit and not from date of investments by FPIs. However, post above relaxation granted, the retention period shall be determined as follows:
|*Unqualified FPIs||Retention period commence from the date of allotment of investment limit
|**Qualified FPIs opting relaxation
|Retention period commence from the date that the FPI invests 75% of CPS|
|Qualified FPIs not opting relaxation
|Retention period commence from the date of allotment of investment limit|
*Unqualified FPIs – whose investments limits are not allotted b/w 24.01.2020 and 30.04.2020
**Qualified FPIs to relaxation – whose investments limits not allotted b/w 24.01.2020 and 30.04.2020
What will be the consequences if the required investment is not made within extended period of 3 months?
Since no separate penal provisions are prescribed under the circular, in terms of VRR Scheme, any violation by FPIs shall be subjected to regulatory action as determined by SEBI. FPIs are permitted, with the approval of the custodian, to regularize minor violations immediately upon notice, and in any case, within 5 working days of the violation. Custodians shall report all non-minor violations as well as minor violations that have not been regularised to SEBI
The COVID-19 disruption has adversely impacted the Indian markets where investors are dealing with the market volatility. Given this, FPIs are pulling out their investments from the Indian markets (both equity and debt). Thus, relaxing investments rules of VRR Scheme during such financial distress, will help the foreign investors manage their investments appropriately.
You may also read our write ups on following topics:
Relaxations to FPIs ahead of Budget, 2020, click here
Recommendations to further liberalise FPI Regulations, click here
RBI removes cap on investment in corporate bonds by FPIs, click here
SEBI brings in liberalised framework for Foreign Portfolio Investors, click here
For more write ups, kindly visit our website at: http://vinodkothari.com/category/corporate-laws/
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Major reforms have been introduced for the MSMEs, providing the required boost to the sector. MSMEs have recently been put into the limelight with several regulatory and financial reforms concerning them.
We have put up this page to provide the access to all relevant resources on the subject at one place, along with our analysis. Hope that the readers find it useful.