Board meeting – Vinod Kothari Consultants

(corplaw@vinodkothari.com)

SEBI in its Board Meeting held on 29^th September, 2020 has approved amendments in various Regulations which shall come into effect by way of amendment in the respective Regulations. The brief highlights of the same are as below:

Strengthening role of Debenture Trustees

SEBI, in the recent past, has brought in certain amendments in order to strengthen the role of DTs so as to protect interest of debenture holders. The latest amendment in the existing DT Regulations was made by SEBI (Debenture Trustees) (Amendment) Regulations, 2017 which aimed to streamline provisions of DT Regulations with the CA, 2013 and other SEBI Regulation and also to enable DTs to secure the interest of investors.

The Board Meeting approved that DTs shall convene meeting of debenture holders for enforcement of security, joining of inter-creditor agreement (ICA) etc. The requirement of forming a ICA comes from the RBI Prudential Framework for Resolution of Stressed Assets and the Resolution Framework for COVID-19 related stress. By virtue of these notifications, there is a mandatory requirement of Inter-Creditor Agreements (ICA) by the lending institution governed by the RBI, for the purpose of invocation of a resolution plan of any defaulting borrower. The aforesaid frameworks recognize that even other lenders to the borrower which are other than the lending institutions, such as debenture trustee, may sign the ICA, if they so desire. In line with the same, SEBI is proposing the DTs to convene meeting for joining ICA to safeguard the interests of the debenture holders.

Keeping the same intent, DTs are also bestowed with the responsibility of monitoring the asset cover for debentures and obtain half yearly certificate from statutory auditor. The Board approved following additions to the responsibility of DTs:

DTs to exercise independent due diligence of the assets of the company on which charge is being created
DTs shall convene meeting of debenture holders for taking required action for enforcement of security, joining the inter-creditor agreement etc.
Carry out continuous monitoring of asset cover including obtaining mandatory certificate from statutory auditor on half yearly basis
Creation of recovery expense fund at the time issuance of debt securities for utilisation in the event of default or to take legal action to enforce the security.

Pursuant to the text of the Board Meeting, it seems that SEBI is going to introduce a new concept of ‘recovery expense fund’ for creating fund for expenses that might be required to recover debts due to debenture holders in case of default.

Apart from the aforesaid, the existing provisions of the Companies Act, 2013 does have a requirement of transferring funds by specified class of companies to Debenture Redemption Reserve (‘DRR’) and also transfer certain amount of funds for debentures maturing during the next year to specified account/securities (‘hereinafter referred to as DRF’). However, these funds/reserves are for recovery of debts, whereas, recovery expense fund is a pool of fund for incurring expenses for recovering debts by DTs. Nevertheless, introduction of a separate fund requirement for any event of default seems to be a new compliance burden on companies. Further, whether such fund has to be created as an internal book entry transfer within the company like in case of DRR or transfer it outside the company in trust of the DT, is something we have to look for. Definitely, companies like NBFCs and HFCs which are frequently involved in raising funds through debentures shall have a new compliance to be ensured, if such amendment is made effective.

Amendments in SEBI (Delisting of Equity Shares) Regulations, 2009

SEBI (Delisting of Equity Shares) Regulations 2009 provides for voluntary delisting of equity shares from stock exchanges which provide the overall framework for voluntary delisting by a promoter or acquirer through a process referred to as Reverse Book Building. The Board Meeting has approved of exempting listed subsidiary from complying with the book building process if following conditions are met:

The listed subsidiary is a wholly owned subsidiary of the company by virtue of scheme of arrangement
The listed subsidiary is a subsidiary of the company for a minimum of 3 years
The listed subsidiary and the holding company should be in the same line of business
The shares of listed subsidiary and the holding company should be listed on recognised stock exchange for a minimum of 3 years
Votes casted by public shareholders of listed subsidiary for delisting of securities should be 2 times in favour of the number of votes cast against it.
The company should be compliance of provisions relating to scheme of arrangement under SEBI (LODR) Regulations, 2015

The process of Reverse Book Building is a price discovery mechanism in order to provide a price on which the public shareholders can exit from the company. Accordingly, the intent of exempting a wholly-owned listed subsidiary from undergoing the said mechanism seems logical by virtue of the fact that such a company will have a sole shareholder.

Disclosure by Informants under PIT Regulations

SEBI vide SEBI (PIT) (Third Amendment) Regulations, 2019 had introduced Chapter III under the existing PIT Regulations providing for a mechanism to submit by a person, a voluntary information with SEBI about alleged violation of insider trading laws. The procedural requirements to be followed by an informant while submitting the information with SEBI have been provided in the said chapter along with the format of the disclosure prescribed under Schedule D of the Regulations.

The aforesaid provisions however do not provide for any limitation period for submitting such an information with SEBI. Accordingly, SEBI has decided to provide for a time period of 3 years. The manner of calculating the said period shall come clear only once the amended text is released. Further, the Meeting approved to make changes in Schedule D of the Regulations so as to require informants to specifically disclose details such as:

Details of securities;
Trades by suspect;
UPSI based on which insider trading is alleged;

Disclosure of forensic audit by listed entities

SEBI has in the past ordered forensic audit for various companies, however, there was no requirement of disclosing the same by the company to the investors at large, except if considered material by the company under Part B of Schedule III of SEBI (LODR) Regulations, 2015. Accordingly, SEBI at its Board Meeting has decided to direct companies to disclose initiation and submit report of forensic audit along with comments of management to the stock exchange without applying any test of materiality.

Though it is not clear as of now, however, it seems that SEBI will introduce this disclosure requirement as an amendment to Schedule III Part A Para A of SEBI (LODR) Regulations, 2015 as it is to be disclosed by the company without applying any test of materiality i.e. deemed to be material.

SEBI intends to bring transparency for investors especially public investor holding larger interest in listed entities to have information about lapses in the company, which otherwise was not being disclosed by the company. SEBI requires every listed entity to disclose following w.r.t. forensic audit:

Initiation of forensic audit along with name of entity initiating forensic audit along with reasons, if any
Final forensic audit report on receipt by the listed entity along with comments of the management.

Nitu Poddar and Ambika Mehrotra

corplaw@vinodkothari.com

As one maybe aware that during this period of disruptions caused by COVID 19, several relaxations have ben provided by the Ministry of Corporate Affairs (MCA) vide its Notifications dated 19th March, 2020[1] and March 24, 2020[2] and the Securities and Exchange Board of India (SEBI) vide its Circular dated March 19, 2020^[3]. Further the Institute of Company Secretaries of India has also issued its Guidance dated April 4, 2020^[4] on the applicability of Secretarial Standards on board and general meetings.

A snapshot of the relaxations granted by the above authorities wrt board meetings are:-

S. No	MCA for Companies Act, 2013	SEBI for LODR
1.	Time gap for conducting board meetings relaxed to 180 days from present 120 days – for the first two quarters of FY 2020-2021 i.e BM from 24^th March 2020 till 30^th September 2020 can be conducted with a larger gap of 180 days	Time gap for conducting board and audit committee meeting has been relaxed without any upper limit – for meetings held / proposed to be held between December 1, 2019 and June 30, 2020. However, it is to be ensured that there are 4 meeting of board and audit committee held during the FY.
2.	Board meetings can be held through video conferencing or other audio visual means for all matters including the otherwise restricted matters mentioned in Rule 4 of the MBP Rules.	The time limit for submitting the annual financial results with the stock exchange has also been extended to June 30 from May 15 (for unaudited results) and May 30 (for audited results)
3.	For the FY 2019-20, a ID meeting per se as per Schedule VI has been relaxed. If the IDs so deem necessary, the views may be shared through telephone / email or any other mode of communication

On close perusal of the relaxations granted by MCA and SEBI, it is understood that the relaxations are different for a listed and an unlisted company and the quarter for which the meeting pertains to. The major points to be kept in mind with respect to board meetings are:

There has to be minimum 4 meetings in the FY;
The maximum gap between two board meeting cannot be more than 180 days (stricter of the provisions to be applicable – MCA allows maximum time gap of 180 days and SEBI does not prescribes any maximum time gap.

Mostly, listed companies might have had their last board meeting held in the month of Feb, 2020. In that case, the next meeting can be held within 180 days but before 30^th June, 2020 since that is the last date of filing financial results for Q4 of FY 2019-20 for both equity and debt[5] listed companies.

It is to be noted that the debt listed companies are required to make half-yearly intimation of financial result u/r 52 of LODR. However, where a debt-listed company is a subsidiary / joint venture or associate of an equity listed company, it needs to prepare and gets its results approved quarterly for the purpose of consolidation.

For unlisted company, the maximum time gap of 180 days is extended till all board meeting to be held before September 30, 2020.

The relaxation is only with respect to the approval of financial results of Q4 of FY 19-20 which is till June 30, 2020. There is no relaxation w.r.t the approval of financial results for Q1 of FY 20-21. Accordingly, the same will have to be held within 45 days of the end of the quarter; i.e by 14^th August, 2020.

In view of the same, we have put together the timelines wrt listed and unlisted companies in the table below:-

BMs to be held/held during the quarter	MCA Relaxation	SEBI Relaxation	Equity Listed	Debt Listed	Unlisted
FY 2019-20 – Q4	Maximum time gap between two meetings can be 180 days	Results of Q4 to be approved latest by June 30, 2020	BM to be held within June 30, 2020	BM to be held within June 30, 2020	Maximum time gap between two meetings can be 180 days
FY 2020-21 – Q1	Maximum time gap between two meetings can be 180 days	No relaxation currently for approving results of Q1	BM to be held within August 14, 2020	If the financial results are consolidated with an equity listed company – BM to be held within August 14, 2020 If the financial results are not consolidated with an equity listed company – will have to ensure that the gap between two board meeting is not more than 180 days
FY 2020-21 – Q2	Maximum time gap between two meetings can be 180 days	No relaxation currently for approving results of Q2	BM to be held within November 14, 2020