| 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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