Getting material on “material” events and information

SEBI issues consultation paper on Reg. 30 of LODR Regulations 

• Payal Agarwal, Assistant Manager (payal@vinodkothari.com) 

[This version: 15th November, 2022]

The importance of transparency and timely dissemination of material information for a listed entity needs no emphasis, since these events and information have a direct bearing on the price discovery of the securities of the listed entities and the investors’ decisions. The intent of regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) is to ensure seamless flow of information; the Regulation is complemented by Schedule III thereto, which provides an indicative list of the events or information in a listed entity that may be considered “material” and thereby, requires prompt disclosure by way of intimations to the stock exchange(s) in which the entity is listed. 

While Para A of Part A of Schedule III specifies the list of information/ events which are “deemed” material, Para B specifies a list of information/ events which are to be tested based on application of guidelines of materiality. These guidelines of materiality are provided in sub-regulation (4) of Reg 30 and are determined on the basis of the policy for determination of materiality (“Materiality Policy”) of the listed entity. The Materiality Policy of a listed entity plays a prominent role in determining the disclosure practices of a listed entity.

The Consultation Paper, while removing discretion and the scope for non-quantitative tests for determining materiality, also seeks to make several other changes in the requirement for seamless disclosures. Notably, the Consultation Paper proposes a threshold of 2% of turnover, that too, standalone, for the listed entity, as the likely impact of the event or information, whereas, as per our study  “Corporate Governance & material price sensitive information: Need for listed entities to frame effective materiality policy”, most companies either did not have any quantifiable thresholds for determination of materiality, and where they did, the threshold was mostly 10% either on a standalone or on a consolidated basis.

If the proposals in the Consultation Paper are finally implemented, we feel that there will be a lot more events calling for Reg 30 disclosures. Currently, for many companies which have listed their specified securities, it is only the events listed in Para A of Part A of Schedule III which come for disclosure on the exchanges; the rest of the events or developments remain prone to subjectivity and therefore, indecision.

The Consultation Paper will remain open for comments till 27th November, 2022. We provide a gist of the key proposals in the Consultation Paper. 

Key proposals in Consultation Paper 

Quantitative criteria for determination of materiality of an event/ information 

As stated above, apart from the “deemed material events”, the determination of materiality of other events and information depends on the Materiality Policy of the listed entity. Many-a-times, listed entities merely reproduce the regulatory provisions in the Policy, without including specific quantitative tests for determination of materiality. To do away with the unreasonable discretion applied by listed entities, it is proposed to include a quantitative criteria for determining thresholds for carrying out the test of materiality of an event/ information. 

The criteria is based on a combination of turnover, net worth and profit/ loss after tax and is proposed to be such event/ information whose threshold value or the expected impact in terms of value, exceeds the least of the following: 

1. two percent of turnover, as per the last audited standalone financial statements of the listed entity;
2. two percent of net worth, as per the last audited standalone financial statements of the listed entity;
3. five percent of three-year average of absolute value of profit/loss after tax, as per the last three audited standalone financial statements of the listed entity.

Proposed amendments in Materiality Policy of the listed entity

Reg 30(5) of Listing Regulations require the board of directors of the listed entity to authorize one or more KMP for the purpose of determining materiality of an event or information and for the purpose of making disclosures to stock exchange(s). However, there may be instances where the authorised KMPs may not have an immediate access to the material event/ information. Therefore, it is proposed that the Materiality Policy of the listed entity shall be framed in a manner so as to assist employees in identifying potential material event or information which shall be escalated and reported to the relevant Key Managerial Personnel for determining materiality of the event or information and for making disclosure to stock exchange(s). Thereby, it is intended that there will be an organisation-wide sensitisation for upstreaming of material events and information, for notification to the exchanges.

Further, the Materiality Policy may contain tests for materiality in addition to the proposed thresholds specified above, but the same shall not have an effect of diluting any requirements of the Regulations. 

Reduction in timelines for disclosure of material events or information

The extant Regulations require disclosure of material events or information within twenty-four hours from the occurrence of the event/ information. However, at times the disclosures are made at the last hour, prior to which the information already gets circulated publicly through media. Therefore, it is proposed to reduce the timelines for disclosure of certain material events or information to twelve hours instead of existing twenty-four hours. It is proposed that the events/ information emanating from the listed entity itself will be required to be disclosed within the reduced timeline of twelve hours. For other information not emanating within the listed entity itself, the existing timeline of twenty-four hours will continue to be applicable. The proposed timeline for disclosure in details has been provided in Annex-II of the Consultation Paper. 

While the Consultation Paper has rightly pointed out the concern on the avoidance or last minute intimation to the stock exchange, however, it is equally important to understand that there may be situation where the notice of the happening of the event reaches the concerned person/ compliance officer at the eleventh hour for it to proceed with the intimation. In view of the probable hardship to the compliance officers, we suggest that the timeline of 24 hours should be retained for any event / information that is considered as a material event. 

Mandatory verification of market rumours

Reg 30(11) of the Listing Regulations provides a general provision for verification of market rumours by the listed entity. However, to ensure that the listed entities do give heed of such information being disseminated in the market through media or other public sources, it is proposed to mandate verification of such information by the top 250 listed entities presently. 

The proposal is interesting, because, by policy, many companies do not respond to rumours. In fact, given the scattered and completely unfathomable reach of electronic media and social media currently, rumours may be spreading anywhere, and it is practically impossible for a listed entity to respond. 

Clarifications and proposed amendments to Schedule III

The Consultation Paper also seeks to provide clarifications with respect to certain existing line items requiring disclosures in terms of Schedule III of the Listing Regulations. Apart from the same, keeping up with the contemporary requirements and to do away with the information asymmetry, various line items are proposed to be amended/ included in the list of material events/ information under Schedule III. The same has been provided in Annex I of the Consultation Paper. 

Modification to the meaning of “acquisition” 

The term “acquisition” has been explained in sub-para (1) of Para A of Part A of Schedule III. The meaning of “acquisition” is proposed to be modified to link the same with a threshold of turnover (2% of the turnover of the listed entity on a standalone basis). A clarification has been further added that the acquisition would mean acquisition of shares in a newly incorporated entity as well as an existing entity. 

In our view, while the meaning of acquisition for the purpose of disclosures has been linked with the impact on the turnover of the listed entity, the threshold of “five percent of voting rights” of the investee may be considered to be removed. This is so because there may be instances where the subsidiaries/ other investee companies have a very small size, roughly about Rs. 10 lakhs of paid-up share capital. The size of investments held by a listed entity in such investees, does not materially impact the listed entity, considering the size and level of operations of the listed entity. The “investor’s turnover” linked approach seems to be a better approach in determining materiality for the listed entity as compared to the “voting rights in the investee” approach. 

Similarly, the meaning of “sale” has also been included in the explanation in line with the existing meaning of “acquisition”. The same should have also been linked with one or more of the financial parameters of the listed entity as is the case with the proposed meaning of “acquisition”. 

Further, some clarificatory changes have been proposed to include events such as sale/ disposal of the whole or substantially the whole of the undertaking(s), or sale of stake in the associate company. 

Expanding the scope of materiality 

Various clauses of Schedule III are proposed to be amended in a manner so as to disclose the impact created by an action of the “senior management” or the “subsidiary” of the listed entity as well. These include the following – 

Particulars of the disclosure	Currently required for	Proposed to be extended to
Frauds/ defaults by	Promoter or KMP or listed   entity	Director Senior management Subsidiary
Arrest of	KMP Promoter	Senior management Director
Change in	DirectorsKMP Auditor Compliance Officer	Senior management
Reason for resignation	Independent director Auditor	KMP Senior management Director other than independent director
Closure of operations	any unit/division (entirety or piecemeal)	Proposed to be extended to closure of operations of subsidiary
Party to litigation/ dispute	Listed entity KMP Promoter Ultimate person in ultimate control	Subsidiary Director

On a preliminary reading of the proposal, it may seem that the expanded scope will lead to frivolous information making its way to the stock exchanges, however, the underlying thread is that all these events/ information needs to be “material” for the reporting listed entity in order to be reported to the exchanges. 

Revision in ratings

The existing clause of Schedule III requires disclosure of “revision in rating” to the stock exchanges. A clarificatory amendment has been done to include the clause of “new rating” to the same. Further, a noteworthy proposal is the mandate of making disclosure of  a rating even if the same was not requested by the listed entity or the request was withdrawn subsequently. 

It is observed that apart from the revision in rating (upgrade or downgrade), there can be cases of re-affirmation of rating or withdrawal of rating. The Schedule currently does not provide for the explanation of the meaning of “revision”, and therefore, there are varied practices on the same. The decision as to whether the same is required to be disclosed or not, depends on the “materiality” of the said rating. For example, withdrawal of the rating happening due to non-payment of fees, or redemption of the instrument to which the rating pertained, does not seem to be material so as to require disclosure to the stock exchanges. 

Unavailability of the MD/ CEO for fulfillment of roles in the listed entity

A new clause is proposed to be inserted in Para A of Part A of Schedule III which states as below – 

“The Managing Director or the Chief Executive Officer of the listed entity is indisposed or unavailable to fulfil requirements of his/her role in a regular and consistent manner for more than one month.”

This may ideally include instances where the MD/ CEO is not available to look after the affairs of the listed entity as a result of prolonged illness, serious ailments, etc. 

Any announcements made to any form of mass communication media in relation to the listed entity

This is a new insertion proposed to be made to Para A of Part A of Schedule III. It requires disclosure of all such information in relation to the listed entity which is put out to the public through any form of mass communication by the directors, KMPs, Senior management, promoters etc of the listed entity. While a preliminary reading of the proposed clause gives an impression that all forms of communication or announcement put out in public domain is required to pass through the stock exchange route, however, we understand that the underlying characteristic feature of “materiality” still remains the evaluating factor. 

For example, information about a charitable program or some employee welfare programme announced in the media, would not generally be “material” to the listed entity and disclosure requirements should not attract. However, a communication with respect to the impact of an ongoing litigation may still be material to attract the disclosure requirements. In our view, the aforesaid clause should include those communications which are related to the operations of the listed entity. 

Clarification on the meaning of regulatory action 

The existing regulations require disclosure of any regulatory actions taken against listed entities on the basis of the Materiality Policy of the entities. However, the proposed amendment has the impact of shifting “regulatory actions” to the list of “deemed material events”, and disclosure for the same will be required irrespective of any materiality thresholds fixed by the listed entity through its Materiality Policy. 

Documentation : preventive approach to future threats 

As already discussed above, the intent of regulation 30 is to ensure a seamless flow of information that is material to a listed entity. The proposal suggests various insertions/ modifications to the events/information specified under Reg 30. This primarily makes the disclosure requirements more elaborate and comprehensive, but may also result in a brainless dumping of irrelevant and redundant information. There may be instances which are not actually material to the listed entity but still disclosed to the stock exchanges or vice versa. Further, while the KMPs authorised for determination of materiality and making disclosures may change over a period of time, the listed entity being a corporate entity having perpetual succession, may face a claim/notice regarding non-disclosure of an event or information at a future point of time. 

In order to deal with the unlimited possibilities, it is recommended that the listed entities (or authorised KMPs thereto) follow a practice of documentation of all events/information in relation to the listed entity and the basis on which such information has been considered material or not, thereby leading to the disclosure/ non-disclosure of the same. 

Disclosure of cyber security incidents or breaches and loss of data/ documents in quarterly corporate governance report 

Given the significance of data and cyber security, cyber security incidents or breaches and loss of data / documents have become a major concern. However, in view of the vulnerability of the said information, it may not be feasible to make prompt disclosure of the same to the stock exchanges. Therefore, the quarterly corporate governance report in terms of Reg 27 of the Listing Regulations is proposed to be amended to provide adequate disclosures with respect to the same. 

Concluding remarks 

The Consultation Paper is an attempt towards strengthening the disclosure requirements to the stock exchanges and promoting information symmetry and uniformity across the listed entities. The step can surely be termed as stringent, and having an impact of making the compliance more rigid. The proposed materialistic thresholds and a few proposed alterations in the Schedule may seemingly have an impact of providing redundant information on the stock exchanges. However, if connected properly with the thread of materiality, the enhanced disclosures will lead to a better dissemination of significant information to the investors and public at large. The principle that needs to guide the practices of listed entities  is that the information shall be “relevant” and not “redundant”. Too much information often leads to overlooking the relevant information.