SEBI LODR amendments: Minority say in independent directors, added regulations for debt issuers

Pammy Jaiswal | Partner | Vinod Kothari and Company (pammy@vinodkothari.com)

Background

Following the various recommendations provided by the Primary market Advisory Committee (PMAC), SEBI in its board meeting held on 30^th September, 2022 discussed several proposals including the agenda to review the process for independent directors’ (IDs) appointment, re-appointment or removal,  introducing the need to appoint a monitoring agency for overseeing the utilisation of the issues proceeds from the preferential issue and the qualified institutional placements (‘QIP’), requirement of obtaining NoC from SEBI for schemes of arrangement involving such companies which have listed their Non-Convertible Securities (‘NCS’) and several other changes dealing with disclosures and financial results for NCS listed entities. Our snippet covering the aforesaid board decisions may be viewed here.

These proposals have been notified, as the SEBI Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2022 (LODR 6^th Amendment Regulations) have come into effect vide Notification dated 14^th November, 2022 (‘Effective Date’). Our snippet covering the amendments may be viewed here.

For the ease of the readers, we have provided a snapshot of the major heads of the changes along with the applicability information:

Regulation No.	Major head for the amendment	Applicable on
Insertion of proviso to Reg 25 (2A)	Rationalisation of the appointment and removal process for the IDs	–       All equity listed entities –       High Value Debt Listed Entities
Amendment to Reg 32(6) and (7)	Introducing the requirement of monitoring agency in case of preferential issue and QIP	–       All equity listed entities
Insertion of proviso in Reg 52(1)	Clarifying the timeline for the submission of the financial results	Entities which have listed their non-convertible debentures, non-convertible preference shares (‘NCS’)
Substitution of provio to (d) of Reg 52(2)	Clarifying the submission of financial results where the same is required to be audited by the C&AG
Substitution of Reg 52(4)	Disclosure of various financial ratios
Substitution of Reg 52(7) and insertion of Reg 52(7A)	Simultaneous submission of utilisation certificate of the proceeds from any issuance as well as statement of deviation in the use, as per a specified format
Insertion of proviso to Reg 52(8)	Clarification on publication of consolidated financial results in case of submission of both standalone and consolidated results to the exchange
Insertion of Reg 59(A)	Requirement of obtaining prior NoC from the stock exchanges before filing scheme of arrangement with the NCLT
Insertion of proviso to Reg 61A(3)	Clarifying that the unpaid and unclaimed amount of such listed entities which do not fall within the meaning of a ‘Company’ under the CA, 2013 to be transferred to IPEF
Insertion of Reg 94A	Clarificatory provisions with respect to duties and obligations of the stock exchanges once the receipt of schemes of arrangement	–       Obligations of the recognised stock exchanges
Substitution of Schedule XVI	Changes in the schedule of fees to be submitted by the listed entities upon submission of the scheme of arrangement so as to introduce the fee payable by NCS listed entities	–       All equity listed entities –       Entities which have listed their NCS

With this, now let us discuss each of the amendments in detail to understand the possible impact and action requirements on the part of the entities.

I. Introduction of minority-centric appointment and removal requirements for IDs

It is important to note that under the CA, 2013, the first-time appointment of an ID follows the same approval threshold (ordinary majority) as an ordinary director, However, on re-appointment of the ID, a special resolution is required. Special resolution is also required at the time of removal for the ID appointed for the second term.

LODR Regulations took a different and more stringent stand, and made an amendment in Reg 25, effective from 1^st January, 2022, to require special resolution for appointment, re-appointment as well as removal. The same can be read at Revised Regulatory Framework for IDs of listed entities in India.

Dual Voting Requirement

In light of this, let us understand where does the concern of the regulator, addressed by the present amendment, lie. If a special majority is required for inducting someone as an ID, the resolution may be blocked by shareholder(s) holding 25% or more of the voting capital. It is seldom such that the promoters and promoter group do not hold 25% – therefore, if the ID being proposed is not suiting the convenience or preference of the promoters, they may be able to block the appointment.

Hence, the proposed rule of dual voting is as follows:

• If the resolution for appointment of an ID has not been passed by special majority, then
• it may still be taken as passed, if both the following conditions are satisfied:
  • there is an ordinary majority of all the shareholders, including the promoters and promoter group
  • there is an ordinary majority of the public shareholders, that is, disregarding the voting of the promoters and promoter group.

This gives a new credence to the views of the public shareholders – the public shareholders’ views cannot be cowed down by the promoter shareholders (unless, of course, the special resolution itself has approved it in the first place). Likewise, the resolution will still require the concurrence of the complete mass of shareholders, as no resolution can completely disregard the rule of ordinary majority, an essential rule of corporate democracy.

Minority will exclude any voting by the promoters so as to keep the appointment completely away from any undue promoter influence. Similarly, for any ID who has been appointed using this dual voting will be able to be removed after applying the same voting test. To understand this better, let us take some examples: –

Case 1

Voting by	Promoters	Public  Institutional	Public – SG/ CG	Public – Non-Institutional	Total
% of total valid votes in favor	50%	11%			61%
% of total valid votes against	0	25%	5%	9%	39%
Whether resolution passed u/r 25 (2A)?	SR not passed;OR passed by all shareholders;OR not passed by public shareholders (11% in favor, 39% against)Resolution not passed.

Case 2

Voting by	Promoters	Public  Institutional	Public – SG/ CG	Public – Non-Institutional	Total
% of total valid votes in favor	8%	42%			50%
% of total valid votes against	15%	10%	5%	20%	50%
Whether resolution passed u/r 25 (2A)?	SR not passed;OR not passed by all shareholders;OR passed by public shareholders (42% in favor, 35% against)Resolution not passed.

Case 3

Voting by	Promoters	Public  Institutional	Public – SG/ CG	Public – Non-Institutional	Total
% of total valid votes in favor	10%	39%			49%
% of total valid votes against	5%	26%	10%	10%	51%
Whether resolution passed u/r 25 (2A)?	SR not passed; OR not passed by all shareholders; OR passed by public shareholders (39% in favor, 46% against)Resolution not passed.

Case 4

Voting by	Promoters	Public  Institutional	Public – SG/ CG	Public – Non-Institutional	Total
% of total valid votes in favor	30%	23%			53%
% of total valid votes against	27%	13%	3%	4%	47%
Whether resolution passed u/r 25 (2A)?	SR not passed; OR passed by all shareholders; OR passed by public shareholders (23% in favor, 20% against)Resolution passed.

Gaps under the regulatory framework between the Listing Regulations and the CA, 2013

After the introduction of this amendment, there will be a gap in the requirements of the Listing Regulations and that under the Companies Act, 2013 (‘CA, 2013’) as is reproduced hereunder:

Provisions in connection with	Requirement under the CA, 2013	Requirement under the Listing Regulations	Impact and remarks
Appointment of an Independent Director (1st Term)	Pass an OR	Pass an SR. If SR not passed then the voting needs to be counted in the manner to check if it satisfies the dual conditions: Passing of OR; and Majority of minority who have voted.	Listing Regulations are stricter since it talks about passing an SR.   However, the new requirement will now enable considering the fulfilment of the ordinary majority as well as the majority of the minority to allow deemed appointment of the ID
Re-appointment of an Independent Director (2nd Term)	Pass an SR.	Pass an SR.	Logically, the requirement of special majority becomes all the more important in case of reappointment, because that is where there is a benefit of hindsight of the performance of the ID during her/his first term. In case of re-appointment, both the Listing Regulations and the CA, 2013 require similar resolutions to be passed. However, if similar changes were proposed for re-appointment, then as mentioned in the SEBI board meeting agenda, there will be a conflict between, CA, 2013 and the Listing Regulations.   Hence, as also acknowledged by SEBI, there will be a gap between the provisions of the CA, 2013 and the Listing Regulations. SEBI, in its meeting has suggested the MCA to introduce similar amendments under the CA, 2013 as far as re-appointment is concerned.
Removal of an Independent Director	First term – Pass an OR Second Term – Pass an SR	Both the terms, pass an SR.   For IDs which have been appointed based on dual voting principle, their removal will also need to be passed likewise as in case of appointment.	Here again, while the removal requirements for the first and the second term is different under both the statutes, however, the introduction of the fulfilment of the dual voting conditions in case of failure to pass an SR will again leave a regulatory arbitrage between the CA, 2013 and the Listing Regulations.   Nevertheless, in case of removal, Listing Regulations will be considered stricter as far as the removal in case of first term is considered since it requires an SR irrespective of the term and also require the fulfilment of the dual voting conditions in case SR is not passed.

A snapshot of the amendments pertaining to IDs’ appointment can be accessed here. 

II. Introducing the requirement to appoint a monitoring agency in cases of preferential issue and QIP

One of the discussions that SEBI considered was the requirement of a monitoring agency even in cases of preferential issues and QIP of specified securities by the listed entities. The changes for requiring the appointment of a monitoring agency have been inserted under the SEBI (ICDR) Regulations, 2018 (Regulation 164A) following which corresponding changes have been made under the Listing Regulations.

The need for appointment and reporting by monitoring agency has been introduced in cases where the issuance size is more than 100 crores for issuance of equity shares and convertible securities.

Further, regulation 32(6) and (7) requires submission of the report from such a monitoring agency to the stock exchange within 45 days  of the end of each quarter and needs to be placed before the audit committee as soon as it is received. The erstwhile requirement under these regulations was limited to the rights issue and public issue.

This requirement may be cumbersome for the listed entities considering the frequency of such issuances. Having said that, the need to appoint a monitoring agency has not been extended to debt security issuances, while the need to submit the utilisation certificate as well as the deviation statement in the format prescribed by SEBI is also there in case of NCS listed companies.

III. Clarificatory changes for submission of financial results by an NCS listed entity

Timeline for submission of financial results for the last quarter

The timeline for submission of financial results for NCS listed entities for the last quarter has been explicitly mentioned provided for 60 days from the end of the last quarter. The same is in line with the timeline provided for equity listed entities.  

Submission of annual financial results for those companies whose accounts are audited by the C&AG in case of PSUs

The erstwhile requirement in case of submission of annual audited standalone and consolidated financial results was a two step process whereby the first level of audit was done by any auditor appointed by the C&AG (submission time was 60 days from the end of the FY) and then once the audit by the C&AG was completed, the said financial results was again submitted to the stock exchanges.

Pursuant to the changes, such listed entities can submit unaudited results post the limited review either by the C&AG or the auditor appointed by the C&AG or any practising chartered accountant within the same timelines as was there earlier and thereafter submit the audited financial results within the same timelines.

Miscellaneous changes

Submission of statement of assets and liabilities and cash flow statement for the half year by way of a note to the financial results at the end of the half year.

Disclosure of various financial and accounting ratios by the listed entity to the stock exchanges along with filing of quarterly and annual financial results. While the requirement to submit sector specific equivalent ratios has been omitted, however, the same does not seem to make any impact since other ratio/equivalent financial information, as may be required to be maintained under applicable laws, will still be required to be disclosed.

IV.  Statement for utilisation of proceeds and statement of material deviation(s) to be filed along with the financial results

As against the requirement of submitting the statement of utilisation of proceeds within 45 days from the end of the quarter, the new requirement is to submit the same along with the financial results in the format specified by SEBI. Further, as against the requirement of informing on the material deviations where there was no specific timeline, the new requirement is to intimate the material deviation(s) from the objects of issue and give it till such time either the amount has been fully utilised or the object/ purpose has been achieved, the prescribed format.

V. Publication of consolidated financial results in newspaper by NCS listed entities

NCS listed entities will be required to publish only the consolidated results where it has submitted both the standalone and consolidated financial results, i.e. at the time of submission of annual consolidated financial results.

VI.  Changes proposed in relation with schemes of arrangement by NCS listed entities

The inspiration for these amendments is to put debt listed entities on a similar pedestal as equity listed entities when it comes to schemes of arrangement. Schemes of arrangement may result into shifting of the liability to debt holders to a new entity, or, further still, may even affect the terms of issue, terms of redemption etc. While there is an inherent protection in sec. 230 of the CA, 2013, but SEBI has considered to make schemes of arrangement by debt listed entities pass through the process of vetting by the stock exchanges. The detailed procedure has been notified vide circular dated 17th November, 2022. Our snippet providing a quick view of the same can be accessed here.

Filing of draft scheme of arrangement along with non-refundable fees with the stock exchange

Similar to the provisions of Reg. 37 of LODR as applicable in case of an entity which has listed its specified securities, every listed entity which has listed its NCS shall, before filing of scheme of arrangement under section 230-234 of the CA, 2013 relating to merger or demerger or  under section 66 of the CA, 2013 relating to reduction of share capital before the NCLT, shall file the draft scheme of arrangement with the stock exchanges along with a non-refundable fees for the purpose of obtaining an NoC from them which shall be valid for a period of six months.

Non applicability of the said provisions in case of restructuring proposed as a part of resolution plan by NCLT

Similar to the provision of reg. 37(7) of LODR, the requirements with respect to filing of scheme of arrangement with the Stock Exchange is not applicable if the same is pursuant to the approval of resolution plan by NCLT u/s 31 of the insolvency and Bankruptcy Code, 2016 provided the approve resolution plan is submitted to the Stock Exchange within one day of the approval of the resolution plan.

Timeline for submission of no objection letter by the Stock Exchange to the Board and the listed entity

Unlike in case of the entities which has listed its specified securities where the timeline for submission of no objection letter to the Board has been prescribed to be within 30 days from the receipt of the draft scheme of arrangement or within 7 days from the date of receipt of clarifications from the listed entity, in case of listed entities which has listed its NCS, no specific time line has been provided.

Again, in case of submission of no objection letter to the listed entity, no timeline is provided in case of entities which have listed its NCS in contrast to a timeline of seven days from the date of receipt of comments from the Board which is provided in case of listed entities which have listed its specified securities.

Conclusion

The amendments are a mixed bag – as regulations continue to become stricter for debt listed entities, and as the process for appointment of IDs continue to become more and more minority-centric, it is time once again to think – whether CA 2013 is still the law for listed entities, or does it make sense to leave corporate governance provisions of the CA, 2013 to SEBI and let SEBI run the same? Otherwise, the gaps in the two continue to baffle practitioners.