2022 Wrapped Up: Regulatory review of corporate law developments
– Payal Agarwal, Assistant Manager (payal@vinodkothari.com)
2022 has been a relatively stable year when it comes to Companies Act, save changes in the forms and filing procedures with increasing online processes, there has been significant traction on the part of SEBI. While Structured Digital Database (SDD) remained the buzzword for the listed entities with the stock exchanges requiring them to submit quarterly compliance certificates, the stress for proper controls on insider trading remained the focal point. For social enterprises, a landmark development was the introduction of the concept of Social Stock Exchanges, which seems to be shortly getting into operational mode.
We have tried to briefly cover the major developments in corporate laws during the year 2022. You may also refer to our brief discussion of the same in this youtube video. For updates relevant to the financial sector including the overseas investment norms, refer 2022 in retrospect: Regulatory activity in the financial sector. You may also refer to our quick round-up of regulatory developments in IBC in the year 2022.
Issue of capital by listed entities[1]
Almost all modes of capital raising by listed entities have been impacted by the series of amendments brought into the ICDR Amendment Regulations, 2018. The first amendment notified in the month of January itself brought amendments to almost all aspects of preferential issuance of securities, be it on valuation and pricing, specificity of purpose of the issue, restrictions in relation to lock-in and pledge of such securities, increased disclosure requirements, or extending applicability of the norms to issuance of convertible loans and instruments too. The amendments had the impact of restricting the permissibility of “consideration other than cash” to mean only swap of securities, with the valuation thereof by a registered valuer.
The requirement of monitoring of use of issue proceeds has been extended to funds raised through QIP and preferential issuances as well, and vide a circular issued by the stock exchange, the funds to be used for general corporate purposes has been limited to a maximum of 25% of the funds raised through such issues.
Timelines for rights issues have been aligned with those under the Companies Act. Further, the timeline for conclusion of trading of “rights entitlements” has been amended from the erstwhile requirement of “4 days” prior to closure of rights offer to “3 working days” prior to closure of offer.
SEBI also brought in stricter regulations in relation to “the objects of the issue” for IPOs, that is, the stated purpose of raising funds, and thereby, also disciplined the utilisation of the issue proceeds. The amended requirement limits the fluid object of issue, viz., general corporate purposes to only 25% of the issue size, and along with funds raised towards un-identified acquisition targets in aggregate, to only 35% of the total issue size. The utilisation also has to be monitored, including the utilisation for the so-called “general corporate purposes”, by the credit rating agencies.
To ensure that the performance indicators provided in the offer documents for IPO and FPO are objective and measurable,, the qualitative statements in abridged prospectus/offer documents have also been mandated to be substantiated with KPIs and other quantitative factors.
Pursuant to a recent amendment, the entities proposing to issue listed securities have been given the option to keep the information-rich DRHP confidential from the public at large until the issuer finds it opportune to proceed with IPO. On receipt of observations from SEBI, the issuer is required to make the updated DRHP-I public for receipt of comments thereon, for a period of at least 21 days. Thereafter, an updated DRHP-II is required to be filed with SEBI again. The issuer may open the IPO within 18 months from the receipt of final observations of SEBI on the DRHP.
Updates to the Listing Regulations
With its avowed objective of strengthening corporate governance in listed entities and investor protection, SEBI brought as many as six amendments Listing Regulations during the year, in addition to various related circulars. Further, the stock exchanges also came up with various guidance notes and circulars, some of which created quite a flutter. .
SEBI introduced stricter norms for appointment/ re-appointment of rejected candidates and provided an alternative appointment and removal mechanism for independent directors. The format of the quarterly shareholding pattern filed by the listed entities was amended towards transparency of information.
While the amended RPT framework[2] was notified on 9th November, 2021, these became applicable w.e.f. 1st April, 2022. Clarifications continued to be issued on the periodicity and manner of obtaining approvals and the stock exchanges also issued guidance notes to that end.
Various initiatives were taken with respect to investor protection and investor convenience. Any request for transfer and transmission or any other corporate action on securities can now be facilitated only through dematerialised mode. The procedure for issuance of duplicate share certificates has been simplified and standardised. An updated SOP for the dispute resolution mechanism was released, and simplified format of investor complaint report.
Contrary to the recommendations made by the Kotak Committee, seemingly under immense pressure from the corporate sector, including PSUs, the requirement of separation of roles of MD and chairman, which was supposed to have become mandatory w.e.f. 1st April, 2022, has been made voluntary.
The NSE Prime listing norms, though released during 2021 itself, have come into effect from 1st July, 2022.
Structured Digital Database and insider trading laws for mutual funds[3]
While the concept of SDD found regulatory recognition back in the year 2019, it was not before 2022 that the listed entities were woken out of sleep to understand the importance of having a proper and well-maintained SDD. It started with the stock exchanges sending separate mails to listed entities, around 4th-5th August, 2022, thereafter, releasing circulars requiring the listed entities to provide a quarterly certificate on the compliance with the SDD maintenance requirements.
The Framework for restricting trading by Designated Persons by freezing PAN at security level during trading window closure for financial results has been notified towards further regulating the probable instances of insider trading.
Insider trading controls were formally and elaborately extended to mutual funds. Further, vide the Amendment Regulations, 2022, provisions have been incorporated in the existing PIT Regulations, 2015 towards regulation of trading by Asset Management Companies and trustees of mutual funds. The same has not been implemented as yet.
Social stock exchanges[4]
The concept of Social Stock Exchanges (SSE) marked its entry in the Indian regulatory framework with the notification of amendments to this effect under the ICDR Regulations, LODR Regulations and AIF Regulations. Further, SEBI also issued a detailed SSE framework for the entities eligible and willing to get registered with the SSEs. The stock exchanges, viz., BSE and NSE also received in-principle approval of SEBI for establishing SSEs as a separate segment within the exchange. The new year is expected to witness a new dawn of “responsible” donations with the operationalisation of SSEs in India. Also, social enterprises will hopefully want to get registered with the social stock exchanges.
Review of provisions of the Companies Act, 2013
The Companies Law Committee (CLC) concluded its review of the existing provisions of the Companies Act and released its report for public comments. The recommendations of the CLC Report touch a wide array of elements under the Act, such as delinking the automatic vacation directorship to corporate defaults, extension of cooling off for independent directors, safeguards against conflict of interest of auditors, disclosure of reasons for resignation of KMPs, etc. Fast track mergers have not really been very well taken; possibly with a view to simplify the approval requirement, the twin tests of special majority of voting rights (for present and voting) and ordinary majority of voting rights (for all existing shareholders) have been proposed, as against the 90% voting requirement as of now. IEPF provisions are proposed to be extended to unpaid monies on buybacks. Some recommendations are expected to de-clog NCLTs by moving the restoration of struck off companies to administrative offices. Recommendations also include setting up of specialised company law Benches of NCLT for dealing with matters of economic importance such as corporate restructuring, and specialised IBC cases or cases involving public interest, etc – all of which may remain pious thoughts unless the appointments to vacant positions in NCLTs are quickly filled up.
Moving further to digitisation, the recommendation permits maintenance of registers in electronic form, and hard-codes the hybrid mode corporate meetings, rather than through the present practice of MCA circulars. . The recommendations also seek restoration of some meaningful provisions of the erstwhile CA 1956, such as non-recognition of trust as shareholders. While some suggestions pertain to ease of compliances and moving towards digitization with respect to certain compliances of a company, others pertain to building a corporate governance framework in alignment with the Listing Regulations, such as formation of risk management committee by prescribed class of companies and mandatory cooling-off period for IDs before accepting managerial positions in companies.
The provisions of CSR continued to evolve with the notification of a web-based form CSR-2 towards transparency of disclosures and the CSR Amendment Rules, 2022 polishing few rough ends left from the 2021 amendments[5].
A very important requirement of compulsory audit trail feature with respect to maintenance of books of accounts in electronic form got deferred and will be applicable w.e.f. 1st April, 2023. Further, the manner of maintaining books of accounts in electronic form has been further amended to require companies to maintain back-up of electronic records in physical servers in India on a daily basis, as opposed to the erstwhile provision of “periodic basis” and details of service provider (if located outside India) to be intimated to ROC on an annual basis.
The procedure for physical verification of registered offices by ROC has been notified in furtherance of the powers provided u/s 12(9) of the Companies Act. The ambit of “small companies” has been broadened with the increase in thresholds of paid-up capital and net worth of small companies.
The NDI Amendment Rules mandated prior approval for foreign investment from countries sharing land borders with India: hence, relevant rules have been amended to require a proposed director, if a national of a country sharing land border with India, to obtain security clearance from the Government (Ministry of Home Affairs) and attach the same with form DIR-2 and DIR-3. Further, various provisions relating to incorporation of companies, compromise and arrangement, appointment of directors etc. witnessed amendments intended towards aligning the same with the NDI Amendment Rules, 2020.
Extending provisions of Companies Act on LLPs
Generally seen as a structure for regulatory arbitrage, the LLP structure has been preferred by various business organisations over the recent years. The regulatory gaps are gradually being plugged up with certain provisions of Companies Act being extended to LLPs such as declaration of significant beneficial owner (SBO), provisions relating to disqualifications and vacancy of office of Designated Persons (DPs), power of inspection and provisions pertaining to restoration of name of struck-off LLP etc. Further, the amended LLP Rules paved the way for decriminalisation of various offences of LLPs.
Amendments pertaining to debt-listed entities
The year also witnessed various amendments in the regulatory framework applicable to the debt-listed entities, some of which were in the nature of clarifications, while others attracted actionables on part of the listed entities. The most important of these is the regulation of online bond platforms. To this effect, the ILNCS Regulations have been amended to bar the intermediaries from facilitating transactions in listed debt securities without a stock broker licence, and the regulatory framework for online bond platform providers has been notified. Certain amendments have been notified to the EBP mechanism and a further cap has been introduced to the maximum number of ISINs that can mature in a year. SEBI has permitted stockbrokers registered under the debt segment of the stock exchanges to place and seek bids on behalf of their clients through the RFQ Platform to enable wider participation.
A Distributed Ledger Technology (DLT) has been introduced towards recording and monitoring of security created on the secured non-convertible securities and monitoring of covenants thereof. Enhanced guidelines have also been issued with respect to monitoring and due diligence by debenture trustees. Amendments have also been made with respect to filing of schemes of arrangement by debt-listed entities.
The various recent amendments pertaining to listed debt securities and long term bond market have been collated by us and can be accessed at Recent changes in the regulatory framework for the long-term bond market.
What to look for in 2023?
Advancing towards the new year, there are various compliances that require attention of the listed entities.
- For many of the entities identified as Large Corporate Borrowers (LCBs), the period ending March 2023 will mark the end of the first 2 years’ block of mandatory compliance with the framework, and the failure to comply with the requirements will attract monetary penalties.
- The corporate governance provisions under the Listing Regulations, that are currently applicable on High Value Debt Listed Entities on a “comply or explain” basis, will become mandatorily applicable w.e.f. 1st April, 2023.
- Certain provisions of the amended RPT framework under the Listing Regulations also become applicable to the listed entities w.e.f. 1st April, 2023. This, importantly, includes the “purpose and effect” test for identification of related party transactions, and reducing the threshold of shareholding from 20% to 10% for being reckoned as a related party. A lot more transactions done by subsidiaries of listed entities may fall within the caption of “material transactions”.
- FY 2022-23 will be the first year for mandatory reporting of Business Responsibility and Sustainability Report (BRSR) by top 1000 listed entities.
- The revised cap on maximum number of ISINs that can mature in a year will be applicable w.e.f. 1st April, 2023.
- Further, we expect social stock exchanges to be operationalised, and we expect significant interest from social enterprises to list therein, not so much for the purpose of raising responsible contributions, but more for aligning themselves with the discipline and disclosure requirements of an SSE listed entity.
Further, SEBI in its board meeting held on 20th December, 2022 has approved amendments to the Buyback Regulations, ILNCS Regulations towards raising sustainable finance with safeguard against greenwashing, appointment of nominee directors, amendments pertaining to REIT, InVITs, mutual funds etc.
A major theme for listed entities may be the mandatory disclosures for material events and developments. A consultation paper has already been issued on the review of disclosure requirements of material events and information under the Listing Regulations and therefore, Reg 30 read with Schedule III thereto is also expected to undergo amendments shortly.
We expect another important regulatory theme to be climate change. On the ESG front, regulations are expected on the ESG rating providers. With the Parliamentary approval on the Energy Conservation Amendment Bill, the carbon trading markets may also commence operations shortly in India on a national level soon. Since the RBI has also released a discussion paper on TCFDs, we expect that financial entities may soon be required to make disclosures on climate risk. We hope this may contribute a penny to the lofty cause of mitigating climate change.
[1] https://vinodkothari.com/2022/01/amendments-in-icdr-public-issues-preferential-allotments/
[2] Our resources on RPTs – https://vinodkothari.com/article-corner-on-related-party-transactions/
[3] Our resources on Insider Trading Regulations – https://vinodkothari.com/prohibition-of-insider-trading-resource-centre/
[4] https://vinodkothari.com/2019/09/social-stock-exchange-a-guide/
https://vinodkothari.com/2021/09/social-stock-exchange/
[5] Our resources on CSR – https://vinodkothari.com/csr/
Leave a Reply
Want to join the discussion?Feel free to contribute!