A sigh of relief for the HVDLEs, not shy from compliance

Extension of “comply or explain” period in respect of corporate governance norms

– Nitu Poddar | corplaw@vinodkothari.com

SEBI in its board meeting dated March 29, 2023 decided to extend the timeline for “comply or explain” period for the High Value Debt Listed Entity (HVDLE) for compliance of corporate governance norms (i.e. regulation 16 to 27 of LODR Regulations) till March 31, 2024. A HVDLE is a company having listed debt and an outstanding value of such listed debt of Rupees 500 crore and above. It is to be noted that the HVDLEs were given a timeline of two financial years[1] (FY 21-22 and 22-23) to comply with the corporate governance norms or explain the reason for non-compliance in the quarterly corporate governance report to be filed with the stock exchange(s). Given this extension of mandatory compliance of the said norms – can the HVDLEs just sit back and relax till March 31, 2024? No, they will still have to endeavor to comply. Any short compliance requires reporting to the exchanges on a quarterly basis.

The corporate governance norms in regulation 16 to 27 inter alia relates to composition of board of directors, remuneration, composition of dedicated committees including risk management committee and roles thereof, minimum number of meetings, framing and implementation of code of conduct, vigil mechanism plan, related party transaction plan, requirement of secretarial audit, obligation with respect to independent directors, disclosure of compliance

 In this article, we discuss the obligations of HVDLEs during the period of “comply or explain”.

Compliance during “comply or explain” period

As also explained in Explanation (3) of Regulation 15(1A) of LODR Regulations, during the “comply or explain” period, the HVDLEs shall endeavor to achieve full compliance of the governance norms. If it is unable to do so, it needs to report the reasons for such non-compliance, partial compliance and also inform steps initiated by it to achieve full compliance in the quarterly corporate governance report.

The impossibility of compliance occurs mostly in cases where such HVDLEs are closely held, debt is privately placed (exempted from the definition of “listed entity” as per the Companies Act, 2013) and the applicability threshold in the Act, 2013 is not triggered. However, while several norms would be practically difficult to comply with, it would be hard to explain the non compliance of few others.

Norms which may require deliberation for compliance

For instance, the requirement of appointing an independent director under section 149 of the Act does not apply on a HVDLE having its debt privately placed[2]. Now if such HVDLE is a private company, it will not inherently have an independent director on its board. To have an independent director (outsider) on the board of the company is not something imbibed in the structure of a private company, leading to detailed deliberation before appointment of such director. Several requirements (balance in the board composition, constitution of various committees, independent directors in material subsidiaries) cannot be complied in the absence of an independent director.

Further, as per the data published in the recent Consultation Paper on review of corporate governance norms for HVDLE, approval of non-related shareholders for material related party transactions is not feasible for atleast 75% of HVDLEs[3] on account of having 90% or more shareholders who are related parties.

Non-compliance hard to justify

Having said the above, it must be noted that compliance of several corporate governance requirements is feasible for any HVDLE, for example – approval of the appointment of a director by shareholders within 3 months of appointment, having in place framework w.r.t risk management, vigil mechanism, review of subsidiaries’ minutes, secretarial audit, filing of quarterly corporate governance report.

Conclusion

Accordingly, the Board of the HVDLEs should have discussed the applicability of the corporate governance norms, gap in the existing practice / compliance by the company and discuss steps to be taken / action plan to comply with the norms in totality by March 31, 2024.

[1] Read detailed FAQs on corporate governance norms applicable to HVDLE at – https://vinodkothari.com/wp-content/uploads/2022/03/FAQs-on-CG-provisions-extended-to-high-value-debt-listed-entities-1.pdf

[2] Refer definition of “listed entity” in section 2(52) of the Act, 2013 read with rule 2A of Companies (Specification of Definition Details) Rules, 2014

[3] Read our detailed article on the consultation paper at – https://vinodkothari.com/2023/02/sebi-to-provide-debenture-holders-the-right-to-object-material-related-party-transaction/

Also read –

1. https://vinodkothari.com/2023/04/bond-market-needs-a-friend-not-parent/
2. https://vinodkothari.com/2021/09/high-value-debt-listed-entities-under-full-scale-corporate-governance-requirements/