Entering in FY 23-24: Regulatory review of corporate law developments

– Payal Agarwal, Deputy Manager (payal@vinodkothari.com)

As the new financial year 23-24 commences, we look back at where we stand at the end of FY 22-23, in terms of the regulatory developments. While there has been no substantial traffic in terms of regulatory developments to the Companies Act, the migration of various forms in MCA’s V3 portal proved to be (and still continues to be so in some cases) a turmoil, with a standstill in the fundraising process, and other practical difficulties, even resulting in levy of additional fines. 

There has been significant traction on the part of SEBI too. 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. Having stiffed the nerves of the Compliance Officers in the listed entities through the quarterly compliance certificates, the same has been finally absorbed in the annual secretarial compliance reports under the Listing Regulations.

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.

FY 22-23 has been a year of consultations and review of existing regulatory provisions too, and SEBI alone came up with as many as 37 Consultation Papers, of which, at least 17 were released in the month of February itself, of which, a mixed bag of proposals have been approved in its meeting on 29th March, 2023 itself.

We have tried to briefly cover the major developments in corporate laws during the FY 22-23. You may also read our calendar year review of 2022 at 2022 Wrapped Up: Regulatory review of corporate law developments (or discussion 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

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 many amendments to the 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 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^[1] 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.

In January 2023, the Listing (Amendment) Regulations, 2023 was notified that brought some clarificatory changes under Listing Regulations, as also, had the effect of relaxing the applicability of existing corporate governance norms on REITs and InVITs, requiring them to comply with a separate set of corporate governance norms w.e.f. 1st April, 2023. The definition of “Senior Management” has been amended to include “functional heads” under the meaning of Senior Management. Further, since various compliances attract w.r.t. “material subsidiary” of a listed entity, from FY 22-23 onwards, the listed entities would be required to disclose details of material subsidiaries, including date and place of

incorporation and name and date of appointment of statutory auditors in their Annual Reports.

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.

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. Various filings under various regulations of Listing Regulations, such as material events and information, prior intimation for board meetings, quarterly financial results etc have been mandated to be provided in XBRL format.

Additional modes for achieving minimum public shareholding has been notified, to help listed companies in complying with the requirements under Securities Contracts (Regulation) Rules, 1957 read with Reg 58 of the Listing Regulations.

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^[2]

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 stock exchanges also released SOPs for ensuring compliance with SDD, and specified action to be taken in the event of non-compliance, that includes, display of the name of the company as ‘non-compliant with SDD’ on the “Get Quote” page of the Exchange website of the listed entity and name of the Compliance Officer.

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

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. As SSEs seem imminent, auditors get ready with social audit standards, for which SROs have been established by both ICAI and ICSI. The new FY is expected to witness a new dawn of “responsible” donations with the operationalisation of SSEs in India. Also, social enterprises^[3] will hopefully want to get registered with the social stock exchanges.

Amendments to Buy-back Regulations

SEBI, following a consultation paper on review of existing Buy-back Regulations on 16th November, 2022, approved amendments to the existing Regulations towards late December. The Consultation Paper, based on a report of a sub-group headed by Mr Keki Mistry, made some very significant recommendations for reform of the existing buy-back regime, including some statutory amendments too. While most of the proposals under the Consultation Paper have been made part of the Buy-back Regulations through the Amendment Regulations, certain proposals such as scaling up the extent of permitted limits of buy-back or proposals on the tax treatment etc have been dropped currently, since the same may also require consent of other regulatory authorities such as MCA, MoF etc. and amendments to other related laws.

The amendments include a glide-path exit for open market buy-backs through stock exchanges, as well as amendments to the existing mechanism for tender offers and book building.

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 CSR Amendment Rules, 2022 had the effect of polishing few rough ends left from the 2021 amendments^[4].

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.

The Companies (Appointment and Qualifications of Directors) Amendment Rules, 2023 revised certain formats as well as provided for the following other changes. The annual declaration by directors on not attracting disqualification in terms of section 164(2) of the Act, has been extended to cover disqualifications u/s 164(1) of the Act as well. The application for removal of disqualification of directors has been moved from ROC to RD^[5]. Migration to the V3 portal has led to changes in various other forms as well.

Amendments pertaining to debt-listed entities

The FY 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. Recently, in its board meeting dated 29th March, 2023, the mandatory applicability of the corporate governance provisions under the Listing Regulations, on High Value Debt Listed Entities has been pushed forward for one more financial year. Therefore, the same is applicable on a “comply or explain” basis for FY 23-24, and will become mandatorily applicable w.e.f. 1st April, 2024.

The regulation of online bond platforms has been one of the most important amendments for debt-listed entities. 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.

To facilitate the appointment of debenture-trustee nominated directors, debt-listed companies have been mandated to contain enabling clauses in the debenture-trust deed as well as their own Articles of Association. The requirement of newspaper advertisement has been waived off and companies are required to send communication through email mode only prior to exercising the right to recall. Clarifications have been issued on the perpetual instruments covered under the provisions of ILNCS Regulations.

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 ‘green debt securities’ also gained some attention of SEBI, and the extant framework of 2017 witnessed various changes, with amended definition, stricter disclosure requirements, as well as guidelines on greenwashing; the most important of these being the mandatory third-party verification on use of proceeds. 

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.

Various consultation papers have also been released by SEBI during the FY, suggesting debenture-holders’ approval for material RPTs, mandatory listing of all issuances of debt securities by debt-listed entities, alignment of offer document disclosures for public issue and private placement of debentures etc, of which, few have been approved by SEBI on 29th March, 2023.

Slew of amendments for insurance companies

IRDAI took up the task of reviewing the major regulations applicable to insurance companies. A number of important regulations were superseded with its latest amended version. Generally speaking, these are in the nature of liberalisation, though one may have to wait for some time to observe the practical implications these have on the industry. Brief consolidated understanding of the amendments can be accessed at IRDAI does comprehensive liberalisation of insurance regulations.

The most recent of these include the IRDAI (Payment of Commission) Regulations, 2023 and the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance business) Regulations, 2023, wherein, product-specific Expenses of Management (EoM) limits has been amended to substitute the same with limits as a percentage of the gross premium earned by the insurance companies. 

Preparedness for FY 23-24

There are various compliances that require the attention of the corporates as we enter the new FY 23-24.

• All companies maintaining books of accounts in electronic form will be required to use such accounting software having mandatory audit trail w.e.f. 1st April, 2023.
• Certain provisions of the amended RPT framework under the Listing Regulations becomes 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”.
• The revised cap on maximum number of ISINs that can mature in a year will be applicable w.e.f. 1st April, 2023.
• Multiple amendments have been approved to the Listing Regulations, which include specification of quantitative thresholds for determining materiality of events and information, for disclosure to the stock exchanges, including stricter disclosure requirements. Further, periodic shareholders’ approval will be required now for special rights granted to specific shareholders, continuation of appointment of non-retiring directors etc.
• A separate framework has been approved for the ESG Rating Providers (ERPs) in India, that will require mandatory registration of ERPs with SEBI before providing ESG Ratings to entities.
• W.e.f. 1st April, 2023, an issuer of green debt securities will be required to engage a third party reviewer for use of proceeds on a ‘comply or explain’ basis.
• Starting FY 23-24, BRSR Core disclosures become applicable to top 250 listed entities, with reasonable assurance on the disclosures.
• Various guidelines have also been approved for investment by the ESG mutual fund schemes.
• 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.

Compliance with the Large Corporate Borrower (LCB) framework, which remained one of the focal points for the entities classified as LCBs, has now been diluted with the extension of the compliance period by 1 FY. 

Climate change will seemingly continue to remain an important regulatory theme. 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, and suggested release of various regulatory initiatives on climate risk and sustainable finance, 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.

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^[1] Our resources on RPTs – https://vinodkothari.com/article-corner-on-related-party-transactions/

^[2] Our resources on Insider Trading Regulations – https://vinodkothari.com/prohibition-of-insider-trading-resource-centre/

^[3] Our resources on Social Sector can be accessed here

^[4] Our resources on CSR – https://vinodkothari.com/csr/

^[5] Snapshot of the changes can be accessed here.