Small by SAT: Smaller listed companies relieved from CG compliance burden

SEBI cannot read “or” as “and”: holds appellate tribunal

Simrat Singh, Executive | corplaw@vinodkothari.com

“I decline to read into any enactment, words which are not to be found there and which would alter its operative effect because of provisions to be found in any proviso.”

– Lord Herschell in West Darby Union vs. Metropolitan Life Assurance Society^[1]

Background

Listed entities in India bear significant compliance obligations, including enhanced disclosure requirements and scrutiny by regulators, primarily due to the involvement of public funds and retail investors. To ensure market transparency and investor protection, several measures of ensuring a strong corporate governance (CG) culture have been provided by SEBI. Several of such requirements are enumerated under Regulations 17 to 27 of SEBI (LODR) Regulations, 2015^[2] and are applicable on listed entities. However, all listed companies are not required to comply with these CG provisions, as Regulation 15(2)(a) provides certain exemptions for small size entities whose paid up equity capital and net worth do not exceed Rs. 10 Cr. and 25 Cr. respectively.

There are 2 things about the carve out for small listed companies – (a) it is based on monetary limits which were prescribed 9 years ago, and never revised since then, though the official loss of value due to inflation itself would be approx 42.9%^[3] (b) Though the Regulation provides a twin-test window for qualifying for the exemption – small capitalisation and small net worth, SEBI was reading these qualifying conditions as being cumulative, with the effect that unless a listed entity was small by both these tests, it will not qualify for the exemption.

While the said Regulation provides for exempting specified classes of listed entities, however, the manner in which the amendment to the said exemption was framed raised two different views on availing the said exemption.

A recent ruling by the Securities Appellate Tribunal (SAT) in the Remsons Industries^[4] case deals with resolving the said confusion and complexity of interpreting regulatory language. Specifically, the judgment highlighted and concluded its remarks on the ambiguity created by the terms “and” and “or” in determining whether entities can claim exemptions from CG norms.

The genesis of the confusion

Before the amendment made in 2021 through the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2021, the relevant provisions of Regulation 15(2) read as follows:

(2). The compliance with the corporate governance provisions as specified in regulations 17, 17A, 18, 19, 20, 21,22, 23, 24, 24A, 25, 26, 27 and clauses (b) to (i) and (t) of sub-regulation (2) of regulation 46 and para C , D and E of Schedule V shall not apply, in respect of –

(a). A listed entity having paid up equity share capital not exceeding rupees ten crore AND net worth not exceeding rupees twenty five crore, as on the last day of the previous financial year:

By virtue of the aforesaid amendment, SEBI inserted a proviso in Regulation 15(2) that caused confusion. While the original text of Regulation 15(2)(a) clearly stated that an entity will be exempt from CG norms if both its paid-up capital and net worth were below specified thresholds, the amendment’s proviso introduced the term “or ”. This new wording implied that once CG norms apply to an entity, such entity will qualify for an exemption if either its capital or net worth remains below the threshold for 3 consecutive years.

The relevant  proviso to Regulation 15(2) read as follows:

Regulation 15

XX

Provided further that once the above regulations become applicable to a listed entity, they shall continue to remain applicable till such time the equity share capital OR the net-worth of such entity reduces and remains below the specified threshold for a period of three consecutive financial years.

XX

Basis the introduction of the aforesaid second proviso, the following could have been the two possible interpretations:

i. Exemption from the CG provisions is available to only those listed entities whose paid-up share capital and net-worth is less than the prescribed thresholds but once either of the conditions have been breached and subsequently reduced and remained so for a period of 3 consecutive financial years while the other criteria remains below the threshold;

As on	Paid up equity capital (in INR crs)	Net worth (in INR crs)	CG norms applicable in next FY
31st March 2023	9	24	Not applicable
31st March 2024	9	26	Yes
31st March 2025	9	24	Yes
31st March 2026	9	24	Yes
31st March 2027	9	24	No

ii. Exemption from the CG provisions is available to those listed entities whose paid-up equity share capital or net-worth falls below the prescribed thresholds and remains so for 3 consecutive financial years, irrespective of the other parameter exceeding the threshold.

As on	Paid up equity capital (in INR crs)	Net worth (in INR crs)	CG norms applicable in next FY
31st March 2023	11	26	Yes
31st March 2024	11	24	Yes
31st March 2025	11	24	Yes
31st March 2026	11	24	No
31st March 2027	11	24	No

SEBI has been firm in its approach and intent, except for the drafting issue emanating from the aforesaid amendment. In fact, keeping with its intent, SEBI, in its informal guidance issued to Sky Industries, clarified that both conditions—paid-up equity capital and net worth—must be fulfilled for a listed entity to claim exemption from the CG provisions. The guidance of NSE on disclosures under RPTs (FAQ no. 12) also states that “if any of the criteria (paid up equity share capital and net worth) is not satisfied, RPT disclosures shall be mandatoryfor the company.”.

Legislative intent vs. literal interpretation

SEBI’s Consultation Paper issued on 11 September, 2020 suggests that SEBI’s intent was to apply the CG norms despite any reduction in the equity capital or the net worth. However, after receiving public comments, SEBI in its board meeting held in April 2021, discussed that to reduce the compliance burden on small listed entities, CG provisions once applicable to a listed entity based on its paid-up capital and net worth, will remain applicable until the entity’s paid-up capital or net worth (whichever was higher and due to which the applicability triggered) falls and stays below the specified thresholds for 3 consecutive financial years.

Thus, the intent behind the amendment was to introduce flexibility in non-applicability after it has been made applicable and not make the parameters loose. However, the use of “and” in the original regulation implied a stricter interpretation, creating ambiguity between the legislative intent (to ease compliance) and the literal text of the regulation (requiring both thresholds to be met).

While SEBI has been clear in its intent, however, given the scope of diverse interpretation, we understand that if the applicability is eased based on either of the parameters reducing below the threshold, the same would actually not be compromising but complementing the compliance burden with the size of the company. This is more because of the fact that while CG provisions should be applicable on listed entities, however for an entity which even though listed has a small shareholder base of less than INR 10 crores, will literally have to bear the burden of the CG provisions. One has to look at the magnitude of the capital base to understand the involvement of shareholder interest and not really the size of net worth since it does not have a direct nexus with the shareholders but with the fluctuations in the market conditions.

Judicial interpretation and case references

The courts have long established principles for interpreting statutory language, particularly when the words “and” and “or” are involved. In Durrani Abdullah Khan vs. State of Maharashtra^[5], the court emphasized that “and” is typically conjunctive and “or” is disjunctive. However, courts can interpret these terms flexibly to avoid absurd or unintelligible outcomes, as demonstrated in cases where literal interpretations would defeat the purpose of the law.

In the case of Joint Director of Mines Safety vs. Tandur and Nayandgi Stone Quarries (P) Ltd.^[6]  The Hon’ble Supreme Court held that the word “and” should be read as “or” in order to keep the interpretation aligned with the purpose of the law, which was to protect labor and safety in mines.

The Supreme Court in Commissioner of Customs (Import) v. Dilip Kumar & Ors.^[7] overruled an extant judgment of the same court that ambiguity in exemption clauses can be interpreted liberally so as to provide the benefit of the ambiguity to the subject. In the aforesaid ruling, the SC has held that “Exemption notification should be interpreted strictly….When   there   is   ambiguity   in   exemption notification   which   is   subject   to   strict interpretation,   the   benefit  of   such   ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue.” The said interpretation has been reiterated in various subsequent judgements, for instance, in the matter of Central Public Information Officer v. Subhash Chandra^[8] and State of Maharashtra v. Vile Parle Mandal^[9]

SAT, in the Remsons Industries case, took a pragmatic approach by focusing on the legislative intent rather than strictly adhering to the text. Drawing from precedents like the Durrani Abdullah Khan^[10] case, SAT concluded that “and” could be read as “or” when a strict reading would contradict the regulatory purpose. Thus, SAT ruled that SEBI’s corporate governance norms would not apply if either the paid-up equity capital or net worth of a listed entity fell below the thresholds for 3 consecutive years.

SAT’s ruling and interpretation

SAT’s interpretation in the Remsons case prioritizes the sententia legis (legislative intent) over the litera legis (literal text), seeking to preserve the broader purpose of the law, therefore  aligning the regulation’s application with its intended purpose of easing compliance for smaller entities while maintaining the necessary regulatory safeguards.

Not only SAT held that the CG norms shall not apply to companies which satisfy either of the two conditions, it also required SEBI to refund the penalty amount imposed on Remsons Industries along with 8% interest.

Concluding remarks

The Remsons Industries case underscores the importance of legislative clarity and the role of judicial interpretation in resolving ambiguities in regulatory language. SAT’s ruling highlights the balance between adhering to the literal text of the law and ensuring that the law’s purpose is fulfilled. This case serves as a reminder that regulations, particularly those affecting small entities, must be clear and consistent to avoid confusion and unintended compliance burdens.

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^[1] 1897 A.C. 647

^[2] Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

^[3] https://dit-live.taxmann.com/_layouts/15/1033/Utilities/Notifications/DirectTaxLaws/HTMLFiles/listcii.htm

^[4] Appeal No.864 and 865 of 2022

^[5] AIR 2017 Bombay 150

^[6] 1987 AIR 1253

^[7] (2018) 9 SCC 40

^[8] Civil appeal no. 10044 of 2010

^[9] Civil appeal no. 7319 of 2021

^[10] supra