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Presentation on Corporate Governance for Debt Listed Entities

Our resources can be accessed through below links:

  1. FAQs on recent amendments under the Listing Regulations – https://vinodkothari.com/2021/08/faqs-recent-amendments-listing-regulations/
  2. Articles on fifth amendment regulations:
  3. Ease of doing business: Debt listed companies slide down to unlisted companies – https://vinodkothari.com/2021/02/debt-listed-companies-slide-down-unlisted-companies/ 

Our  Book on Law and Practice Relating to Corporate Bonds and Debentures, authored by Ms. Vinita Nair Dedhia, Senior Partner and Mr. Abhirup Ghosh, Partner can be ordered through the below link:
https://www.taxmann.com/bookstore/product/6330-law-and-practice-relating-to-debentures-and-corporate-bonds

Debt listed entities under new requirement of quarterly financial results

-Implications and actionables

Anushka Vohra | Deputy Manager

corplaw@vinodkothari.com

The SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2021[1] have increased the compliance burden on the debt listed entities. Ranging from introducing the corporate governance requirements on High Value Debt Listed Entities (HVDLEs)[2] to increasing the disclosure and compliance requirements on all debt listed entities, the amendment per se aims to make the current regulatory requirements stringent on the debt listed entities.

One significant amendment under Chapter V, which is applicable on all debt listed entities, is the requirement of submission of financial results on a quarterly basis instead of a half yearly basis, as was previously the requirement. With this write-up, we will try to understand the implications on the debt listed entities due to change in the periodicity of submission of financial results and the required actionables.

As per the amendment, the debt listed entities will be required to prepare the quarterly and annual financial results, as per the format specified by the Board. Having said that the said amendment is effective immediately, the format is not yet in place. Accordingly, the extent of actionables required for preparation of quarterly results (like whether results for the 1st quarter and corresponding second quarter, etc needs to be prepared from now and onwards) may not be clear as on date. 

Entities with listed non-convertible securities

Consideration of financial results

Non-convertible securities include debentures which are not convertible into equity at any given time and constitute a debt obligation on the part of the issuer. Chapter V of the SEBI(Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) is applicable to entities that have listed their non-convertible securities on the stock exchange(s). Regulation 52 of the Listing Regulations deals with the preparation and submission of financial results

The extant Regulation provided that such listed entity shall submit financial results on a half yearly basis, within 45 days from the end of half year i.e; within 45 days from the end of September & March [for entities following FY April-March]. For the first half year the requirement was mandatory but SEBI provided a relaxation for second half year, whereby it was stated that such listed entity may not be required to submit unaudited financial results for the second half year, if it intimates in advance to the stock exchange(s), that it shall submit its annual audited financial results within 60 days from the end of financial year. Akin to such relaxation, SEBI provided that if such a listed entity submits the unaudited financial results within 45 days from the end of the second half year, the annual financial results may be submitted as and when approved by the board of directors.

Extant framework

Unaudited accompanied with limited review report Audited financial results + statements + Auditor’s Report (AR)
For the first half year (have to be mandatorily given) For the second half year (whether submitted / not)
Yes No Within 60 days from end of financial year
Yes Yes As soon as approved by the board

 

Now, since the periodicity has changed from half yearly to quarterly, such listed entities will be required to submit financial results within 45 days from the end of each quarter, other than the last quarter and the annual financial results within 60 days from the end of the financial year.

New framework

Unaudited accompanied with limited review report Audited financial results + statements + AR
For the first quarter* For the second quarter* For the third quarter* For the fourth quarter**
Yes Yes Yes No Within 60 days from end of financial year

*mandatorily required

**not required

 

Landscape of intimations & disclosures – understanding the actionables

It is an irrefutable fact that debt in India is mostly privately placed which primarily involves the Qualified Institutional Buyers (QIBs) and no prejudice is caused to the public at large. Keeping that in mind, the debt listed entities were treated differently from the equity listed entities and were not subject to the such stricter compliances when compared to debt listed entities.

In view of  SEBI’s approach during recent times, , it has put an end to the easy going voyage of a debt listed entity and they have been placed at par with the equity listed entities.

Regulation 50 dealing with intimation to stock exchange(s) has been amended and now require the debt listed entities to intimate to the stock exchange(s) at least 2 working days in advance, excluding the date of board meeting and date of intimation, of the board meeting where the financial results shall be considered (quarterly / annually). This Regulation 50 corresponds to Regulation 29 which is applicable to equity listed entities.

Further, in case of equity listed entities, Regulation 30 (read with Schedule III Part A) is a cumbersome Regulation as the same requires certain events to be disclosed as and when they occur. For debt listed entities, the corresponding Regulation is Regulation 51 (read with Schedule III Part B). Unlike Regulation 30, the list under Regulation 51 (i.e; under schedule III) was narrow in its scope, however, with the said amendment, the list under the Part B of Schedule III, applicable on debt listed entities has also been amended to streamline the same with what is applicable on equity listed entities.

Furthermore, while submitting the financial results (quarterly / annually) under Regulation 52, the debt listed entities have to provide certain information. Such information is captured under Regulation 52(4) and includes the following:

Exemption : Non Banking Financial Companies (NBFCs) which are registered with the RBI were exempted from making disclosure of interest service coverage ratio, debt service coverage ratio and asset cover. However, exemption from disclosure of asset cover has been withdrawn i.e; now the NBFCs that have listed their debt securities have to make disclosure of asset cover. Also, the exemption from disclosing interest service coverage ratio and debt service coverage ratio is now also extended to Housing Finance Companies (HFCs) registered with the RBI.

This new framework is now in sync with what is applicable to equity listed entities. The Regulator’s intent to subsume the compliances applicable on equity and debt listed entities seems to have been inspired by the need for more transparency and promptness of information. However, this sudden drift calls for certain actionables on the part of debt listed entities.

A summary of actionables can be represented as under:

 

Other aspects :

Entities with listed equity shares / convertible securities

The entities that have listed their equity shares / convertible securities i.e; specified securities are covered under Chapter IV of the Listing Regulations, subject to exemptions under Regulation15. These entities have to comply with Regulation 33 for preparation and submission of financial results and the timeline for the same is quarterly. There has been no change for such listed entities as far as the financial results are concerned.

However, since the amendment has made Chapter IV applicable on HVDLEs which are debt listed entities covered under Chapter V, these HVDLEs have to comply with both Regulation 33 and Regulation 52. But since the requirements in both these regulations have been streamlined, no impact will be caused on such HVDLEs.

Entities with listed equity shares & non-convertible securities OR listed convertible securities & non-convertible securities

Such entities are governed by both Chapter IV and Chapter V, thus w.r.t. financial results they have to comply with both Regulation 33 and Regulation 52. Prior to such amendment, such listed entities followed the quarterly preparation and submission of financial results, since the same is stricter. For all other provisions which are common among both chapters but vary in timelines, the one with the stricter provision needs to be followed. For instance, in case of prior intimation of board meetings where financial results shall be considered, Chapter IV provides advance intimation of 5 days, whereas Chapter V provides advance intimation of 2 working days. Clearly, the timeline of 5 days in advance is stricter, therefore such entities shall comply with the same.

Concluding remarks

The sense of ease on the debt listed entities has been undone and the Regulator is preparing to bring the equity and debt listed entities under the same blanket. The extension of Chapter IV on HVDLEs seems to be a wake up call for debt listed entities which are not HVDLEs as of now. The enhanced disclosure on all debt listed entities would nevertheless burden them, however the impact of the same is yet to be analysed.

Our other resources on related topics –

  1. https://vinodkothari.com/2021/09/high-value-debt-listed-entities-under-full-scale-corporate-governance-requirements/
  2. https://vinodkothari.com/2021/09/corporate-governance-enforced-on-debt-listed-entities/
  3. https://vinodkothari.com/2021/09/full-scale-corporate-governance-extended-to-debt-listed-companies/
  4. https://vinodkothari.com/2021/09/presentation-on-lodr-fifth-amendment-regulations-2021/

[1] https://www.sebi.gov.in/legal/regulations/sep-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-fifth-amendment-regulations-2021_52488.html

[2] A listed entity which has listed its non-convertible debt securities and has an outstanding value of listed non-convertible debt securities of Rs. 500 crore & above as on March 31, 2021.

Step-by-step guide for disclosure for Analysts/Investors Meet

Do’s and don’ts to be ensured by listed companies

Brief Background

In order to disseminate information regarding performance of the company, its future prospects etc. listed companies usually conduct gatherings of analysts/investors after dissemination of quarterly results or atleast once in a year. Such meets generally include conference calls or meeting with group of investors or one-to-one meet or calls with investors or analysts, including those in the nature of walk-in. The idea behind conducting such meets is to provide transparency for the company’s performance figures, to address the queries of the analysts/investors and to ensure that the company’s information is available to the stakeholders. However, the risk of information asymmetry in such meets or gatherings is very inherent.

While the Regulatory Framework of SEBI i.e. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) provided for disclosure of adequate and timely information to enable investors to track the performance of a listed entity including the information pertaining to occurrence of investors meet/conference call with analysts, however, several inconsistencies were observed in the disclosures made by the listed entities. For instance, several entities were not divulging the details of what transpired in such investors’ meetings and were merely disclosing the limited presentations w.r.t. the meetings. As such, minority shareholders, who did not attend these meetings, were not privy to the information shared with a select group of investors, thereby creating information asymmetry among different classes of shareholders.

Realizing this, SEBI, on November 20, 2020, came up with the consultation paper[1] and recommended enhanced disclosure requirements w.r.t. post earning calls and one-to-one meets. Our write-up analyzing the said consultation paper can be viewed here.

Later, vide notification dated May 05, 2021, SEBI enhanced the disclosure requirements w.r.t. Investors’/ Analysts’ meet.

In this article, the author has made an attempt to discuss the changes made in the disclosure requirements w.r.t. analyst meet step by step.

Post amendment in Listing Regulations

On May 05, 2021, SEBI amended the Listing Regulations which inter alia, covered analyst meet. Pursuant to the said amendment, the companies are required to include enhanced disclosure requirements with respect to analyst/ investors meets so as to avoid selective disclosure and information asymmetry and to ensure market integrity and to safeguard the interest of investors. The said amendments are voluntary for FY 2021-22, and will become mandatory from FY 2022-23.

The synopsis of the amendment is provided below:

Regulatory requirements in case of one-to-one meet

In respect of one-to-one meet, there are no legal restrictions as such. However, considering the intent of the Listing Regulations and SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’), the following things are explicitly clear:

  1. One-to-one meets even though unregulated, should be discouraged looking at the high possibility of leakage of UPSI; and
  2. Even if the entity has one-to-one meet, it cannot share any UPSI.

Whether sharing of UPSI is allowed in a group meet or one-to-one meet?

The PIT Regulations prohibit sharing of UPSI in any manner to any person including analysts/ investors and require the listed entities to take all required steps to ensure the same. Considering the same, the facts whether it is a group meet/ call or otherwise or whether such meet/ call was organized by the listed entity itself or not, become irrelevant and the prohibition shall apply in all cases.

Therefore, there is a remote chance of sharing such UPSI until and unless the same is as per the provisions of code of fair disclosure framed by the listed entity. Accordingly, if any UPSI is shared, legitimately in terms of the said code, the entity will have to disclose the audio/ video recordings or the transcripts of such meeting to the stock exchange promptly.

Guidance Note of Analyst/ Institutional investors’ meet

The amendment in the Listing Regulations came up with various interpretations and ambiguities w.r.t. disclosure requirements. We have discussed such anomaly in our previous article which can be viewed here.

In order to clear the ambiguities w.r.t the disclosure requirements, NSE, vide circular dated 29th June, 2021[2], has provided further clarifications. While the intention of the stock exchange was to provide clarity, in reality, it further complicated the issue. In this article, we have tried to provide the step-by-step guide for disclosure on analyst meets and post earning calls. Further, we have also provided the do’s and don’ts to be ensured by the companies.

Disclosure requirements w.r.t. Analyst meets

In order to comply with the provisions of Listing Regulations in letter and spirit, the listed companies are required to ensure that it makes timely disclosure to stock exchanges and on their own website. The compliance requirement as per the amended provisions w.r.t. analysts/ investors meet are jotted down below:

Sr. No. Cases Disclose what? By When? Other Points to be ensured
1. Post earning calls/ Quarterly calls, by whatever name called (after disclosure of quarterly financial results) Schedule of such meeting As soon as the same is fixed but not later than 24 hours. ·         Mandatory only for group meets.
Presentation and the audio/ video recordings of such meeting Before the next trading day or within 24 hours from the conclusion of the meet, whichever is earlier. ·         Mandatory for both group meets and one to one meets.

·         To be disclosed whether conducted by listed entity or any other entity.

·         To be hosted on the website of the company for minimum 5 years and thereafter as per the archival policy of the company.

·         To be disclosed simultaneously to the stock exchange.

Transcripts of such meeting Within 5 working days of conclusion of the meet. ·         Mandatory for both group meets and one-to-one meets.

·         To be disclosed whether conducted by listed entity or any other entity.

·         To be hosted on the website of the company and preserved permanently.

·         To be disclosed simultaneously to the stock exchange.

2. Other Analysts/ Investors meets Schedule of such meeting As soon as the same is fixed but not later than 24 hours. ·         Mandatory only for group meets.
Presentation made in such meeting As soon as the same is concluded but not later than 24 hours. ·         Mandatory only for group meets.

·         To be disclosed on the website of the company, whether conducted by listed entity or any other entity

·         To be disclosed simultaneously to the stock exchange.

3. In case any UPSI is shared for legitimate purpose as per the Code of Fair Disclosure Audio/video recordings or transcripts of such meeting Promptly ·         Applicable to both group as well as one-to-one meets.

·         To be disclosed on the website of the company, whether conducted by listed entity or any other entity.

·         To be disclosed simultaneously to the stock exchange.

 

Do’s and Don’ts to be ensured by the listed entities

The listed entities will be required to observe some crucial points while scheduling or attending analysts’/ investors’ meet, conference calls, post earning calls etc.  Briefly, the following are the do’s and don’ts:

Do’s Don’ts
Always conduct scheduled meets. Avoid unscheduled meets.
Always schedule group meets. Avoid scheduling one-to-one meet.
Upload the schedule of group meets/ calls on the website promptly but not later than 24 hours from fixing the same and also simultaneously submit the same with SE. Do not forget to upload and send the schedule on the website and to the stock exchanges, respectively beyond the prescribed time.
Upload the presentation made to analysts/ investors in the scheduled group meet the website promptly but not later than 24 hours from fixing the same and also simultaneously submit the same with SE. Do not forget to upload and send the schedule on the website and to SE, respectively beyond the prescribed time.
Ensure to make audio and video recording of the post earnings/ quarterly calls, whether conducted physically or through digital means, either conducted by listed entity or any other entity including one- to- one meets. Do not avoid making audio/video recording of such calls irrespective the same was conducted by the listed entity itself or by any other entity.
Ensure transcripts of the post earnings/quarterly calls, whether conducted physically or through digital means, either conducted by listed entity or any other entity including one- to- one meets. Do not avoid making transcripts of the proceedings of such calls irrespective the same was conducted by the listed entity itself or by any other entity.
Ensure that the information shared with the investors is already available in public domain. Do not share UPSI with the investors.
Maintain silence period, if any, as provided in the code of fair disclosure framed by the entity. Discourage any sort of meets either group meet or one-to-one meets (including walk-in investors) during silence period.
Upload all audio/video recordings and presentation of the post earning/ quarterly calls on the website of the Company within 24 hours of conclusion of such calls or next trading day, whichever is earlier. Avoid uploading audio/video recording beyond the prescribe time.
Upload all transcripts of the post earning/ quarterly calls on the website of the Company within 5 working days of conclusion of such calls. Avoid uploading transcripts of the post earning/ quarterly calls on the website of the company after 5 working days of conclusion of calls.
Simultaneous to uploading audio/video recording and transcripts on the website of the company, submit the same to the recognized stock exchange Do not forget to send audio/video recording and transcripts of the meets to the recognized stock exchange
Preserve the disclosures made on the website of the Company

(a)    Audio/video recording- for minimum 5 years and thereafter as per archival policy of the company;

(b)   Transcripts: permanently

Do not avoid preserving of audio/video recording and transcripts of the meets

Conclusion

The amendment in Listing regulations and guidance note by the stock exchanges give us the clear view that the companies are required to make timely disclosure of audio/ video recordings, transcripts of post earning calls and only presentations of analyst meet to the stock exchange. Even though this seems to be the compliance burden on part of the listed companies which are already pressed with various disclosure requirements, this step is surely a welcome move as it will help the watchdog of capital markets to curb insider trading and information asymmetry.

[1] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/nov-2020/1605853267317.pdf#page=1&zoom=page-width,-16,792

[2] https://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20210629-44

Our other article on similar topics can be read here – http://vinodkothari.com/2020/11/sebi-proposes-enhanced-disclosures-for-meetings-with-analyst-investors-etc/