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Understanding Silent Period for listed entities

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By CS Aisha Begum Ansari (aisha@vinodkothari.com)

Introduction

When you go silent, you may be doing a soul searching, as for example, in meditational techniques. However, in case of listed entities, silent period is a period just before declaration of financial results, to ensure that there is no accidental leakage of confidential information. Silent period is different from “trading window closure” that most corporate professionals in India are familiar with. However, this article discusses the relevance of silent period, as a subset of the trading window closure, and its relevance to listed entities in India. While exploring the topic, the author also makes a study of the global laws around silent period.

Why silent period?

Insider trading is a ‘white collar’ crime that seeks to exploit the unpublished, non-democratic information (that is, what is not available in public domain) to the advantage of a select few, and to the disadvantage of the market in general. Since, it is a fraud upon the market in general, it has always been a significant topic for the securities market regulators around the globe. In India, Securities and Exchange Board of India (‘SEBI’) has framed the regulatory framework to curb the insider trading called as SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’).

The material inside information is generally accessed by the top executives and employees of the company. To avoid the exploitation of such information, the company prohibits them from trading in its securities while having access to such information.  The preventive framework of insider trading does not just end by prohibiting the employees from trading; it also needs to ensure that such material inside information is not leaked outside the organization. There are many ways used by the insiders to leak such information such as sharing the same on social media, sharing of information during analyst or institutional investor meets, etc.

Silent period is different from trading window closure. Silent period is when the company’s top executives, say that CEO, CFO etc. will refrain from doing public communications altogether. The intent is to ensure that there is no interaction with investors or public at large, so as to avoid unintended slippage of information. Currently, SEBI regulations do not require companies to mandatorily observe a silent period; therefore, companies may choose to adopt this practice by way of their Code of Fair Disclosure.

What is silent period?

A silent period (also known as quiet period) is a stipulated time during which a company’s senior management and investor relation officers do not interact with the institutional investors, analysts and the media. The purpose of the silent period is to preserve the objectivity and avoid the appearance of the company providing insider information to select investors. During the silent period, the company does not make any announcements that can cause a normal investor to change their position on the company’s securities.

Is it different from trading window closure?

Trading window closure period (also known as blackout period or closed period) refers to the period during which the employees of the company who have access to material inside information are prohibited from trading in the securities of the company. In some of the developed countries, the securities market regulators give a freehand to the companies to decide the period during which the trading window shall be closed. In India, the PIT Regulations provide that the companies shall close the trading window from the end of the closure of the financial period for which results are to be announced till 48 hours after the disclosure of financial results to the stock exchanges. For any other material inside information, SEBI has given the responsibility to the compliance officers of the companies to close the trading window when the employees can reasonably be expected to have possession of inside information.

Silent period differs from the trading window closure in such a way that trading window closure prohibits the employees to trade in the securities of the company while having access to material inside information and silent period prohibits or restricts the company’s spokespersons to interact with the institutional investors or analysts. The purpose of trading window closure is to prohibit trading on the basis of inside information and the purpose of silent period is to prohibit communication of inside information illegitimately.

Duration of silent period

The PIT Regulations or any other regulatory framework in India do not provide for the requirements of silent period. So, the duration of silent period differs from company to company. Some companies specify the silent period as 20-30 days before the declaration of financial results till the date of disclosure and some companies align the silent period with the trading window closure period. The following table gives the synopsis of the practice followed by the Indian listed entities regarding silent period:

Name of the Company Practice followed
Mahindra & Mahindra Limited Silent period commences from 20 days before the declaration of financial results till the date of disclosure of results
Tata Consultancy Services Limited Quiet period starts 20 days before the declaration of financial results till the date of disclosure of results
HCL Technologies Limited Silent period is same as trading window closure period
Asian Paints Limited Silent period is observed between the end of the period and the publishing of the stock exchange release for that period
Wipro Limited Quiet period commences from 16th day of the last month of the quarter and ends with 48 hours after earnings release.
Infosys Limited Silent period is observed between the 16th day prior to the last day of the financial period for which results are required to be announced till the earnings release day.

Thus, it can be concluded that the silent period is smaller than the trading window closure period.

Analysts/ investors meets during silent period

Analysts/ investors meets can be a medium of leak of material inside information, therefore, the companies avoid interaction with them during trading window closure period. So, does it mean that companies completely abstain from interacting with the analysts and investors? While the answer may differ from company to company and the policies adopted by them for communication with analysts and investors. Some companies completely refrain from the analysts/ investors meets while some companies interact with them and discuss the past and historical information which is already available in public domain and general future prospects of the company, dodging the specific questions relating to the material inside information.

Guidelines for Investor Relations for Listed Central Public Sector Enterprises[1]

While the regulations framed by SEBI are silent about the silent period, the Guidelines for Investor Relations for Listed Central Public Sector Enterprises issued by the Department of Disinvestment, Ministry of Finance, Government of India, provides for the duration of silent period and obligations of the public sector enterprises in this regard. The Guidelines advise that the silent period should commence 15 days prior to the date of Board meeting in which financial results are considered and end 24 hours after the financial results are made public. The Guidelines requires the companies to abstain from meeting the analysts and investors and not communicate with them unless such communication would relate to the factual clarifications of previously disclosed information.

International practice with respect to silent period

Country Trading window closure period Silent period Analyst meet during silent period
United States of America (USA)[2] USA laws do not provide any specific timeline for trading window closure period. Thus, the companies are free to determine it There are two types of silent period prevalent in USA:

1.    When the company makes an Initial Public Offering (‘IPO’) – the Securities Exchange Commission (‘SEC’) mandates such companies to maintain a silent period from the date of registration with SEC which lasts till 40 days after the securities begin to trade on the stock exchanges. Such silent period is heavily regulated by the SEC.

2.    During finalization of quarterly results – the silent period is not clearly defined by SEC.

 During the silent period, the interaction with the analysts and investors is reduced. The companies either go completely silent or they speak about only past and historical information.
United Kingdom (UK)[3] Unlike USA, the UK laws prescribe the trading window closure period. Article 19.11 of Market Abuse Regulations specifies the period of trading window closure starting from 30 calendar days before the announcement of an interim financial report or a year-end report till the second trading day after announcement of financial report. UK laws do not comment anything about the silent period. Thus, the companies determine the silent period as per their own discretion.

 

 Since UK laws do not provide for silent period, the companies, as per their discretion, avoid interactions with the analysts and investors during such period.

 
Canada[4] Para 6.10 of National Policy on Disclosure Standards (‘Policy’) discusses about blackout period. It states that the company’s insider trading policy should specify the period which may mirror the quiet period. Para 6.9 of the Policy talks about quiet period. While the Policy does not prescribe the duration of quiet period, it states that the period should run between the end of the quarter and the release of a quarterly earnings announcement. The Policy states that the company need not completely stop communicating with the analysts and investors during the quiet period, but the communication should be limited to responding to inquiries concerning publicly available or non-material information.

Conclusion

After discussing the practices followed by the Indian listed companies and the regulatory framework of other developed countries, it can be concluded that the concept of silent period is not something new, though unregulated. Some companies align the silent period with the trading window closure period while some provide for lesser duration for silent period. Some companies completely abstain from interacting with the analysts and the institutional investors during the silent period whereas some prefer discussing the generally available information only.

[1]https://www.dipam.gov.in/dipam/downloadFile?fileUrl=resources/pdf/capital-market-regulation/IR_Guidelines_website.doc

[2] https://www.irmagazine.com/reporting/six-commonly-asked-questions-and-answers-about-quiet-periods

[3] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0596&from=EN

[4] http://ccmr-ocrmc.ca/wp-content/uploads/51-201_np_en.pdf

Other relevant materials of interest can be read here –

http://vinodkothari.com/2021/07/step-by-step-guide-for-disclosure-for-analysts-investors-meet/

http://vinodkothari.com/2021/05/sebi_defines_investors_meet/

http://vinodkothari.com/2020/11/sebi-proposes-enhanced-disclosures-for-meetings-with-analyst-investors-etc/

Independent Directors: The Global Perspective

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Ajay Kumar KV, Manager and Himanshu Dubey, Executive  (corplaw@vinodkothari.com)

Introduction

The role or failure of independent directors in preventing corporate scandals became one of the central themes in corporate governance in India, and when SEBI issued a Consultation paper proposing a dual approval process for the appointment of independent directors, there was a substantial concern among leading companies in the country. Following discussions, the SEBI board has eventually decided to drop the proposal for dual approval, and instead, go for approval by a special majority. The decision of SEBI to not implement dual approval has not been appreciated by several commentators including Mr. Umakanth Varottil. Therefore, there is a sizzling controversy on the mode of appointment of independent directors.

In this article, we have made a comparison of the legislative framework for independent directors, especially the process of appointment, across various jurisdictions.  While we note that some countries have moved to a dual approval process, the concept such as a database of IDs and a proficiency test remains an Indian aberration.

Independent Directors – Evolution in India

In India, the idea, or rather the need of having Independent Directors on the board of companies (especially those involving public interest) was acknowledged in the early 2000s through the SEBI Listing Agreement. Therefrom, the concept found a concrete legislative recognition in late 2013 as the Companies Act, 2013 took shape and character covering unlisted companies as well.

A snapshot of the concept’s evolution through guidelines and report to the Companies Act and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 is given below –

As compared to India, the western world was way ahead in the race- the concept of Independent Directors traces its inception as long back as in the 1950s when the murmurs of representation of small shareholders surrounded the corporate world. However, like in India, it took a long time for countries in Europe and North America to bring the concept within the regulatory framework. In the USA, the concept of Independent Director received regulatory recognition under the Sarbanes-Oxley Act, 2002. Thereafter the regulations issued by various stock exchanges took the lead.

Who is an Independent Director – The Indian Viewpoint

With all the hullabaloo about Independent Director, the natural question was ‘who is an independent director’; while the terminology was largely suggestive of the answer – “someone who is capable of putting forth an independent view about the business of the company”, it was crucial to define the term.

The definition of Independent Director from Section 149 of the Companies Act, 2013 (‘Act’) and Regulation 16 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’). While unlisted companies are required to adhere to the requirement under section 149 of the Act; listed companies or those intending to be listed are required to abide by LODR too.

On the same lines as discussed above, LODR identifies an independent director as someone who is not related to the company, either as a promoter or director of the company, its group companies, who do not have a material pecuniary relationship with the company or its group, as well as someone who does not or has not been related to the company in any manner in the recent position, such that s/he could influence the decisions/ business of the company.

The aforesaid is provided in Regulation 16 of LODR[1], which defines “Independent Director” as “a non-executive director, other than a nominee director of the listed entity, who:

  • who, in the opinion of the board of directors, is a person of integrity and possesses relevant expertise and experience;
  • who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity;
  • who is not related to promoters or directors in the listed entity, its holding, subsidiary, or associate company;
  • who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the  [three]*  immediately preceding financial years or during the current financial year
  • none of whose relatives ;

[(A) is holding securities of or interest in the listed entity, its holding, subsidiary or associate company during the three immediately preceding financial years or during the current financial year of face value in excess of fifty lakh rupees or two percent of the paid-up capital of the listed entity, its holding, subsidiary or associate company, respectively, or such higher sum as may be specified;

(B) is indebted to the listed entity, its holding, subsidiary or associate company or their promoters or directors, in excess of such amount as may be specified during the three immediately preceding financial years or during the current financial year;

(C) has given a guarantee or provided any security in connection with the indebtedness of any third person to the listed entity, its holding, subsidiary or associate company or their promoters or directors, for such amount as may be specified during the three immediately preceding financial years or during the current financial year; or

(D) has any other pecuniary transaction or relationship with the listed entity, its holding, subsidiary or associate company amounting to two percent or more of its gross turnover or total income:

Provided that the pecuniary relationship or transaction with the listed entity, its holding, subsidiary or associate company or their promoters, or directors in relation to points (A) to (D) above shall not exceed two percent of its gross turnover or total income or fifty lakh rupees or such higher amount as may be specified from time to time, whichever is lower;]*

  • who, neither himself/herself nor whose relative(s) —
  • holds or has held the position of a key managerial personnel or is or has been an employee of the listed entity or its holding, subsidiary, or associate company [or any company belonging to the promoter group of the listed entity]* in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

[Provided that in case of a relative, who is an employee other than key managerial personnel, the restriction under this clause shall not apply for his / her employment.]*

  • is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of —
    • a firm of auditors or company secretaries in practice or cost auditors of the listed entity or its holding, subsidiary, or associate company; or
    • any legal or a consulting firm that has or had any transaction with the listed entity, its holding, subsidiary, or associate company amounting to ten percent or more of the gross turnover of such firm;
    • holds together with his relatives two percent or more of the total voting power of the listed entity; or
    • is a chief executive or director, by whatever name called, of any non-profit organisation that receives twenty-five percent or more of its receipts or corpus from the listed entity, any of its promoters, directors or its holding, subsidiary or associate company or that holds two percent or more of the total voting power of the listed entity;
    • is a material supplier, service provider or customer or a lessor or lessee of the listed entity;
  • who is not less than 21 years of age.
  • who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director

Evidently, the definition in India is very comprehensive compared to other major jurisdictions. Below we discuss and compare some major provisions in the definition of IDs in India, the USA and the UK –

Basis India USA[2] UK[3]
Material relationship The director shall, apart from receiving director’s remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the three immediately preceding financial years or during the current financial year;

 

None of the director’s relatives

[(A)is holding securities of or interest in the listed entity, its holding, subsidiary or associate company during the three immediately preceding financial years or during the current financial year of face value in excess of fifty lakh rupees or two percent of the paid-up capital of the listed entity, its holding, subsidiary or associate company, respectively, or such higher sum as may be specified;

 

(B) is indebted to the listed entity, its holding, subsidiary or associate company or their promoters or directors, in excess of such amount as may be specified during the three immediately preceding financial years or during the current financial year;

 

(C) has given a guarantee or provided any security in connection with the indebtedness of any third person to the listed entity, its holding, subsidiary or associate company or their promoters or directors, for such amount as may be specified during the three immediately preceding financial years or during the current financial year; or

 

(D) has any other pecuniary transaction or relationship with the listed entity, its holding, subsidiary or associate company amounting to two percent or more of its gross turnover or total income:

 

Provided that the pecuniary relationship or transaction with the listed entity, its holding, subsidiary or associate company or their promoters, or directors in relation to points (A) to (D) above shall not exceed two percent of its gross turnover or total income or fifty lakh rupees or such higher amount as may be specified from time to time, whichever is lower;]*

 The director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company).

The references to “listed company” would include any parent or subsidiary in a consolidated group with the listed company

 The director has, or had within the last three years, no material business relationship with the company, either directly or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;

 

The director has not received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme
Employment The director neither himself/herself nor his relatives hold or has held the position of a key managerial personnel or is or has been an employee of the listed entity or its holding, subsidiary or associate company, [or any company belonging to the promoter group of the listed entity]* in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.

 

[Provided that in case of a relative, who is an employee other than key managerial personnel, the restriction under this clause shall not apply for his / her employment]*

 

 The director is not independent if the director is, or has been within the last three years, an employee of the listed company or an immediate family member is, or has been within the last three years, an executive officer, of the listed company.

The director has received or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 indirect compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).

 The director neither is or has been an employee of the company or group within the last five years
Promoter/director or related to them The director is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity;

 

Who is not related to promoters or directors in the listed entity, its holding, subsidiary, or associate company;

 

 No director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with the listed company either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company. The director has close family ties with any of the company’s advisers, directors, or senior employees.
Cross-directorship The director is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director

 

 The director or an immediate family member is or has been with the last three years, employed as an executive officer of another company where any of the listed company’s present executive officers at the same time serves or served on that company’s compensation committee. The director holds cross-directorships or has significant links with other directors through involvement in other companies or bodies

 

One may find many similarities in the definition of IDs in foreign jurisdictions with that in India but as already mentioned above, the definition in India is one of the most comprehensive and meticulous ones.

Appointment/reappointment process of IDs in different jurisdictions

In India, the extant provisions require ordinary resolution to be passed by the shareholders for the appointment of IDs and a special resolution in case of re-appointment, based on the recommendation of the Nomination and Remuneration Committee (NRC) and the approval of the Board.

Earlier, SEBI had released a consultation paper w.r.t. regulatory provisions for Independent Directors which warranted a ‘dual approval’ for such appointment/ re-appointment as follows:

  • An ordinary resolution by shareholders (Special Resolution in case of re-appointment) and
  • A resolution by “majority of minority”

(Note: The Paper defined minority shareholders to mean shareholders other than the promoter and promoter group.)

However, owing to the response received thereafter, SEBI, in its Board Meeting held on June 29, 2021[4] (SEBI Board Meeting), disregarded the earlier proposal of a dual approval and instead decided that the approval of shareholders would be required by way of special resolution for both appointment and re-appointment

[SEBI, vide (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2021 ( ‘Amendments’) notified on August 4, 2021, have amended the Regulation 25 providing that the appointment, re-appointment or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution. Thus, listed entities henceforth shall have to obtain the approval of members via a special resolution for the appointment as well.]*

In the USA, the NASDAQ Listing Rules provide that, where shareholders’ approval is required, the minimum vote that will constitute shareholder approval shall be a majority of the total votes cast on the proposal.

Akin to the NRC in India, the UK Corporate Governance Code of 2018 requires that the Board should establish a Nomination Committee, composed of majority independent non-executive directors, to lead the process for the appointment of all directors. Any appointment must be approved by the Board and shareholders of the company by way of an ordinary resolution.

However, as per the UK Listing Rules, the appointment of IDs is dependent on the existence of a controlling shareholding[5]. A snapshot of the manner of appointment is given below

Hence, approval is required from both the set of shareholders. If the company still proposes to appoint the same person as an independent director despite failing to receive the dual nod as discussed above, it can propose another resolution to elect the same person, but after 90 days from the date when the previous proposal was put to vote. This time the resolution will only require approval by the shareholders of the company[6].

Databank of Independent Directors & the Online Proficiency Test

One of the prerequisites to become an Independent Director in India is the inclusion of their name in the Databank of Independent Directors (‘Databank’) and passing an Online Proficiency Test (‘Test’) within a period of two years from the date of inclusion of name in the databank as per Section 150 of the Act, read with Rule 6 of the Companies (Appointment and Qualification of Directors) Rules, 2014. However, certain categories of persons have been exempted[7] from the requirement of passing the Test who possess requisite experience and expertise as prescribed;

The question, however, is whether such arduous and tedious criteria required for an appointment really ensure board independence and good governance practices. It is understood that the tenet behind such steps was quality control – it was to ensure that only persons with a certain minimum level of expertise & experience are appointed as Independent Directors.

Further, some previous instances of celebrity directorships were also to be discouraged since the role of IDs is to ensure good governance practices and upholding the interest of all the stakeholders as a whole including minority stakeholders. Therefore, it should not merely be used as a tool of publicity.

However, keeping in mind the seniority of the position of directors in companies as well as lack of precedent, the requirement of passing the test seems rather odd and brings anomalies in the IDs’ regulatory regime in India vis-à-vis the rest of the world.

Constituted Body for selection of candidates for the role of IDs

As per the extant laws in India, the NRC recommends the persons to be appointed as IDs on the board of the company. This committee oversees the functions of formulation and recommendation of remuneration of the directors and the senior management. It has been decided in the SEBI Board Meeting that the process to be followed by NRC while selecting candidates for appointment as IDs, shall be elaborated and be made more transparent including enhanced disclosures regarding the skills required for appointment as an ID and how the proposed candidate fits into that skillset.

[SEBI, via the Amendments, has added a new sub-clause after sub-clause (1) in Para A in Part D of Schedule II for implementing its decision on an elobaroted and transparent selection oricess of IDs.

The NRC of every listed entities shall, for every appointment of IDs,

  • evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation
  • prepare a description of the role and capabilities required of IDs.
  • ensure that the person recommended to the Board for appointment as an ID has the capabilities identified in such description.

For the purpose of identifying suitable candidates, the Committee may:

  1. use the services of an external agencies, if required;
  2. consider candidates from a wide range of backgrounds, having due regard to diversity; and
  3. consider the time commitments of the candidates

Thus, the NRCs of every listed company henceforth has to first formulate the description of the role of an ID after considering the skill sets and knowledge and experience required for acting as an ID of the company. This has also widened the scope of NRC as well as the responsibility for finding the right candidate for the position of an ID. The extant practice was to give disclosures in Corporate Governance Report and the Board report that forms part of the Annual Report of the Company.]*

Just like the NRC in India, companies in the USA have to constitute Compensation Committee as per the NASDAQ Stock Market LLC Rules [5605. Board of Directors and Committees] “Each Company must have, and certify that it has and will continue to have, a compensation committee of at least two members. Each committee member must be an Independent Director as defined under Rule 5605(a) (2).”

As per the NASDAQ Rules, director nominees must either be selected, or recommended for the Board’s selection, either by:

  1. Independent Directors constituting a majority of the Board’s Independent Directors in a vote in which only Independent Directors participate, or
  2. a nominations committee composed solely of Independent Directors.

The New York Stock Exchange Listed Company Manual (‘NYSE Manual’) vests on the nominating/corporate governance committee, the sole authority to retain and/or terminate any search firm to be used to identify director candidates, including sole authority to approve the search firm’s fees and other retention terms.

The UK Corporate Governance Code, 2018 states that the board should establish a remuneration committee of independent non-executive directors, with a minimum membership of three, or in the case of smaller companies, two. In addition, the chair of the board can only be a member if they were independent on appointment and cannot chair the committee. Before appointment as chair of the remuneration committee, the appointee should have served on a remuneration committee for at least 12 months.

Tenure and re-appointment of IDs

In India, one term of appointment of IDs is for a maximum of 5 years and can be re-appointed for another term. Such re-appointment has to be made by way of passing a special resolution. Further, the performance of Independent Directors is to be evaluated every year based on which the NRC recommends whether the said director shall be re-appointed or not. However, the question of such recommendation only comes when the tenure of the director comes to its end.

Furthermore, the UK Corporate Governance Code provides that all directors should be subject to annual re-election.  The code also considers the presence of an ID for more than nine years on the Board of a company as a threat to his independence.

In Singapore, Rule 720(5) of the SGX Listing Rules (Mainboard) / Rule 720(4) of the SGX Listing Rules (Catalist)[8] requires all directors to submit themselves for re-nomination and re-election at least once every three years.

The rule requires a re-nomination & re-election of all directors of the company at least once in 3 years and it helps to ensure that the assessment of independence happens once in every 3 years by members.

Cooling-off Period for appointment/reappointment of IDs

In India, a cooling-off period of 2 years is required in case of any material pecuniary transactions between a person or his/her relative and the listed entity or its holding, subsidiary, or associate company. The LODR has prescribed a cooling-off period of three years for Key Managerial Personnel (and their relatives) or employees of the promoter group companies, for appointment as an ID in the listed entity. However, relatives of employees of the company, its holding, subsidiary, or associate company have been permitted to become IDs, without the requirement of a cooling-off period, in line with the Companies Act, 2013.

[SEBI via Amendments has provided that an ID who resigns from a listed entity, shall not be appointed as an executive / whole time director  on the board of the listed entity, its holding, subsidiary or associate company or on the board of a company belonging to its promoter group, unless one year has elapsed from the date of resignation.]*

The NASDAQ Stock Market LLC Rules[9] (‘NASDAQ Rules’) have prescribed a cooling-off period of 3 years for the appointment of an independent director where such person has a relationship with the company as prescribed under the rule.

UK Corporate Governance Code, 2018[10] (‘UK Code’) provides that a person who has or had within the last three years, a material business relationship with the company, either directly or as a partner, shareholder, director, or senior employee of a body that has such a relationship with the company shall not be appointed as an Independent Director.

The Singapore Code of Corporate Governance, 2018[11] prescribes a cooling-off period of 3 years for the appointment of an independent director where such person has a relationship with the company.

Remuneration of Independent Directors

In India, offering stock options to Independent Directors is prohibited. On the contrary, as per the New York Stock Exchange Listed Company Manual (‘NYSE Manual’), Independent directors must not accept any consulting, advisory, or other compensatory fees from the Company other than for board service.

Further, the UK Corporate Governance Code 2018 provides that remuneration for all non-executive directors should not include share options or other performance-related elements. Independent directors shall not be a member of the company’s pension scheme.

The Singapore Code of Corporate Governance 2018 the Remuneration Committee should also consider implementing schemes to encourage non-executive directors (NEDs) to hold shares in the company so as to better align the interests of such NEDs with the interests of shareholders. However, NEDs should not be over-compensated to the extent that their independence may be compromised.

Fees payable to non-executive directors shall be by a fixed sum, and not by a commission on or a percentage of profits or turnover. (Appendix 2.2 Articles of Association)

Important determinants of Independence across jurisdictions

Determinants of Independence India USA UK Singapore
Present or past employment relationship Yes Yes Yes Yes
Relationship of close family members Yes Yes Yes Yes
Pecuniary relationship with company* Yes Yes Yes Yes
Cooling-off period Yes Yes Yes Yes
Restriction on Stock options Yes Yes Yes No
ID databank & Proficiency test Yes No No No

* Subject to specific monetary limits

Conclusion

The regulatory framework for Independent Directors in India has a lot of things in common with other jurisdictions around the world. However, the requirement of passing an online test for becoming eligible to be appointed as an Independent Director is something peculiar to India. The regulators across jurisdictions have been proactive in bringing changes to the Independent Director regime, to strengthen the corporate governance in listed companies. One may expect some of the above discussed benchmark practices in different foreign jurisdictions may soon be adopted in India as well.

Related presentation – https://vinodkothari.com/2021/08/ensuring-board-continuity-and-balance-of-capabilities/

[1] https://www.sebi.gov.in/legal/regulations/sep-2015/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirement-regulations-2015-last-amended-on-may-5-2021-_37269.html

[2]  https://nyse.wolterskluwer.cloud/listed-company-manual

[3]https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF

[4] https://www.sebi.gov.in/media/press-releases/jun-2021/sebi-board-meeting_50771.html

[5] A company is said to have controlling shareholder(s) if a shareholder/ an entity/ a group holds more than 30% voting power in the company

[6] https://www.mondaq.com/uk/acquisition-financelbosmbos/315598/new-dual-process-for-appointing-independent-directors-amendments-to-articles-of-association

[7] https://www.independentdirectorsdatabank.in/pdf/databank-rules/FifthAmdtRules_18122020.pdf

[8] https://rulebook.sgx.com/rulebook/board-matters-1

[9] https://listingcenter.nasdaq.com/rulebook/nasdaq/rules

[10] https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PD

[11] https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulatory-and-Supervisory-Framework/Corporate-Governance-of-Listed-Companies/Code-of-Corporate-Governance-6-Aug-2018.pdf

*[ The changes are applicable with effect from 1st January, 2022].

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

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

Updated as on September 28, 2023 , pursuant to the SEBI LODR (Second Amendment) Regulations, 2023

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 company including the information pertaining to occurrence of investors meet/conference call with analysts, however, several inconsistencies were observed in the disclosures made by the companies. For instance, some 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 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 were voluntary for FY 2021-22, and became mandatory from FY 2022-23. The synopsis of the amendment is provided below:

Figure 1: Disclosure requirement for analyst meet

Regulatory requirements in case of one-to-one meet

In respect of one-to-one meet, there are no explicit disclosure requirements 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:

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

Regulation 8 of PIT Regulations mandates every listed company to frame a code of practices and procedures for fair disclosure of UPSI in line with the principles set out in Schedule A to PIT Regulations. Para 6 of Schedule A requires the company to ensure that information shared with analysts and research personnel is not UPSI. Para 7 provides for developing best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made.

The PIT Regulations do not distinguish between group meets and one-to-one meets. It requires the company to record such meets and develop best practices to disclose the same on its website. The practice of recording the meet also safeguards the company officials participating in the meeting from any possible allegation of having divulged 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 companies to take all required steps to ensure the same. Considering the same, the fact whether it is a group meet/ call or otherwise or whether such meet/ call was organized by the company itself or not, becomes 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 company. Accordingly, if any UPSI is shared, legitimately in terms of the said code or otherwise, 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 anomalies in our previous article which can be viewed here.

In order to clear the ambiguities w.r.t the disclosure requirements, BSE, vide circular dated 29th June, 2021 and July 29, 2022, provided further clarifications and recommendations. In this article, we have tried to provide 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 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.CasesDisclose 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 meetingAtleast 2 working days in advance (excluding the date of intimation and date of the meet).Mandatory only for group meets.         
 Presentation and the audio/ video recordings of such meetingBefore 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 a company 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 meetingWithin 5 working days of conclusion of the meet.Mandatory for both group meets and one-to-one meets.To be disclosed whether conducted by a company 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 meetsSchedule of such meetingAtleast 2 working days in advance (excluding the date of intimation and date of the meet)Mandatory only for group meets.
 Presentation made in such meetingBefore the next trading day or within 24 hours from the conclusion of the meet, whichever is earlier..Mandatory only for group meets.To be disclosed on the website of the company, whether conducted by company or any other entity.To be disclosed simultaneously to the stock exchange.
 In case any UPSI is sharedAudio/video recordings or transcripts of such meetingPromptlyApplicable to both group as well as one-to-one meets.To be disclosed on the website of the company, whether conducted by a company or any other entity.To be disclosed simultaneously to the stock exchange. 

Best practices that may be adopted by companies

Disclosure of schedule of meet/ call

While making disclosure of schedules, the company may also provide the details pertaining to the meet/ call, mode of attending, details pertaining to registrations, disclaimers/ note to complete/ ease registration/ attending the call, details regarding specific platform requirements, if any, inclusions/ exclusions of audience/ participants if any, etc.

Further, a disclaimer or a confirmation may be added in the intimation stating that ‘Company will be referring to publicly available documents for discussions’ or ‘No UPSI is proposed to be shared during the meeting / call’. This will create confidence amongst the investors and will maintain sanctity of the meet / call.

Disclosure of transcripts of the meet/ call

While disclosing the transcripts of the meet/ call, the companies may also consider providing the list of attendees and record the dialogues, Q&As and assents and dissents of the analysts/ investors. Further, a confirmation may be added in the disclosure that no unpublished price sensitive information was shared/ discussed in the meeting / call.

Do’s and Don’ts to be ensured by the companies

The companies 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:

Sr. No.Do’sDon’ts
 1.Always conduct scheduled meets.Avoid unscheduled meets.
 2.Always schedule group meets.Avoid scheduling one-to-one meet.
 3.Upload the schedule of group meets/ calls on the website atleast 2 working days in advance (excluding the date of intimation and date of the meet) and also simultaneously submit the same with the stock exchange.Do not forget to upload and send the schedule on the website and to the stock exchanges, respectively beyond the prescribed time.
 4.Upload the presentation made to analysts/ investors in the scheduled group meet on the website promptly before the next trading day or within 24 hours from the conclusion of the meet, whichever is earlier and also simultaneously submit the same with the stock exchange.Do not forget to upload and send the schedule on the website and to SE, respectively beyond the prescribed time.
 5.Ensure to make audio and video recording of the post earnings/ quarterly calls, whether conducted physically or through digital means, either conducted by company 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 company itself or by any other entity.
 6.Ensure transcripts of the post earnings/quarterly calls, whether conducted physically or through digital means, either conducted by company 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 company itself or by any other entity.
 7.Ensure that the information shared with the investors is already available in the public domain.Do not share UPSI with the investors.
 8.Maintain a 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.
 9.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 prescribed time.
 10.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.
 11.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
 12.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: permanentlyDo 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.

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/

Our Podcast on the topic: https://open.spotify.com/episode/2oVRo2iEOV7cVVqYwcqb2c?si=b860b48d6f924ad6&nd=1

Our Resource Centre on LODR:

LODR Resource Centre

Case Study I – Related Party Transactions – [Case 1]

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In our series of case studies on corporate laws, we present to you our first case study on Related Party Transactions. Readers and viewers are invited to share their views and solutions in the comment section below –

Case Study 1- Related Party Transactions

Dividend restrictions on NBFCs

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– Financial Services Division (finserv@vinodkothari.com)

Background

The Reserve Bank of India (RBI) vide a notification dated 24th June, 2021[1] imposed restrictions on distribution of dividends by non-banking financial companies (‘Notification’). The restrictions cover both systemically important NBFCs as well non-systemically important ones. The guidelines have been issued in line with the draft guidelines for the declaration of dividends by NBFC issued in December 2020. Restrictions on dividend payout essentially force financial sector entities to plough back a minimal part of their profits, and therefore, result in creation of a profit conservation. Such restrictions are common in case of financial institutions world-over, and are also imbibed as a part of Basel III capital adequacy requirements. Similar restrictions exist in case of banking entities[2]. In case of NBFCs, such restrictions were proposed by the RBI vide Draft Circular on Declaration of Dividend by NBFCs dated December 9, 2020[3]. Dividend Payout Ratio (DP Ratio) is an important policy measure for companies for shareholder wealth maximisation. A conservative dividend distribution policy ensures churning of profits thereby ensuring organic growth of the net worth, and assisted by leverage, a return on shareholders’ funds higher than what the shareholders can fetch on distributed money. On the other hand, aggressive dividend distribution policy entails that profits be returned to the shareholders as there are less business investment opportunities, thus wealth of shareholders be returned. The foregoing arguments does not encompass stictict dividend payout criteria, but a broad policy objective which organisations seek to achieve. However, in the case of financial institutions like Banks and NBFCs  the motivation of regulators to limit the dividend payout is from the perspective of prudential regulation. The limit on dividend distribution allows regulators to ensure that adequate capital conservation buffers are maintained at all times by the financial institutions. Most NBFCs follow very conservative dividend policies, and based on publicly available data, the DP Ratios of some of the NBFCs for FY 2019-20 are as follows:
  1. Manappuram- 18.86%
  2. Cholamandalam- 12.78%
  3. Bajaj Finserv- 11.93%
  4. Muthoot Finance- 19.91%
  5. Tata Capital Financial Services- 32.96%
  6. DCM Shriram- 17.19%

Applicability

Who all are covered? The opening statement of the Notification provides that the Notification is applicable on all NBFCs regulated by RBI. Further, reference is made to the term ‘Applicable NBFCs’  as defined under the respective RBI Master Directions on NBFC-ND-SI and NBFC-ND-NSI. The concept of Applicable NBFC is relevant to determine the applicability of the provisions of the aforesaid RBI Master Directions. Accordingly, it can be understood that, along with the ‘Applicable NBFCs’, the following categories of NBFCs shall be covered under the ambit of the Notification-
  1. Housing Finance Companies (HFCs),
  2. Core Investment Companies (CICs),
  3. Government NBFCs,
  4. Mortgage Guarantee Companies,
  5. Standalone Primary Dealers (SPDs),
  6. NBFC-Peer to Peer Lending Platform (NBFC-P2P)
  7. NBFC- Account Aggregator (NBFC-AA).
  8. NBFC-D (deposit taking NBFCs)
  9. NBFCs-ND (non-deposit taking NBFCs) (both SI and NSI)
  10. NBFC-Factor (both SI and NSI)
  11. NBFC-MFI (both SI and NSI)
  12. NBFC-IFC (both SI and NSI)
  13. IDF-NBFC
However, it is to be noted that For NBFCs that do not accept public funds and do not have any customer interface no limit has been imposed with regards to the dividend payout ratio. Effective from which financial year? Effective for declaration of dividend from the profits of the financial year ending March 31, 2022 and onwards. Which all dividends are covered? Proposed dividend shall include both dividend on equity shares and compulsorily convertible preference shares. However, other than CCPS, dividends declared on preference shares are not included under the Notification. Note that the issue of bonus shares is, in essence, capitalisation of profits, and therefore, is not affected by the present requirement.

Computation of dividend payout ratio:

Besides the upfront conditionalities such as capital adequacy ratio, leverage ratio, etc., the stance of the present Notification is limitation on dividend payout ratio. Hence, the meaning of the DP ratio becomes important. The Notification defines the same as : ‘the ratio between the amount of the dividend payable in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed.’ As we discussed elsewhere, the word “dividend” shall be restricted to only equity and CCPS dividend. Hence, dividend on redeemable preference shares shall be excluded. Also note that the word “profit for the year” refers to profits after tax. There is no question of adding the brought forward profits of earlier years, whether parked in reserves or retained as surplus in the profit and loss account. In case of companies adopting IndAS, there are always questions on what constitutes distributable profits – whether the gains or losses on fair valuation, taken to P/L are a part of the distributable profits or not. The relevant provisions of the Companies Act, viz., proviso to sec. 123 (1) shall have to be borne in mind.

Eligibility Requirement and Quantum Restrictions

Category Eligibility Requirement Quantum*
NBFCs (including SDPs) meeting prudential requirements ●  Complies with applicable regulatory capital adequacy requirements/leverage restrictions/Adjusted net-worth for each of the last three financial years including the financial year for which the dividend is proposed

○ For SPDs, minimum CRAR of 20% to be maintained for the financial year for which dividend is proposed.

● Net NPA ratio shall be less than 6% in each of the last three years, including as at the close of the financial year for which dividend is proposed to be declared.

○ Calculation of NNPA

● Complies with the provisions of Section 45 IC of the RBI Act/ Section 29 C of the NHB Act, as the case may be, that is to say, has transferred 20% of its net profits to the regulatory reserve fund ● No explicit restrictions placed by the regulator on declaration of dividend		 ●  Type I NBFCs- No limit●  CICs and SPDs- 60% ●  Other NBFCs- 50%
NBFCs (other than SPDs) not meeting prudential requirements ● Complies with the applicable capital adequacy requirements/ leverage restrictions in the financial year for which dividend is proposed to be paid● Has net NPA of less than 4% as at the close of the financial year. 10%
As regards NBFC-ND-NSI, the applicable regulatory capital requirement, as mentioned in Annex I[4] of the Notification,  seems to suggest that if there is a breach of leverage ratio at any time since 2015, the NBFC is disqualified. This however, does not seem to be the intent of the regulator. The meaning of the aforesaid restriction should be that the provision became applicable from 2015; however, it should not be leading to a conclusion that a dividend distribution will ensure that there is no breach of leverage ratio at any time in the history of the said NBFC. We are of the view that each of the ratios (CRAR or Leverage of Adjusted Net worth, as the case may be) need to be observed ideally at the time of distribution (last three FYs including the year for which dividend is declared), and even conservatively, during the year in question. *The Notification has prescribed the same limits on quantum for a certain class of NBFCs, however, the draft guidelines had prescribed the limits based on the CRAR or adjusted net-worth of the NBFCs. (Refer Annex I of draft guidelines)

Reporting Requirements

NBFC-D, NBFC-ND-SIs, HFCs & CICs declaring dividend shall report details of dividend declared during the financial year as per the prescribed format within a fortnight after declaration of dividend to the Regional Office of the RBI/Department of Supervision of NHB, as the case may be. There seems to be a lack of clarity w.r.t. the disclosure requirement for NBFC-MFIs and NBFC-IDFs. Though they are covered under the definition of ‘Applicable NBFCs’ under the RBI Master Directions, however, they are not generally classified as NBFC-ND-SI. Hence, whether the disclosure requirement is applicable to them or not seems to create confusion. In our view, going by prudence, this must be adhered to by such systemically important MFI and IDFs as well. Accordingly, it can be inferred that the disclosure requirements shall not be applicable to following:
  • Mortgage Guarantee Companies,
  • Standalone Primary Dealers (SPDs),
  • NBFC-Peer to Peer Lending Platform (NBFC-P2P)
  • NBFC- Account Aggregator (NBFC-AA).
  • NBFCs-ND-NSIs

Comparison with the dividend regulations on Banks

Criteria Bank NBFCs
Eligibility Only those banks would be eligible to declare dividends who have a CRAR of at least 9% for preceding two completed financial years and the accounting year for which it proposes to declare dividend and Net NPA less than 7% NBFC-ND-NSI with leverage upto 7 times and NBFC-ND-SI with a CRAR of not less than 15% for last three years (including the FY for which dividend is declared) and Net NPA less than 6% in each of the last three years
In case not meeting eligibility In case any bank does not meet the above CRAR norm, but has a CRAR of at least 9% for the accounting year for which it proposes to declare dividend, it would be eligible to declare dividend provided its Net NPA ratio is less than 5% In case any NBFC does not meet the above eligibility criteria for each of the previous three FY, but meets the capital adequacy for the accounting year, for which it proposes to declare dividend and has a Net NPA ratio of less than 4% at the close of the FY, it shall be allowed to declare dividend, subject to a maximum of 10% on the DP ratio.
Quantum Dividend payout ratio shall not exceed 40 % and shall be as per the prescribed matrix CIC’s and SPDs shall ensure the maximum dividend payout ratio does not exceed 60%, while the other NBFCs shall not exceed 50% of the DP ratio. For Type I NBFCs there is no limit.
Reporting All banks declaring dividends should report details of dividend declared during the accounting year as per the proforma furnished by RBI NBFC-Ds, NBFC-ND-SIs, HFCs & CICs declaring dividend should report the details of dividend within a fortnight after declaration of dividend to RBI/NHB, as may be applicable.

Immediate Actionables

NBFCs, who already have a Dividend Distribution Policy in place, may have to amend the policy in line with the Notification. As per SEBI LODR Regulations, top 1000 listed companies are mandatorily required to have a dividend distribution policy.  Further, NBFCs may also have voluntarily adopted a policy. The dividend distribution policy includes the following parameters:
  • the circumstances under which the shareholders may or may not expect dividend;
  • the financial parameters that shall be considered while declaring dividend;
  • internal and external factors that shall be considered for declaration of dividend;
  • policy as to how the retained earnings shall be utilized; and
  • parameters that shall be adopted with regard to various classes of shares
The eligibility requirements and limits on quantum of dividend, as provided in the Notification,  may be additional criterias for such NBFCs to declare dividend. In such a case, the existing dividend distribution policy shall be required to be amended in order to include the additional parameters. It is noteworthy here that, as per regulation 43A of the LODR, if a listed entity proposes to amend its dividend distribution policy, it shall disclose the changes along with the rationale for the same in its annual report and on its website. [1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12118&Mode=0 [2] https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=2240&fn=2&Mode=0 and other associated circulars [3] https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50777 [4] https://rbidocs.rbi.org.in/rdocs/content/pdfs/NBFCS24062021_A1.pdf Our related write-ups:
FAQs on Dividend Distribution Policy
Our presentation on dividends – https://vinodkothari.com/2021/09/an-overview-of-the-regulatory-framework-of-dividends/ Watch our YouTube video on Restrictions on dividend distribution on NBFCs

RBI Guidelines at odds with the Companies Act on appointment of Auditor

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A comparative analysis between the Companies Act, SEBI Guidelines and SEBI Circular dated 18th Oct. 2019

– Ajay Kumar K V | Manager (corplaw@vinodkothari.com)

Introduction

The Reserve Bank of India has issued Guidelines[1] for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) under Section 30(1A) of the Banking Regulation Act, 1949, Section 10(1) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 and Section 41(1) of SBI Act, 1955; and under provisions of Chapter IIIB of RBI Act, 1934 for NBFCs, on 27th April 2021.

The Guidelines provide for appointment of SCAs/SAs, the number of auditors, their eligibility criteria, tenure and rotation as well as norms for ensuring the independence of auditors.

However certain provisions of these Guidelines are either completely different or stringent as compared to the provisions of the Companies Act, 2013 (Act). Further, in case of listed entities the question would arise whether the SEBI circular CIR/CFD/CMD1/114/2019[2] dated 18th October 2019 shall be applicable, where the existing auditor is ineligible to continue as the auditor of the company and a new auditor is to be appointed.

In this write up, we have discussed the requirements under both RBI Guidelines as well as the Act.

Read more →

Easing Delisting of Equity Shares

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-Shreya Masalia and Anushka Vohra

corplaw@vinodkothari.com

In order to make the existing delisting Regulations robust, efficient, transparent and investorfriendly, the Securities Exchange Board of India (‘SEBI’) has issued the SEBI (Delisting of Equity Shares) Regulations, 2021[1] (‘Delisting Regulations, 2021’) on June 11, 2021, thereby superseding the erstwhile SEBI (Delisting of Equity Shares) Regulations, 2009[2] (‘Erstwhile Regulations’). The Erstwhile Regulations were notified on June 10, 2009. Thereafter, several amendments have been carried out in the delisting regulations according to the changing need and developments in the securities market. Thus, to further streamline and strengthen the process to be followed for delisting, the Delisting Regulations have been introduced.

In India, a large number of entities are listed on regional stock exchanges, serving no public interest at all. In fact, over the years, most of them have become non-compliant. However, given the cumbersome process of delisting, these companies have chosen to remain listed. The Delisting Regulation, 2021 has made the path of exit for these entities comparatively easier.

In this article, the authors have made an attempt to discuss the changes in the delisting procedure as introduced vide the Delisting Regulations, 2021.

Background

Listing of shares at stock exchanges provides for free transferability and ready marketability to the shares of a company. In contrast to that, when a public company chooses to go private, it has to delist from the stock exchanges – which means that the shares of that company will no longer be available for trading on the platform provided by the stock exchange.

The Companies choose to list themselves to grab the advantages of listing viz; lower cost of capital, greater shareholder base, liquidity in trading of shares, prestige etc. But the companies need to be contended that the benefits of listing outweigh the listing costs, the compliance requirements do not overburden the companies and do not expose them to disciplinary actions.

Initially, there existed 21 regional stock exchanges (‘RSE’) in India of which 20 such RSEs have shut down over the years due course due to their lack of financial viability, exchanges becoming defunct, usage of archaic technology and subsequent derecognition of the exchanges by SEBI. The lone-standing regional stock exchange is the Calcutta Stock Exchange (‘CSE’), which is also at its verge of getting shut. Various companies continue to be listed on CSE, however the economic viability of the same is still questionable. The Delisting Regulations provide for an easy exit opportunity to these companies by significantly reducing the time-period of the delisting process and streamlining the same.

Also with the relisting bar of 5 years in case of voluntary delisting having been reduced to 3 years will now allow the companies to relist in a comparatively lesser period of time and raise funds for their new venture.

Why do companies opt for delisting?

The statistics given below show that there has been a tremendous increase in the number of companies being delisted from the stock exchange. Delisting from the stock exchanges could either be undertaken voluntarily, or compulsory delisting by the Stock Exchanges or delisting pursuant to liquidation.

(Source: NSE)

Understanding compulsory and voluntary delisting

Compulsory delisting generally, is caused due to procedural and compliance lapses by the companies. Amongst other causes, the major causes for compulsory delisting include non-payment of listing fee, reduction in public shareholding and failure to meet the same, unfair trade practices at the behest of the management/promoters etc.

While compulsory delisting is at the precept of the Stock Exchanges, companies opt to voluntarily delist themselves.

The most common rationale for companies to opt for voluntary delisting in the recent time has been;

  1. To obtain full ownership of the company by the promoter & promoter group which will in turn provide increased financial flexibility to support the Company’s business and financial needs;
  2. To explore new financing structures including financial support from the Promoter Group;
  3. To help in cost savings and allow the management to dedicate more time and focus on the core business;
  4. To provide easy exit to shareholders because of thin trading volume.

Modes of Exit via Delisting

The Delisting Regulations, as laid down by SEBI provides two modes of delisting of equity shares viz; (a) Compulsory and (b) Voluntary:

Further, in the case of voluntary delisting, companies have the following options:

  1. delisting from all the recognised stock exchanges ;
  2. delisting from any but not all the recognised stock exchanges, including delisting from Stock Exchange having nationwide trading terminal;
  3. delisting from any but not all the recognised stock exchanges, while remaining listed on the Recognised Stock Exchange having nationwide trading terminal.

In the case of 1 and 2 above, the companies have an obligation to provide an exit opportunity to the existing shareholders.

While the process in case of iii. above remains the same, changes have been brought about in the way a company has to manage the delisting offer pursuant to provision of exit opportunity. The gist of the changes introduced by the Delisting Regulations have been discussed below.

Overview of the Key Changes

  1. Disclosure by the Acquirer / Promoter[3]–

 In the Erstwhile Regulations, the process flow was that the acquirer used to intimate their intention to delist the Company to the Board and the Board would then intimate the same to the Stock Exchanges before granting its approval.

Now the Delisting Regulations, 2021, cast an obligation on the acquirer to intimate to the Stock Exchanges, their intention to delist the Company first and within one working day of its intimation shall also inform the Company at its Registered Office, this is termed as the Initial Public Announcement.

Comments: An intention to delist a company is a price sensitive event and can have a major impact on the market. Hence, its immediate disclosure to the public is warranted. Therefore, to fill the lacunae on information being made available to the public, intimation by the acquirer has been made mandatory.

2.Time-bound mechanism

The delisting procedure involves intricacies requiring approvals at various stages.Unlike the t new regulations specify the timelines for the entire process, making it less cumbersome and time-bound, as shown in the table below:

Event / complianceExisting TimelineRevised Timeline
Board resolutionNone specifiedWithin 21 days from the date the acquirer expresses his intention
Special resolutionNone specifiedWithin 45 days from the date of approval of the board
Escrow AccountBefore making public announcementNot later than 7 working days from the date of obtaining the shareholder’s approval.
In-principle approvalNone specifiedWithin 15 working days from the date of obtaining shareholders approval or receipt of any statutory or regulatory approval; whichever is later.
Outcome of Reverse Book Building (‘RBB’)None specifiedTo be announced within 2 hours from the closure of the bidding period. The same is also required to be published in the same newspapers as the newspapers in which the detailed public announcement was made within 2 working days from closure of the tendering period.
Release of shares in case of failure of offerWithin 10 working days from the closure of the offer, where bids were not acceptedIn case of failure due to

90% of the shares are not tendered: on the date of disclosure of the outcome of the RBB process

 

Discovered price being rejected by acquirer: on the date of making public announcement for the failure of the delisting

Payment on successful delistingWithin 10 working days from closure of offerDiscovered price same as floor price: payment through secondary market settlement mechanism

 

Discovered price higher than floor price: within 5 working days from the date of making the payment to the public shareholders

Final application to the stock exchanges after successful delistingWithin a period of 1 year from the date of passing of special resolutionWithin 5 working days from the date of making the payment to the public shareholders

 

 

 

3.Due diligence by Peer Reviewed Company Secretary

 Before making the public announcement in case of voluntary delisting, the board had to appoint a Merchant Banker for carrying out the due diligence and then on obtaining the in-principle approval, the acquirer had to appoint a Merchant Banker to act as manager to the issue. The Regulations provided that the Merchant Banker appointed by the board could act as manager to the offer.

Comments: Realising that this could probably result in conflict of interest, the new regulations provide that the board shall appoint a Peer Reviewed Company Secretary, who shall be independent of the promoter/ acquirer/Merchant Banker/or their Associates before the board meeting for granting approval and the Company Secretary shall carry out the necessary due diligence. Further, the acquirer shall before making the initial public announcement, appoint a Merchant Banker to act as manager to the offer. This has also opened up a new avenue for the Company Secretaries in Practice.

4.Escrow Account

Under the Erstwhile Regulation, the acquirer was required to deposit the consideration amount in the Escrow account after getting in-principle approval from SE however before making the PA. The new regulations make it obligatory on the acquirer to open an escrow account even before applying for in-principle approval. The acquirer has to deposit an amount equivalent to 25% of the total consideration at the time of opening the escrow account and the remaining consideration amount of 75% shall be deposited in the escrow account prior to the detailed public announcement.

Comments: Because of stringent timelines, surety is provided that the acquirer has the financial stability and has earmarked funds for the proposed delisting. Moreover, since this is an interest-bearing account, there would be no loss of interest, even if the delisting offer fails at the end.

5.Enhanced responsibility on the Board of Directors

 The new regulations intend to be more robust as far as the responsibility of the board is concerned. The erstwhile regulations required that the board shall before granting its approval certify that the proposed delisting is in the interest of the shareholders. And this certification was mere infructuous because there was no disclosure of the same and no reasonable justification, for that matter.

Comments: Considering a situation, where the Expression of Interest is received from an amicable acquirer i.e. the case of friendly takeover, there is a possibility of collusion between the acquirer and the management and in that case the interest of shareholders’ might take a back seat. However, to avoid the same, Regulation 28 has been added into the new regulations which provides that upon receipt of the detailed public statement the Board of Directors shall constitute a committee of independent directors to provide written reasoned recommendations on the delisting offer and the same shall also be disclosed by the Company in the newspapers where the detailed public statement was published, at least 2 working days before the bidding period.

6.Investor friendly regulations

 SEBI, being the watchdog of the Securities Market, had been established to protect the interest of investors as one of its main objectives, amongst others.

The Delisting Regulations provide that the public shareholders who could not participate in the RBB process could further tender their shares upto 1 year from the date of delisting and the promoter shall accept the tendered shares at the price which was finalised through RBB.

In addition to that, the new regulations now require the promoter/acquirer/Merchant Banker to comply with the following on a quarterly basis for 1 year from the date of delisting:

  1. Submit quarterly reports to the Stock Exchanges specifying details of shareholders at the beginning and end of the quarter and shareholders who availed the offer during the quarter;
  2. To send follow up communications to remaining shareholders;
  3. Publishing advertisement to invite the remaining shareholders to avail the offer

Comments: While the shareholders were given a time of upto 1 year, it was observed that the promoters did not take active steps to bail out the remaining shareholders.

7.Indicative Price

The new regulations have unraveled the concept of Indicative Price. As a general practice, some companies with a view to wriggle out of the complexities of remaining listed on the bourses, used to mention the terms indicative price or attractive price in the letter of offer. This price being higher than the floor price, was used to lure the shareholders to tender their shares.

The new regulations have defined Indicative Price as being a price higher than the floor price.

Comments: Even though the word has found its place in the regulations, in our view, SEBI should place a capping on the indicative price so as to ensure that the Companies do not offer lucrative price to the shareholders.

Changes in addition to the above

 Special provisions for delisting of shares already existed for small companies in the erstwhile regulations. SEBI has further prescribed the following special provisions for delisting:

1.Special provisions for delisting of shares on Innovators Growth Platform

These provisions are similar to the provisions for delisting of shares from the main board however, these provisions require that shares tendered reach 75% of the total issued shares of that class and at least 50% shares of the public shareholders as on date of the board meeting in which such delisting is approved are tendered and accepted instead of the 90% requirement.

 2. Special provisions for a subsidiary company getting delisted through scheme of arrangement wherein the listed holding entity and subsidiary company are in the same line of business

Transactions covered under the given head will not attract provisions of these Regulations provided the various conditions mentioned in regulation 37(2) have been complied with.

SEBI, vide notifcation dated July 09, 2021 has exempted the listed subsidiary companies, getting delisted through scheme of arrangement, that are –
– in the ‘same line of business’ as of its holding company;
– the subsidiary shall be a listed subsidiary of a listed holding company for a period of 3 years.

Further, vide said notification, SEBI has also laid down the following criteria for ascertaining whether the listed holding entity and subsidiary are in the ‘same line of business’:

 3. Special provisions for delisting by operation of law

These provisions shall be applicable in case of winding up of a company and recognition of a stock exchange by SEBI. In the former, the process of winding up shall be as prescribed by the prevalent regulatory framework. However, the latter seems highly unlikely.

Some Miscellaneous Changes

  1. The erstwhile regulations identified only peer reviewed chartered accountants and merchant bankers as valuers, however the same has now been defined with reference to section 247 of the Companies Act, 2013 which widens the scope of the definition. Therefore, any individual with a post-diploma/postgraduate degree or a bachelor’s degree with 3 and 5 years experience respectively in the specified field or having membership of a professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession with at least 3 years’ experience after such membership shall also be considered as eligible valuers.
  2. The detailed public announcement, amongst other details, is now also required to provide the indicative price if any given by the acquirer and a list of documents copies which shall be available for inspection by public shareholders at the registered office of the manager during the working days.
  3. The copy of the letter of offer shall be made available on the website of the company as well as that of the manager to the offer. The order copy of the stock exchange ordering compulsory delisting of the entity shall be uploaded on the website of the stock exchanges.
  4. As a pre-condition to voluntary delisting, the erstwhile regulations provided that the Companies cannot apply for delisting pursuant to buyback/preferential allotment offer being made. But there was lack of cohesiveness on when the buyback/preferential allotment offer being made by the Company would restrict delisting offer. Therefore, the new regulations specify that voluntary delisting shall not be permitted unless a period of 6 months has elapsed from the date of completion of last buyback/preferential allotment.
  5. For counting minimum 90% of the issued shares of a class, shares held by custodian of depository receipts, by Trust under SEBI (Share Based Employee Benefit) Regulations, by inactive shareholders such as vanishing and struck off companies have been excluded aiding the acquirer to achieve the minimum share tendering criteria with greater ease.

Effect of the instant changes

The new regulations have eased the earlier complex procedure of voluntary delisting. The enhanced disclosures and transparency will help to instil confidence among the shareholders. The business environment is dynamic and the time-bound procedure would help the companies to avail exit from the Stock Exchanges and explore their business opportunities by going private.

Concluding Remarks

In India, “Delisting” process has seen very less success as compared to the global market. The new regulations irrefutably addresses some core aspects and also emphasizes on incremental improvements by plugging some of the gaps in the Erstwhile Regulations, as the new Regulations inter alia provide for delisting of equity shares of a subsidiary company (having the same line of business), delisting pursuant to a scheme of arrangement and delisting due to operation of law such as due to winding up of a company or de-recognition of a stock exchange. However, in view of the authors, the cautious approach taken by the SEBI in the New Regulations may still narrow its applications. The impact of the changes brought in through New Delisting Regulations on the success rate of the delisting process is yet to be seen.

[1] https://egazette.nic.in/WriteReadData/2021/227507.pdf

[2] https://www.sebi.gov.in/legal/regulations/jun-2009/sebi-delisting-of-equity-shares-regulations-2009-last-amended-on-march-6-2017-_34625.html

[3] “acquirer” includes a person –

(i) who decides to make an offer for delisting of equity shares of the company along with the persons

acting in concert in accordance with regulation 5A of the Takeover Regulations as amended from

time to time ; or

(ii) who is the promoter or part of the promoter group along with the persons acting in concert.

Ourresources on the topic:- 

  1. http://vinodkothari.com/wp-content/uploads/2020/04/Note-on-Delisting-of-equity-shares-1.pdf 
  2. http://vinodkothari.com/2023/09/sebi-proposes-to-ease-delisting-process-consultation-paper-on-review-of-voluntary-delisting-norms/

Assessing the Viability of a Gold Spot Exchange in India

/0 Comments/in , /by

-Megha Mittal 

(mittal@vinodkothari.com)

The Securities and Exchange Board of India (‘SEBI’) has issued a consultation paper dated 19th May, 2021, on proposed framework for Gold Exchange in India and draft SEBI (Vault Managers) Regulations, 2021 (‘Consultation Paper’), thereby seeking public comments on the framework for operationalising gold exchange and the regulation of intermediaries inter-alia Vault Managers.

While the idea of setting up a regulated gold exchange was highlighted in the Union Budget 2018-19 as well as in the Budget 2021-22, the Consultation Paper comes as the first concrete step towards bringing into operation a gold exchange for the Indian market. This comes in the backdrop of the fact that despite being the second largest consumer and importer of gold, India continues to be a price-taker – India does not play any significant role in influencing the global price-setting for the commodity. As such, the Consultation Paper envisages an entire ecosystem of trading and physical delivery of gold so as to create a transparent and robust market which paves the way for India to become a global price setter.

That being said, before delving into the procedural aspect, it is important to understand the fundamentals as to what are the objectives being aimed, what would the target market look like, and if at all the proposed framework would put the investors, the parties and the nation in a better place that is today.

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AIF Second Amendment Regulations, 2021 – Regulated Steps towards Liberalised Investment

/0 Comments/in , , /by

-Megha Mittal  (mittal@vinodkothari.com)

Amidst the various concerns addressed in the Board Meeting dated 25th March, 2021,[1] the Securities and Exchange of Board of India (‘SEBI’) extensively dealt with several issues identified with respect to Alternative Investment Funds (‘AIFs’), inter-alia a green signal to AIFs for investing in units of other AIFs; ambiguity regarding the scope of the term ‘start-up’; and the need for a code of conduct laying down guiding principles on accountability of AIFs, their managers and personnel, towards the various stakeholders including investors, investee companies and regulators.

Thus, with a view to target the issues in consideration, the Board proposed that the following amendments be introduced in the SEBI (Alternative Investment Funds) Regulation, 2012 (‘AIF Regulations’/ ‘Principal Regulations’)[2] –

  • provide a framework for Alternative Investment Funds (AIFs) to invest simultaneously in units of other AIFs and directly in securities of investee companies;
  • provide a definition of ‘start-up’ as provided by Government of India and to clarify the criteria for investment by Angel Funds in start-ups
  • prescribe a Code of Conduct for AIFs, key management personnel of AIFs, trustee, trustee company, directors of the trustee company, designated partners or directors of AIFs, as the case may be, Managers of AIFs and their key management personnel and members of Investment Committees and bring clarity in the responsibilities cast on members of Investment Committees; and
  • remove the negative list from the definition of venture capital undertaking.

 The aforesaid proposals, put to the fore in view of the suggestions and requests received from several stakeholder groups like the domestic AIFs, global investors, and the regulatory bodies, have now been notified vide notification dated 5th May, 2021, via the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2021[3] (‘Amendment Regulations’). A key takeaway from the Amendment Regulations is the flexibility granted w.r.t. indirect investments by AIFs for investment in units of another AIF, however with some riders and possible gaps, as discussed below.

Below we summarise and discuss the amendments introduced vide the Amendment Regulations, and analyse its impact

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