Sunlight is the Best Disinfectant with specific reference to Disclosure Requirements for Listed Entities in India

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Mitisha Santosh Kotecha
Symbiosis Law School, Nagpur

“Good governance with good intentions is the hallmark of our government. Implementation with integrity is our core passion.” – Shri Narendra Modi

Sunlight is a powerful disinfectant with a universal phenomenon which acts as a bactericide as a result of which further contamination could be terminated. In the same manner Securities Exchange Board of India vide notification dated September 02, 2015 has notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 which acts as a sunlight over the wrongdoers who attempt to contaminate the society. These regulations became effective from December 1, 2015 which is the compilation of all the listing agreements for different securities with the recent amendments. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 obligates the listed entity to disclose the requirements for better accountability of the listed entities. When an entity is accountable to the public it roots out corruption, misfeasance of government and reduces the risk while gaining public confidence which is also laid down by Justice Louis Brandeis as an alluring notion[1].

The responsibility of enforcing the different rules of listing agreements was that of the stock exchange on which the securities are listed. In order to enhance the enforceability and to abide by the rules given in section 11A[2] of the SEBI Act a committee was set up to provide a blanket Act for the purpose of disclosures of the various securities not only in national but also international jurisdiction where the market regulator scrutinizes the complete disclosures. The Listing regulation has two fold aspects first is to comply with the SEBI (LODR) requirement and to have a single listing agreement.

Listed entity under the regulation means all the securities which are listed on recognized stock exchange according to Section 2(52) of Companies Act, 2013. A private ltd. company whose debt securities have been listed in any recognised stock exchange will also come under the ambit of listed entity. According to SEBI Regulations listed entity means an entity which is listed in recognised stock exchange or which is a designated security in accordance with the listing agreements entered between the entity and the recognised stock exchange.

Regulation 4 safeguards the interest of the minority shareholders through the principles of disclosures governing corporate governance. In the case of Satyam computers Services Ltd[3]. Where through a whistle-blower the finance crime was confessed. The mail was first sent to an independent director which stated that Satyam had no liquid assets and this fact should be independently confirmed from the bank. On 16th December, 2008 Satyam computers Services Ltd announced to propose acquiring of 51% shares of Maytas Infra Ltd of which 31% was to be acquired by promoters of Maytas and remaining 20% from the public. After the proposal was made the next day it was withdrawn by SCSL. The price rise in the profit of the company was because of the inflated profits which eventually led to rise in the difference of the actual operating profit and the profit in the books of the company, the income tax returns were falsified even the invoices were fabricated thereby significantly increasing the cost.

In the case of PC Jeweller Ltd[4] a listed company proposed for a buyback. During the compliance obligation with respect to buyback offer SEBI observed that PCJ did not disclose the objection raised by SBI. On May 10, 2018 the board of directors approved buy back of its equity shares from its shareholders. On July 7, 2018 PCJ asked SBI for the NOC for its proposal of buyback. SBI disclosed objections over the buy-back of shares. Again PCJ wrote SBI for the NOC for which SBI responded to refer the previous objection. PCJ did not get NOC from SBI before initiating buy-back. On 13th July PCJ announced that the buy backs were withdrawn due to non-receipt of NOC by SBI. This situation was not disclosed till the time of the postal ballot and the objection raise by the SBI was not disclosed to NSE. PCJ failed to disclose the voting outcome and scrutinizers report as the meeting was closed on July 13th. As for a buy-back NOC is preceding condition and so PCJ should have disclosed before postal ballot. SEBI found that the non-disclosure of SEBI objection was a material requirement and should be disclosed as per regulation 30(1), 30(4)(i), 30(7) of the LODR regulation and the above adjudication was settled.

In the case of DHFL which was incorporated in the year 1984 was listed in BSE. The company used to provide loans to the people for purchase of residential property. The media on 29th January, 2019 alleged that promoters had siphoned off the money through grants and shell companies and there was no liquidity in the banks. RBI then appointed administrator and later initiates CIRP under IBC code. It was held that the financial statements of company were falsified and so further the company was restricted to perform any type of trade in the market.

In the very recent case of Yes Bank we have seen that how penalty of rupees 1 crore was imposed on Rana Kapoor for not following the SEBI LODR requirement. He had opened an opaque layer between the stakeholders and between himself and had become personal guarantor which was hidden from the board of directors of the bank. He also failed to inform about his interest in the transaction which led to the violation of SEBI (LODR).

Disclosures encourages strengthening the Corporate governance practice in cooperation with disclosure requirements. This helps to have faith in the listed entities and enhances harmonized control. Proper regulations reduce the burden on the authorities as well as on the listed entities. It facilitates an increase in the economy through public trust. It would be difficult to have control in the economy having no authority to deal with the requirements of disclosure. This could lead to further exploitation and will slow down the progress.

We have observed in the case of Five Crore Electronics Ltd. (FCEL). In this case company board meeting was conducted and no information of the outcome was given to NSE. It was further observed that the CFO, CS claimed resignation which was also not disclosed by the company with the stock exchange. The company further failed to announce intimation of delay in submission of financial results. The section 19 read with section 11, 11(4), 11 B of SEBI Act. The NSE notice restrained from being associate with any intermediary registered with SEBI and also restricted the sale, alienation, disposition of assets and funds till further orders.

Recently we have seen that Facebook agreed to pay 100$ million to settle the charges as it was alleged by SEC that the information was misused by the third party developer and the information was not disclosed by facebook when they were already aware of this fact. When the entities fail to disclose what they are obliged to it not only affects the investor’s money but also the downsides whole economy. As Sunlight is said to be the best disinfectant in the same way SEBI kills the infectants of the system who try to earn profits by causing harm to innocent investors for their own interest

The main object of the formation of SEBI was to create a level playing field for every investor by protecting the rights of investors against malicious practices and creating a healthy environment for the investors to invest in the stock market. The funds in the listed entity do rely on the amount raised by the common man and so they have every authority to inspect the documents of the company, to scrutinize the working of the entity and to ask for disclosures to the entity, it moreover provides a shield to the general public. It is through this disclosure that the corporate democracy could be maintained and the entities could be well governed.

A company’s position is determined on the basis of its capital, borrowings, turnover and on the basis of the dealings of the company. The main purpose requiring the disclosure of its material facts is that the investors have a clear, precise knowledge of where their hard earned money is being deposited and also a scrutiny could be done by SEBI based on the disclosures made by the companies on the performance of the company so that the company does not violate any of the provision under any law or statute. The apex court bench consisting of D.Y.Chandrachud, A.M.Khanwilkar, Dipak Misra has said that “Sunlight is the best disinfectant” to protect the people and the dignity of the litigants to bring in more transparency and accountability.

Amidst the corona virus the requirements has been relaxed and the due dates have been extended for fillings and disclosures. In general sense we have observed that all the practices like white collar crimes, scams happen when any material information has not been disclosed. Therefore the establishment of this regulation for disclosure over the listed entities is of crucial importance to restrict the contamination of malpractices and frauds in the society.  






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