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Operational Challenges for

Disclosures under the Revised
Regime of SEBI LODR
by Asish Philip Abraham*, Astha Sinha** and Simran
Chetwani***
Cite as: 2024 SCC OnLine Blog Exp 8
Published on January 17, 2024 - By Bhumika Indulia

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S
ecurities and Exchange Board of India (SEBI) has, in the recent past, introduced
various progressive regulations for the protection of interest of investors in areas of
insider trading, social media “finfluencers”, greater disclosures at the time of initial
public offerings (IPOs), adoption of global Environmental, social, and corporate governance
(ESG) mandates and more. In alignment with the said goal, SEBI also introduced the SEBI
(Listing Obligations and Disclosure Requirement) (Second Amendment) Regulations, 2023
(Amendment) to improve the quality of disclosures and avoid information asymmetry.

SEBI had been dappling with the concerns over the information imbalance that was being
generated by the disclosures being made by the listed entities under the earlier disclosure
requirements under SEBI (Listing Obligations and Disclosure Requirements) Regulations
(SEBI LODR). It was of the view that adequate disclosures are not being made and this is

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leading to a delayed price discovery of shares and lack of investor awareness of information
that impacts the investors.

SEBI analysed the international practices on disclosure requirements and floated a

consultation paper to invite comments from stakeholders on the revised objective
materiality threshold and revised timelines, as well as the increased disclosure requirements
from companies.

While the Amendment has brought a more objective approach to disclosures to be made by
listed companies, there are various practical challenges that are still being faced by the
companies in complying with the same, leading to several operational concerns.

In this article we will examine the practical challenges faced by the companies in disclosures,
which require further clarifications from SEBI:
1. Objective criteria test and mandatory materiality thresholds.
2. Disclosure of litigations, disputes, and regulatory actions like search, imposition of
penalty, etc.
3. Disclosures of guarantees and loan agreements.
4. Disclosures of fraud and default.
5. Disclosure of ratings — unsolicited ratings and repetitive maintenance of ratings.
6. Disclosure of agreements entered into by stakeholders/promoters.
7. Verification of rumours on mainstream media.
8. Disclosures to be made for events or information of the activities of subsidiary.
9. Turpitude of excessive disclosure versus consequence of non-disclosure under SEBI
LODR.
10. Key takeaways.

Objective criteria for determination of materiality of information and events

The Amendment requires listed entities to make three types of disclosures of
events/information:
(a) Events and information deemed to be material under Para A, Part A of Schedule III of
SEBI LODR.
(b) Events and information under Para B, Schedule III which meet the materiality
threshold under Regulation 30(4) of the SEBI LODR.
(c) Voluntary disclosures of events considered to be material by the Board of Directors.

The Amendment also require companies to make necessary changes to their materiality
policy in such a way that they are aligned with the spirit of the regulation and do not dilute
any requirements enshrined under LODR. Additionally, the materiality policy must assist
employees in identifying material events for the purposes of disclosures.

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Earlier, listed companies had the discretion to determine if an event/information was

material or not. However, with the onset of the 2023 Amendment, the criteria for
determination of materiality of a transaction has been made objective. Listed entities must
now disclose all events and information which meet the threshold based on the “2-2-5” rule
provided under Regulation 30(4) of the SEBI LODR1.

Whilst the introduction of the objective materiality criterion brought about uniformity in
disclosures to be made, the “lower-of” mechanism which includes absolute value of profit or
loss has led to an asymmetry of disclosures having to be made by some companies. For
example, companies having low turnovers or less profit/loss are compelled to now make
disclosures of several insignificant events having extremely low value owing to the low
materiality threshold.

In this backdrop, some significant amendments to SEBI LODR and the implementational
constraints faced thereof by listed entities are encapsulated below:

Disclosures of litigation(s), disputes(s) and regulatory action(s)

Prior to the Amendment, all litigations, disputes, and regulatory actions formed part of Para
B and were to be disclosed only if they were considered material in the opinion of Board of
Directors.

However, with the onset of the Amendment, regulatory actions have been classified as
“mandatory” disclosures under Para A and ligations/disputes under Para B have to be tested
against the objective criterion of materiality.

(a) Regulatory actions

Under Para A of Schedule III, Entries 19 and 20 cover regulatory action(s) which are required
to be disclosed by listed companies irrespective of the materiality threshold. Both entries
cover action(s) by regulatory, statutory, enforcement authorities and judicial bodies against
the listed entity or its directors, KMPs, promoter, subsidiary, and senior management, when
in relation to the listed entity.

Under Entry 19 of Para A, companies are required to disclose initiation of certain

action(s),namely, search and seizure, investigation under the Companies Act, 2013 and
reopening of accounts under the Companies Act, 2013.

On the other hand, under Entry 20 of Para A, it is only the action(s) taken and orders passed
with respect of events such as suspension, imposition of fine or penalty, closure of
operations and other such serious disabilities that must be disclosed. Entry 20 also includes
the term “any other similar action” thereby widening the scope of disclosures under the
same.

The significant distinction between the two provisions is the stage of disclosure. While for
events such as search and seizure, the disclosure shall be made at the stage of initiation of
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an action, an event of imposition of penalty disclosure shall be made only once action has
been taken or order has been passed.

Although the provisions enlist the events that have to be disclosed irrespective of
materiality, there exists considerable ambiguity as to the scope and extent of regulatory
actions to be disclosed under Entries 19 and 20. For instance, there is limited clarification on
the quantum of fines and penalties that should be disclosed. This has led to practical
difficulties as it may not be feasible for companies to disclose every trivial fine and penalty
levied on them. Similarly, the term “any other similar action” must be interpreted to
ascertain the extent to which it applies, considering that the other events listed under Entry
20 pertain to disclosures of serious disabilities to business operations.

(b) Litigation(s) and disputes(s)

Entry 8 of Para B requires companies to disclose any pending litigations and disputes which
exceed the materiality threshold, and where the outcome thereof might have an impact on
the company. The SEBI Circular clarifies that any litigation or dispute (including an
assessment, adjudication, arbitration, and conciliation2) that may have any impact and
exceeds the materiality threshold must be disclosed.

With varying types of assessment, specifically in direct and indirect tax, a question arises on
disclosure requirements of show-cause notice by authorities, order for tax assessments,
property tax assessments, claims not involving money, etc.

Additionally, although a standalone litigation or dispute may not exceed the materiality
threshold, the requirement of ascertaining materiality on a cumulative basis by SEBI has
caused ambiguity as to the mechanism of consolidating such litigations, especially in
taxation matters.

Another such question that companies are facing is the disclosure of updates and
developments once an event or information has been disclosed.3 In addition to determining
the materiality of an event, listed entities are also posed with the challenge of determining
what developments thereafter are material and warrant a disclosure. These challenges have
essentially created asymmetry of disclosures within listed entities.

Disclosures of guarantees and loan agreements

Companies are required to disclose guarantees and indemnities issued by them under Entry
11 of Para B, if they exceed the materiality threshold on a cumulative basis.

This has been a huge compliance challenge as it is a recurrent practice for companies to
issue guarantees for their subsidiary and associate companies in addition to unrelated third
parties and manner of cumulation is creating an information asymmetry. It also raises
questions on disclosure of non-monetary guarantees, such as performance guarantees, as
the materiality threshold cannot be applied to the same. Further, once these disclosures are

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made, the Income Tax and GST Departments will have readily available data to initiate
scrutiny for the tax paid on such guarantee’s, based on the artificial valuation provisions of
the respective act.

Similarly, loan agreements, both in the capacity of borrower and lender, are now required to
be disclosed under Entry 5 of Para B, based on the materiality threshold. However, an
exception has been provided to companies who enter into loan agreements as a part of
their ordinary course of business. This raises questions on whether loans that are extended
in the form of inter-corporate deposits are required to be disclosed under SEBI LODR or
would they come within the purview of ordinary course of business of certain companies. It
also raises the question of the intention of the authorities with respect to the extent of
disclosure that is expected from the entities.

Disclosures of fraud and default

The Amendment introduced disclosure requirement of fraud and default by the company,
its promoters, directors, senior management, subsidiaries and KMPs is a mandatory
disclosure under Entry 6 of Para A. This means that irrespective of the quantum of value
involved, disclosure is required.

However, the regulation has not elaborated on what would constitute as a “trigger event” for
disclosure of such fraud/default. Many companies are faced with the challenge of
determining the appropriate stage at which a fraud must be disclosed. Whether fraud is to
be disclosed on the receipt of a mere notice alleging a fraud or would have to be disclosed
only upon a Disciplinary Committee/judicial forums declaration of a fraudulent activity
having been undertaken are practical challenges faced by the companies.

Other significant disclosure requirements

Disclosure of rating: The Amendment in SEBI LODR introduced the requirement of disclosure
of any new ratings in addition to revision in ratings. However, there is no clarity of the
institutions, agencies or authorities whose ratings are covered under the same and neither
is there any clarity on whether revision in rating is to include reassessment of rating wherein
the same rating is maintained on a year-on-year basis.

Agreements entered into by stakeholders and promoters: Similarly, newly inserted Entry 5-A of
Para A requires companies to disclose any agreements entered into by their shareholders,
promoters, subsidiaries, etc. which may impact their management or control, or create any
restriction or liability. A preceding step to this is the mandatory disclosure by the
abovestated personnel, who are parties to the “specified agreements” to the listed entity
about the agreement to which such a listed entity is not a party. As per Regulation 30-A,
such a disclosure is to be made within 2 working days of entering into such agreements or
signing an agreement to enter into such agreements. These provisions increase the
obligation of companies to ensure constant scrutiny and vigilance over the acts of personnel
concerned, over and above their own increased quantum of disclosures.
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Verification of rumours: Another such provision which severely increases the requirement of
entities to keep checks and balances and ensure vigilance is the verification of rumours
under Regulation 30(11). This new proviso now requires top 100 listed companies (with
effect from 1-10-2023) and thereafter the top 250 listed entities (with effect from 1-4-2024)
to promptly deny, confirm or provide clarifications with respect to reported events and
information on mainstream media, within 24 hours. The process of keeping track of ever
such rumour on mainstream media is a cumbersome process for most companies and will
increase the chance of misstep of compliance.

Disclosures for subsidiary companies: In addition to the increased quantum of disclosures and
uncertainties that listed entities are striving to overcome for their own disclosures, they are
also obligated to make disclosures for their subsidiaries under Regulation 30(9).

This disclosure requirement extends to all events and information under Paras A and B.
However, in case of disclosures for subsidiaries, companies must apply their materiality
threshold even for Para A events. Even though the general principle is that all events must
be checked for materiality in case of disclosure for subsidiaries, the regulation contains
certain exceptions for which disclosures for subsidiaries must be made irrespective of the
threshold, for example, disclosures of action(s) taken under Entry 20, Para A.

Every organisation has a unique structure involving various subsidiaries which may be listed,
unlisted, international, domestic, material, in multiple layers, etc. Accordingly, every listed
entity is faced with a distinct disclosure requirement, specific to their organisational
structure. It thus becomes necessary for companies to develop a mechanism to keep track
of activities undertaken by their subsidiaries and to ensure timely disclosures under SEBI
LODR.

Turpitude of excessive disclosure versus consequence of non-disclosure

under SEBI LODR
As discussed, the Amendment was introduced to bring an objective criterion for disclosure
requirements so as to reduce information asymmetry about listed entities. However,
increased and broad disclosure heads without granular details on the type of disclosure
required from the company has created further disorientation on information that is
considered to be material and that is required to be disclosed by listed entities.

This is leading to an inclination for the more prudent listed companies to indulge in
excessive disclosure. While it may be perceived that excessive disclosure is beneficial to the
interest of the investors and in line with the objective of SEBI LODR, this may not be true.
Excessive disclosures can create an information dump with the investors drawing their
attention away from what is truly material and important. For instance, disclosure of
frivolous show-cause notices received by the company without receiving any finality or
routine inter-company transactions which may have no impact on the investors.

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There is also the concern of the privacy of companies being maintained and businesses
being able to exercise internal control for the functioning of the business without having to
disclose every strategic move being undertaken by the company. For instance, verification of
rumours, while intended to benefit the investors, may have adverse effects on sensitive
strategic alliances or first mover advantage being attempted in privacy of business.

However non-disclosure of information can lead to hefty penalties of rupees one lakh per
day for delay or one crore, whichever is lesser under Section 23-A of the Securities Contracts
(Regulation) Act, 1956 and Section 15-A(b) of the SEBI Act, 1992. This was noted in the case
of the NDTV adjudicating order4, where penalty was levied for non-disclosure of an income
tax order by the company.

Thus, it is imperative to exercise caution in interpretation of disclosure requirements under

SEBI LODR. An attempt should be made to have uniform practices and standard views
across industries with respect to disclosures. This can be achieved if questions of
interpretation are seen considering all related laws applicable to a particular event. Not only
will this maintain uniformity, but it will also ensure the correct extent of disclosures by a
company resulting in a balance between investors’ interest and statutory compliance
requirements.

Key takeaways
Some action points that companies may adopt to curb operational challenges faced for
disclosure requirements under SEBI LODR are as under:
(a) Review the materiality policy and develop standard operating procedures (SOPs) to
maintain uniformity in disclosures over the years.
(b) Companies having offices in different locations to centrally align their disclosure
policies across branches.
(c) Industry specific events/information must be disclosed in a manner as is
collaboratively decided and implemented by industry players.
(d) Train the employees and other stakeholders to identify events/information that would
require disclosures so that the strict timelines of the Amendment can be adhered to.

*Partner, LKS Attorneys

**Principal Associate, LKS Attorneys
***Associate, LKS Attorneys
1. Where the value or impact in terms of value exceeds, the lower of the following:
(a) 2% of the turnover, as per the last audited and consolidated financial statements.
(b) 2% of the net worth, as per last audited and consolidated financial statements.
However, this provision does not apply in the event the arithmetic value of the net

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worth is negative.
(c) 5% of the average absolute value of profit or loss after tax, as per the last three
audited consolidated financial statements of the listed entity.
2. SEBI Circular No. SEBI/HO/CFD/CFD-PoD-1/P/CIR/2023/123 dated 13-7-2023, Annexure II.
3. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)
Regulations, 2015, Regn. 30(7).
4. New Delhi Television Ltd., In re, 2018 SCC OnLine SEBI 270.
Tags : Disclosures | ESG | Experts Corner | IPOs | Operational Challenges |
Revised Regime | SEBI LODR | Securities Contracts (Regulation) Act

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