SEBI (LODR): - Regulations to Resilience: Transparency, Governance & Sustainable Growth

These transformative changes can be categorized into the following four main aspects:

Transparency

• Materiality: One of the significant changes in the LODR is the introduction of a quantitative threshold for determining the materiality of events or information. This threshold, based on 2% of turnover, 2% of net worth, or 5% of the average absolute value of profit or loss after tax, provides greater clarity and certainty for listed entities in fulfilling their disclosure obligations and eliminates subjectivity for dissemination of information.
• Tightening Timelines: SEBI has also tightened the timelines for disclosing material events, ensuring that investors have access to timely and accurate information. This includes reducing the time for disclosing the outcome of board meetings from 12 hours to 30 minutes. Further, in the 207th Board meeting held on 30.09.2024 the timelines for disclosing the outcome of board meeting happening after market hours has been increased to 3 hours.
• Disclosure of penalties, fines, litigation & disputes: The disclosure requirements now mandate listed entities to disclose any penalties or fines imposed on them by regulators or judicial bodies and litigation & disputes without any threshold. Soon, we saw that materiality was taken over by triviality in form of notices/fines/tax litigation of miniscule amounts being disseminated to the exchange. Keeping this in mind, SEBI extended the time limit for dissemination to 72 hours if the information is stored in SDD, only significant tax litigations and disputes are required to be disclosed and penalties and fine with a Rs. 1 lac threshold for sectoral and Rs. 10 lac thresholds for others.
• Verification of Market Rumours: Confirm, Deny or Clarify upon material price movement due to any reported events or information in the mainstream media i.e. a rumour is what the regulation has mandated the top 100 listed companies by market capitalization w.e.f. 01.06.24 and, subsequently, the top 250 listed entities w.e.f. 01.12.24.

Governance

• Changes in Corporate Governance Reports: The LODR has introduced changes in corporate governance (CG) reports, requiring listed entities to provide more comprehensive information on their CG practices. This includes disclosing details of cybersecurity incidents & breaches along with the quarterly CG report and particulars of senior management including changes therein since the close of the previous FY, need to be reported in the Corporate Governance Report.
• Tightening Promoter & Key Person Disclosure Norms: To enhance governance, SEBI has tightened the disclosure norms for promoters of listed entities. Promoters must now disclose any agreements or arrangements that could impact the management or impose restrictions on the company. Also, key persons are now obligated to provide adequate, accurate and timely response to the queries raised or explanations sought by listed companies regarding any fraud/default or other event which they are required to report related to key persons.
• Filling Vacancies & Disclosure of Resignations: SEBI has introduced specific timelines of 3 months for filling vacancies in key positions, such as the CEO, CFO, and Compliance Officer subject to the case where the entity is required to obtain any regulatory approval, approval of government or statutory authorities where the timelines shall be of 6 months. This ensures that critical roles are filled promptly, maintaining the operational efficiency of listed entities. Also mandated disclosure of resignation of KMP, senior management, director other than independent director within 7 days of resignation.
• Prohibition of Insider Trading (PIT) Regulations: -
  
  • Expansion of the definition of connected persons to include a firm or its partner or employee where a \"connected person\" is also a partner, as well as individuals sharing a household or residence with a connected person.\"
  • The provisions related to connected persons will now apply to \"relatives\" rather than just \"immediate relatives\"
  • Insertion of a new definition \"relative\" to include the spouse, parents (including parents of the spouse), siblings (including siblings of the spouse), and children (including children of the spouse), along with their spouse

Sustainability: - BRSR Reporting

BRSR is not just another box to tick. It is a journey towards a more sustainable and responsible future for Indian businesses. India is one of the few countries where a comprehensive statutory reporting framework exists for ESG parameters. Think of BRSR as a compass, guiding us towards a destination where profit and purpose coexist. It is about recognizing that our actions today shape the world of tomorrow. It is about understanding that sustainability is not just a buzzword, it is the bedrock of long-term success.

Let me share a quick story. Imagine you are on a road trip. You have a powerful car, a clear map, but no fuel gauge. You might speed ahead initially, enjoying the ride. But sooner or later, you will be stranded, unsure of how far you have come or how much further you can go. That is where BRSR comes in. It is our fuel gauge for the journey towards sustainability. It helps us measure our impact, identify areas for improvement, and communicate our progress transparently.

The journey might be challenging. There will be hurdles to overcome, data to gather, and new ways of thinking to embrace, because BRSR is not just about reporting, it is about rethinking our role in society and contributing to a better world.

• BRSR Core: The introduction of the BRSR Core framework is a significant step towards enhancing sustainability reporting. BRSR Core is a sub-set of the BRSR, consisting of a set of KPIs under 9 ESG attributes. Reporting of BRSR Core mandates listed entities to report on key ESG (Environmental, Social, and Governance) parameters, providing investors with standardized and comparable data on their ESG performance.
• Revised BRSR Framework: SEBI has also revised the BRSR framework including BRSR Core KPIs & other KPIs such as job creation in small towns, open-ness of business, gross wages paid to women etc. This updated framework provides a more holistic view of a company\'s sustainability efforts and impacts.
• Reasonable Assurance & Value Chain Reporting: To ensure the credibility of BRSR disclosures, SEBI has introduced the requirement for reasonable assurance of BRSR Core disclosures. This assurance, to be provided by independent third-party experts, enhances the reliability and transparency of sustainability reporting. Further, its scope has been expanded to include disclosures on the ESG Parameters of 75% of Downstream and Upstream value chain partners of listed entities

Related Party Transactions

• Expanded Definition of Related Party: The definition of a related party has been expanded to include promoters and promoter group entities, regardless of their shareholding. This removes a previous loophole and ensures that all related parties are subject to the same disclosure and approval requirements.
• Inclusion of any person equity shares in the company (even on beneficial basis): The definition of \"related party\" has been further amended to include any person or entity holding equity shares either directly or on a beneficial interest basis as provided under section 89 of the Companies Act, 2013, at any time, during the immediately preceding financial year amounting to 10% or more (w.e.f. April 1, 2023).
• Inclusion of Subsidiaries\' Transactions: Related party transactions now cover transactions between a listed entity or its subsidiaries and a related party of either the listed entity or any of its subsidiaries. This ensures that all related party transactions within a group are subject to scrutiny.
• Transactions Benefiting Related Parties: A transaction with an unrelated party will also be considered a related party transaction if its purpose is to benefit a related party of the listed entity or any of its subsidiaries. This provision, effective from April 1, 2023, focuses on the substance of the relationship rather than just the legal form.
• Enhanced Role of Audit Committee: The audit committee\'s role has been strengthened, requiring them to approve related party transactions of subsidiaries exceeding specific thresholds. This ensures greater oversight and accountability.
• Shareholder Approval: The threshold for obtaining shareholder approval for related party transactions has been revised to cover transactions exceeding INR 1,000 crore or 10% of the annual consolidated turnover, whichever is lower. This ensures that significant related party transactions are subject to shareholder scrutiny.

Impact of Reforms

The recent amendments to the LODR have brought India\'s regulatory framework more in line with global standards. The reforms related to materiality, disclosure timelines, and corporate governance practices are like those implemented by the various other regulators across globe.

The LODR reforms have significantly impacted India\'s capital markets, enhancing transparency, governance, and investor communication. The introduction of quantitative thresholds for materiality, stricter disclosure timelines, and the verification of market rumours has improved the quality and timeliness of information available to investors. The tightening of promoter disclosure norms and the expansion of shareholder approval for certain events have strengthened corporate governance practices. The introduction of the BRSR Core and the revised BRSR framework has enhanced the transparency and accountability of listed entities on their sustainability performance.

This alignment enhances India\'s attractiveness as an investment destination and facilitates greater integration with global capital markets.

Implementation Challenges

While the SEBI (LODR) amendments aim to enhance transparency and governance, their implementation presents practical challenges for companies. The expanded definition of related parties, encompassing subsidiaries\' transactions and those indirectly benefiting related parties, along with tighter timelines and the requirement for verification of market rumours, adds complexity to compliance efforts. Moreover, the BRSR Core, while promoting standardized ESG reporting, necessitates the collection and disclosure of extensive ESG data across the value chain, potentially straining resources, particularly for companies with intricate supply chains. Value chain reporting and reasonable assurance requirements are under consideration for revision, and we might see changes to facilitate ease of doing business in these regulations.

Conclusion

The journey from regulations to resilience is ongoing, and SEBI\'s proactive approach to regulatory reform is shaping a more robust and investor-friendly Capital Market ecosystem in India. The LODR reforms have not only enhanced transparency and governance but have also aligned India\'s regulatory framework more closely with global standards. As India continues its journey towards becoming a global economic leader, our commitment to regulatory excellence will play a crucial role in ensuring sustainable growth and investor protection. Let us end this chapter of discussion at this saying of father of nation: \"The future depends on what we do in the present.\" - Mahatma Gandhi.