Summary: On May 17, 2024, SEBI announced significant amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, aimed at improving the ease of doing business in India. These changes align with the Minister of Finance’s objectives to reduce compliance costs. Key updates include a new framework for handling market rumors, requiring listed companies to respond based on specific criteria, which poses challenges for balancing transparency and corporate confidentiality, particularly regarding non-disclosure agreements (NDAs). The revised market capitalization calculation introduces a six-month average to mitigate the effects of temporary market fluctuations and provides a more flexible compliance schedule. Additionally, mandatory corporate governance rules for high-value publicly traded entities (HVDLEs) will extend until March 31, 2025, resolving significant non-compliance issues in this sector. A “comply or explain” approach, similar to the UK model, could improve governance by allowing companies to adapt their practices while maintaining transparency. While these reforms aim to improve the business environment and integrity of the Indian market, challenges remain, including the need for suitable governance frameworks and clear guidelines for rumor management. SEBI’s continued engagement with stakeholders will be crucial to ensure that these amendments achieve the desired results while preserving investor confidence and market stability.

By a notification dated May 17, 2024, the Securities and Exchange Board of India (SEBI) has made major amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR). These developments complement the Finance Minister’s drive to reduce compliance costs and simplify doing business in India. Based on the recommendations of the SEBI expert committee and consultation papers from late 2023 and early 2024, the adjustments include many significant changes to current laws intended to simplify business operations while preserving market integrity.

Market Rumor Checking System

Introduced by a proviso to SEBI LODR Regulation 30 (11), the revised framework establishes a thorough methodology for managing market rumours. Under this structure, qualified listed companies must respond to market rumors according to specific criteria. These factors include significant price fluctuations, the emergence of rumors in popular media, and the relevance of rumors to particular, imminent events or information. This structure, however, poses major difficulties, particularly with regard to the balance between openness and corporate secrecy.

Nondisclosure agreements (NDAs) control many corporate transactions and can give rise to disputes related to the need to manage rumors. Although SEBI asserts that the mere existence of rumors indicates a violation of the NDA, this argument may oversimplify the complex nature of corporate privacy and the pragmatic reality of business operations.

External models present possible answers to these problems. Through Rule 701, Singapore’s disclosure policy provides exclusions for sensitive information that could compromise company objectives and allows for deferral of disclosure for pending matters. The Australian Continuous Disclosure Standards also consider reasonable expectations of disclosure, protect trade secrets and incomplete projects, and exempt immediate disclosure in particular circumstances. Similar exclusions in the SEBI LODR could help strike a better balance between commercial interests and market openness.

Market capitalization reform

The initial approach to calculating market capitalization had several important restrictions. These included an over-reliance on single-day calculations that produced arbitrary benchmarks, short compliance deadlines that presented difficulties for newly qualified businesses, and undefined compliance obligations that unnecessarily burdened organizations.

To address these challenges, SEBI has proposed a revamped structure effective December 31, 2024. This new method minimizes the effect of temporary market fluctuations by using a six-month average (July 1 to December 31) for calculations. , thus producing more consistent and representative rankings. In addition to a more flexible compliance timeline that provides for a three-month period from December 31 and alignment with the financial year, the framework also proposes. In an effort to minimize unnecessary compliance burden, a sunset clause has also been included, whereby the criteria cease three successive years below the level.

Yet the new paradigm raises serious questions. Consistency of ranking raises questions as regular changes in regulatory status could compromise management performance and increase apparent investment risk. Just as U.S. companies have responded to Sarbanes-Oxley, the risk of manipulation also exists, with companies possibly trying to influence rankings to avoid compliance. Moreover, with the expert committee’s proposals currently awaiting approval by SEBI, issues remain regarding the management of different rankings between exchanges.

Corporate governance for listed entities with high value debt

By extending the mandatory corporate governance (CG) rules until March 31, 2025, high value listed entities (HVDLEs) will face much greater implementation challenges. Comprising corporations, trusts, REITs and InvITs, each with their own regulatory requirements and governance systems, these organizations cover a wide range of organizational forms. Entities under government control have very particular difficulties in applying these standards. The significant non-compliance rate – 71% of HVDLEs not meeting CG criteria between April and June 2022 – reflects the complexity of these difficulties.

A “comply or explain” strategy similar to the UK Financial Reporting Council model could provide a more flexible and effective governance structure to help address these challenges. This method will allow organizations to modify their governance strategies to suit their particular situation while maintaining openness through quality explanations for any discrepancies. Further improving compliance and efficiency would require creating customized frameworks that take into account the specific needs of each entity, while balancing regulatory objectives and pragmatic limits.

Finally

While preserving market integrity, the SEBI LODR 2024 changes mark a major step towards improving the business environment in India. While the changes address many of the current issues, several areas require more work, including the development of industry-specific governance frameworks, clear procedures for managing multiple exchange rankings, and implementation guidelines for verification needs. rumors.

The effectiveness of these revisions would primarily depend on SEBI’s continued interaction with stakeholders and its ability to modify the rules based on pragmatic experience. The reforms demonstrate a desire to strike a balance between business efficiency and regulatory oversight, thereby improving India’s position in global financial markets. Maintaining market stability and investor confidence will depend on constant monitoring and adjustment as these adjustments come into effect to ensure they achieve their intended results.