Background
The Government of India announced the national lockdown on March 25, 2020. Businesses have come to a standstill due to which the economy has incurred unprecedented losses. In such difficult times, the role of Government, as well as sectoral regulators, is crucial in aiding the companies in surviving as well as recovering from its impact.
Worldwide statutory securities authorities are attempting to assess the impact of COVID-19 outbreak on the markets and thus, requiring disclosures from the market players. The U.S. Securities and Exchange Commission (“SEC”) on April 8, 2020, made a public announcement asking public companies to ‘provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning’. Similarly, the European Securities and Market Authority (“ESMA”) issued a recommendation on March 11, 2020, requiring the issuers to disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects, financial situation or a qualitative and quantitative assessment of business activities per their transparency obligations under the Market Abuse Regulation.
Securities Exchange Board of India (“SEBI”) has taken a lenient approach concerning the compliances the listed companies have to adhere to during this period. During the lockdown period, SEBI has in total issued 37 circulars out of which 35 are about relaxations and extensions in timelines regarding compliances due to COVID 19.
SEBI Advisory on Disclosures
The advisory issued by SEBI on May 20, 2020, urged the listed entities to publish material information on the impact the COVID-19 pandemic has had on their business, performance, and financials along with the measures taken to curb the same.
SEBI acknowledged that many companies have issued statements regarding the temporary closure of their operations, however, the financial disclosures have been less and prompted the companies to endeavor to make disclosures in a timely and adequate manner.
The regulator has given the following examples as to what may form material information
- Impact of the CoVID-19 pandemic on the business;
- Ability to maintain operations including the factories/units/office spaces functioning and closed down;
- Schedule, if any, for restarting the operations;
- Steps were taken to ensure smooth functioning of operations;
- Estimation of the future impact of CoVID-19 on its operations;
- Details of the impact of CoVID-19 on listed entity’s-
- capital and financial resources
- profitability
- liquidity position;
- ability to service debt and other financing arrangements
- assets;
- internal financial reporting and control;
- supply chain
- demand for its products/services
7. Existing contracts/agreements where non-fulfillment of the obligations by any party will have significant impact on the listed entity’s business;
8. Other relevant material updates about the listed entity’s business.
However this list is subject to the application of criteria of materiality criteria develop by the BOD and the information is to be provided as far as possible, thus vesting the final discretion to decide the extent of disclosure on the company’s management.
The circular does not provide a specific timeline for such disclosures but reasonably it can be understood to be done pursuant to a Board of Directors (“BOD”) meeting and updating it as and when material developments occur.
Material Information
The Circular provides discretion to the companies to determine what form ‘material’ information. Under SEBI Listing Obligations and Disclosure Regulations, 2015 (“LODR”), Regulation 4 the listed entities are to timely disclose all accurate information on material matters including the financial situation, performance, ownership, and governance.
Regulation 30 of the LODR requires the entity to make such disclosures about material information in a periodical as well as event-based manner. The BOD of the listed entities are to develop a guideline for determining the materiality of an event or information on the basis that its omission is likely to result in its discontinuation or alteration of the event which is already publicly available, or where the late disclosure of such omission is likely to result into a major market reaction and other criteria determined by the BOD.
The Schedule III Part A of LODR provides a list of events that are considered material and have to be mandatorily disclosed like any acquisition, the scheme of the arrangement, fraud defaults by KMPs, issuance/ forfeiture of securities, loan agreements taken not in the ordinary course of business, etc. Part B provides a list of events that shall be disclosed if such guidelines apply to them, one of such events is the disruption of operations of the listed entities. It is in pursuance of this provision that many companies issued statements about the closure of their business activities due to COVID 19 even before the SEBI advisory.
Disclosures regarding Future Actions
It is also pertinent to note that the advisory also provides for disclosures regarding future actions to be taken by the Companies, which are not covered in the LODR. Typically LODR requires disclosure limited to the facts thus the statements concerning the future obligations are not addressed under Indian Securities law. The SEC has also directed the companies to make forward-looking disclosures dealing with future operating conditions and strategies to be followed and directed companies to shift the focus on health and welfare strategy. Similarly, the ESMA has stated the forward-looking disclosures must be in adherence to the market regulations to prevent any form of market manipulation.
Such disclosures are quite relevant in making the investors aware and capable of assessing the entity’s current position and future approach. However, such information also has the potential to affect instruments’ market value, create a false market, and infringe other statutory provisions. General and vague statements without any details will also not serve the purpose of transparency, thus there is a need for a delicate balance to be maintained here.
Conclusion
In furtherance of the advisory several companies have issued statements. For instance, Tata stated that the impact of the outbreak has been severe in its non-food industries. The production is gradually restarting with the approvals being granted steadily. D-Mart stated that it was able to continue its operations due to its classification as essential services but its revenue reduced by 45% in April. Leela Hotels estimated zero revenue in the June quarter.
The intention behind it is to increase transparency and make the information available to the public domain not only for the benefit of the Government but also for investors, individuals, and institutions alike. Such disclosures will be imperative in drawing an analysis of the pandemic. It shall also facilitate the formulation of draft policies to form a way forward by the Government and other statutory bodies.
These measures have been preemptive and have paved a way to make corporate compliances and market awareness possible in the current scenario. Companies must refrain from making general or selective statements. Rather disclosures should be made in letter and spirit to ensure minimum risk to the investors and greater market transparency which in turn will aid in revival of the investments in the market.
This Article is written by: Ms. Anumeha Agrawal, Student, Vth year B.A.,L.L.B.(Hons.), Symbiosis Law School, Pune.
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