SEBI came out with FAQs on its Listing Regulations three times in January alone. However, the FAQs continue to create more ambiguity instead of clarity
On three different dates, market regulator Securities And Exchange Board Of India (SEBI) has come out with twenty one (21) frequently asked questions (FAQs) on the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the Listing Regulations). In this month alone, SEBI has issued FAQs on 8th, 19th and 21 January 2016. In addition to the same, more FAQs, are expected to come. It is however left far from bringing clarity as was expected; rather it creates more and more ambiguity in a clear sense.
Before the inception of the Listing Regulations 2015, various workshops have been conducted in the major cities of the country in order to enable the market participants to implement the new Listing Regulations and seeking the pros and cons, comments and difficulties on such implementation. Various issues have also been discussed and answered thereon and some queries were told to be clarified later by way of clarifications or FAQs. It is felt that even on completion of almost two months from the inception of the aforesaid Regulations; many issues have been left unattended or ambiguous. One of such ambiguities lies in Regulation 24 of the aforesaid Regulations which pertains to corporate governance requirements with respect to subsidiary (ies) of the listed holding entity which corresponds to earlier Clause 49 (V) of the equity listing agreement.
Regulation 24(4) - significant transactions or arrangements by unlisted subsidiary
The provisions under Regulation 24(4) and Clause 49 (V) (C) have been kept unchanged, which requires the management of an unlisted subsidiary to bring to the notice of the Board of Directors of the listed holding entity on a periodic basis, a statement with respect to all significant transactions or arrangements entered into by such an unlisted subsidiary. Although, similar requirements were there in the listing agreement earlier, there were however, no such representations or ambiguities discussed or brought to the notice of SEBI; the probable reason of which may be the absence of any statutory recognition of the listing agreement. However, considering the fact that the replacement of the erstwhile listing agreement with the new Listing Regulations gives statutory recognition to the listing norms as were existing earlier, it is felt necessary to retract the ambivalence so that the listed entities are able to implement the new Listing Regulations, follow its obligations and make disclosures thereunder in letter and spirit as required by the said Regulations.
The ambiguity under Regulation 24(4)
The ambiguity under Regulation 24(4) appears from the explanation provided below the said Regulation and such ambiguity would not have been appeared so. Interpretation of the said Regulation would not have been so difficult, if SEBI would not have come up with the FAQs. SEBI vide its FAQs has clarified that for the purpose of Regulation 24, wherever the terms ‘unlisted material subsidiary’ or ‘unlisted subsidiary’ have been distinctly mentioned, the provisions shall be applicable to such ‘unlisted material subsidiary’ or ‘unlisted subsidiary’ as the case may be. Further, the said FAQs also provide that the Regulation 24(4) is applicable to all unlisted subsidiaries. However, while the Regulation 24(4) talks about unlisted subsidiary, the explanation given below talks about unlisted material subsidiary. The applicability of the said Regulation arises when there is any significant transaction or arrangement comes into picture with respect to the unlisted subsidiary. However to understand the meaning of such a significant transaction, one has to refer to the explanation, which provides the meaning of such a transaction in respect of an unlisted material subsidiary. At first instance, the intention might have been to include any one of the both i.e. unlisted material subsidiary and unlisted subsidiary; however, the same is an ambiguous and contradictory provision till date which requires more clarity.
Even if SEBI clarifies to include either of the two above, the practical situations that may arise in the process of complying with the said provisions may be of much burdensome for a listed entity having a greater number of unlisted subsidiaries or unlisted material subsidiaries. Even the Board of Directors of the listed entity will have to take note of all such information placed before it, since the threshold to become a transaction a significant one is only greater than 10% of total revenues, total expenses, total assets or total liabilities of such single reporting subsidiary, which is much easier to achieve in day-to-day business.
Considering the requirements under Regulation 24(4) as aforesaid, although, the Board of Directors has to concentrate on various other sensitive matters or business decisions, which require more time and evaluation, however, it will still have to waste its valuable time in discussing the information placed by its subsidiaries. Hence, it seems that the aforesaid provisions need a review or revisit so that implementation of the new Listing Regulations becomes easier and the same does not become a burdensome process.
(Munmi Phukon works in the Corporate Law Division at Vinod Kothari & Company)
