Alerts & Updates 17th Nov 2022

Qualifications added to appointment & removal of Independent Directors | Schemes for companies having listed Non-Convertible Securities

Authors

Manendra Singh Partner | Mumbai
Tanvi Goyal Principal Associate | Mumbai
Aditi Ladha Associate | Mumbai

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SEBI has notified amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) vide the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2022 (LODR Amendment Regulations).

  • Significant changes include
    • Deemed appointment of an independent director (ID) in certain cases introduced even if special resolution fails to get requisite majority, and removal of such ID made subject to additional qualification;
    • Submission of report of monitoring agency for preferential issue or qualified institutions placement with stock exchange and audit committee;
    • In respect of financial results of listed entities having non-convertible securities listed on the stock exchange(s), following have been introduced/ modified:

    – Financial statements for the last quarter of the financial year to be submitted within 60 days from the end of the quarter;

    – Submission of statement of assets and liabilities and statement of cash flows at the end of every half year, along with the financial results;

    – Line items revised which are to be disclosed on submission of quarterly and annual financial results;

    – Statement indicating utilization of issue proceeds of non-convertible securities to be submitted along with the quarterly financial results;

    – Submission of statement disclosing material deviations in use of proceeds of non-convertible securities from the objects of the issue;

    – Publication of consolidated financial results along with line items;

    – Procedure prescribed for filing of draft scheme of arrangement and scheme of arrangement for listed entities having listed non-convertible securities

  • The above changes have been analysed in the table below
    Amendment Particulars of amendment
    Appointment, re-appointment or removal of an independent director (ID) | Deemed appointment in certain cases

     

    Regulation 25(2A) of the LODR Regulations provides that the appointment, re-appointment or removal of an ID of a listed entity, shall be subject to the approval of shareholders by way of a special resolution. SEBI has now provided for the following conditionalities for appointment/ removal of ID:

    Deemed appointment of ID: Where a special resolution for the appointment of an ID fails to get the requisite majority of votes but:

    • the votes cast in favour of the resolution exceed the votes cast against the resolution, and
    • the votes cast by the public shareholders in favour of the resolution exceed the votes cast against the resolution,

    then the appointment of such an ID shall be deemed to have been made.

    Removal of ID: An ID appointed in the method as provided above shall be removed only if:

    • the votes cast in favour of the resolution proposing the removal exceed the votes cast against the resolution, and
    • the votes cast by the public shareholders in favour of the resolution exceed the votes cast against the resolution.
    Submission of report of monitoring agency appointed for preferential issue or qualified institutions placement with stock exchange and audit committee Presently, under Regulation 32(6) and 32(7) of LODR Regulations, where the listed entity has appointed a monitoring agency to monitor utilisation of proceeds of a public or rights issue, the listed entity is required to submit to the stock exchange any comments or report received from the monitoring agency and the monitoring report is also required to be placed before the audit committee.

    SEBI has now provided that even in case of preferential issue or qualified institutions placement, where the listed entity has appointed a monitoring agency to monitor utilisation of proceeds, the listed entity is required to submit to the stock exchange any comments or report received from the monitoring agency and the monitoring report is also required to be placed before the audit committee.

    Consequently, an amendment has also been introduced in Part C(6) of Schedule II of the LODR Regulations (Role of the Audit Committee and Review of Information by Audit Committee) whereby the role of the audit committee has been provided to inter alia include reviewing, with the management, the statement of uses / application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document / prospectus / notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public issue or rights issue or preferential issue or qualified institutions placement, and making appropriate recommendations to the board to take up steps in this matter.

    Timeline prescribed for submission of financial statements for the last quarter of the financial year Presently, Regulation 52(1) of the LODR Regulations inter alia requires listed entities having non-convertible securities listed on recognized stock exchanges, to prepare and submit unaudited or audited quarterly and year to date standalone financial results on a quarterly basis within 45 days from the end of the quarter, other than the last quarter, to recognized stock exchange(s).

    The LODR Amendment Regulations now clarify that for the last quarter of the financial year, the listed entity shall submit un-audited or audited quarterly and year to date standalone financial results within 60 days from the end of the quarter to the recognised stock exchange(s).

    Auditing of issuers by Comptroller and Auditor General of India Presently, Regulation 52(2)(d) of the LODR Regulations provides for two step process for disclosure of the annual audited financial results for issuers being audited by the Comptroller and Auditor General of India, has been done away with.

    Now, issuers, which are required to be audited by the Comptroller and Auditor General of India under applicable law, shall submit:

    • un-audited financial results along with the limited review report issued by the Comptroller and Auditor General of India or an auditor appointed by the Comptroller and Auditor General of India or a Practising Chartered Accountant, to the stock exchange(s), within 60 days from the end of the financial year; and
    • the financial results, audited by the Comptroller and Auditor General of India, to the stock exchange(s), within 9 months from the end of the financial year
    Submission of statement of assets and liabilities and statement of cash flows Listed entities having listed non-convertible securities shall submit a statement of assets and liabilities and statement of cash flows as at the end of every half year, by way of a note, along with the financial results.
    Line items revised which are to be disclosed on submission of quarterly and annual financial results Now, a listed entity having listed non-convertible securities, while submitting quarterly and annual financial results, shall disclose the following line items along with the financial results:

    • debt-equity ratio;
    • debt service coverage ratio;
    • interest service coverage ratio;
    • outstanding redeemable preference shares (quantity and value);
    • capital redemption reserve/debenture redemption reserve;
    • net worth;
    • net profit after tax;
    • earnings per share:
    • current ratio;
    • long term debt to working capital;
    • bad debts to Account receivable ratio;
    • current liability ratio;
    • total debts to total assets;
    • debtors’ turnover;
    • inventory turnover;
    • operating margin percent;
    • net profit margin percent.

    If the information mentioned above is not applicable to the listed entity, it shall disclose such other ratio/ equivalent financial information, as may be required to be maintained under applicable laws, if any.

    Statement indicating utilization of issue proceeds of non-convertible securities to be submitted along with the quarterly financial results Listed entities having listed non-convertible securities to submit to the stock exchange(s), along with the quarterly financial results, a statement indicating the utilisation of the issue proceeds of non-convertible securities, in such format as may be specified by SEBI, till such proceeds of issue have been fully utilised or the purpose for which the proceeds were raised has been achieved, as opposed to the earlier requirement of submitting such statement within 45 days from the end of every quarter.
    Statement disclosing material deviations in use of proceeds of non-convertible securities from the objects of the issue to be submitted along with the quarterly financial results A listed entity having listed non-convertible securities is required to submit to the stock exchange(s), along with the quarterly financial results, a statement disclosing material deviation(s) (if any) in the use of issue proceeds of non-convertible securities from the objects of the issue, in such format as may be specified by SEBI, till such proceeds have been fully utilised or the purpose for which the proceeds were raised has been achieved.
    Publication of consolidated financial results along with line items in newspaper Regulation 52(8) of the LODR Regulations inter alia requires a listed entity having listed non-convertible securities to publish the financial results and statement referred to in Regulation 52(4) in at least 1 (one) English national daily newspaper circulating in the whole or substantially the whole of India.

    The LODR Amendment Regulations have introduced the following changes in this respect:

    • Following the amendment to Regulation 52(4) of the LODR Regulations in respect of disclosure of line items along with the financial results, the term “statement” has been substituted with “line items”; and
    • Where the listed entity has submitted both standalone and consolidated financial results, to the stock exchange(s), it shall publish consolidated financial results along with the line items referred to in the revised Regulation 52(4), in the newspaper.”
    Procedure for filing of Draft Scheme of Arrangement and Scheme of Arrangement for listed entities having listed non-convertible securities
    • Filing of draft scheme of arrangement with stock exchnages and obtaining no-objection letter: Without prejudice to the provisions of Regulation 11 of the LODR Regulations (Scheme of Arrangement), the listed entity that has listed non-convertible debt securities or non-convertible redeemable preference shares, intends to undertake a scheme of arrangement or is involved in a scheme of arrangement under Sections 230-234 and Section 66 of the Companies Act, 2013 (CA2013), shall file the draft scheme of arrangement with the stock exchange(s), along with a non-refundable fee as specified, for obtaining the no-objection letter, before filing of such scheme with the National Company Law Tribunal (NCLT), in terms of the requirements as specified by SEBI or stock exchange(s) from time to time.
    • Mandatory requirement to obtain no-objection letter before filing any scheme of arrangement: The listed entity shall not file any scheme of arrangement under sections 230-234 and section 66 of the CA2013 with the NCLT unless it has obtained a no-objection letter from the stock exchange(s).
    • Placing the no-objection letter before NCLT: The listed entity shall place the no-objection letter of the stock exchange(s) before the NCLT at the time of seeking approval for the scheme of arrangement in the manner as may be specified from time to time.
    • Validity of the no-objection letter: The validity of the no-objection letter of the stock exchange(s) shall be 6 months from the date of issuance, within which the draft scheme of arrangement shall be filed by the listed entity with the NCLT.
    • Submission of documents on sanction of scheme: Upon sanction of the scheme by the NCLT, the listed entity shall submit such documents, to the stock exchange(s), as may be specified by SEBI and/ or stock exchange(s) from time to time.
    • Compliance with other requirements: The listed entity shall ensure compliance with such other requirements as may be specified by SEBI from time to time.
    • Requirements not applicable to restructuring proposal approved as part of a resolution plan by NCLT: The requirements specified herein and under the new Regulation 94A of LODR Regulations shall not apply to a restructuring proposal approved as part of a resolution plan by the NCLT under section 31 of the Insolvency Code, subject to the details being disclosed to the recognized stock exchanges within 1 day of the resolution plan being approved.
    Duties and obligations of recognized stock exchanges in case of a draft scheme of arrangement & scheme of arrangement

     

    Following the insertion of Regulation 59A on Draft Scheme of Arrangement and Scheme of Arrangement for listed entities having listed non-convertible securities, the LODR Amendment Regulations has also inserted a new Regulation 94A which lists out the duties and obligations of recognized stock exchanges in case of a draft scheme of arrangement or scheme of arrangement submitted by entities that have listed their non-convertible debt securities or non-convertible redeemable preference shares:

    • Submission of draft scheme of arrangement with SEBI: Upon receipt of the draft schemes of arrangement and the documents, the designated stock exchange shall forward the same to SEBI in such manner as may be specified.
    • Submission of no-objection letter to SEBI: The stock exchange(s) shall submit to SEBI its no-objection letter on the draft scheme of arrangement, after ascertaining whether the draft scheme of arrangement is in compliance with securities laws, within the timelines as may be specified from time to time.
    • Issuance of no-objection letter: The stock exchange(s), shall issue no-objection letter to the listed entity in the manner and within the timelines, as may be specified from time to time. The validity of the No-objection letter of stock exchanges shall be 6 months from the date of issuance.
    • Objections to scheme of arrangement: The stock exchange(s) shall bring the objections to the notice of NCLT at the time of approval of the scheme of arrangement by the NCLT.
    • Stock exchange’s recommendations on documents of listed entity: Upon sanction of the Scheme by the NCLT, the stock exchange shall forward its recommendations to SEBI on the documents submitted by the listed entity.
    Unclaimed amount in escrow account to be transferred to Investor Protection and Education Fund created by SEBI Regulation 61A of the LODR Regulations inter alia provides for dealing with unclaimed non-convertible securities and benefits accrued thereon whereby it is provided that where the interest/dividend/redemption amount has not been claimed within 30 days from the due date of interest/ dividend / redemption payment, a listed entity shall transfer the same to an escrow account. Where any amount transferred to the escrow account remains unclaimed for 7 years, the same shall be further transferred to the ‘Investor Education and Protection Fund’ constituted in terms of section 125 of CA2013.

    The LODR Amendment Regulations has clarified that for listed entities which do not fall within the definition of “company” under the CA2013 and the rules made thereunder, any amount in the escrow account that remains unclaimed for 7 years shall be transferred to the Investor Protection and Education Fund created by SEBI in terms of section 11 of the SEBI Act, 1992.

    Fees in respect of draft scheme of arrangement
    • Fees to be remitted with along with draft scheme of arrangement:

    –  For an entity with listed specified securities, or listed specified securities and listed nonconvertible debt securities or non-convertible redeemable preference shares: A fee at the rate of 0.1% of the paid-up share capital of the listed/ transferee/ resulting company, whichever is higher, post the sanction of the scheme by the NCLT. The total amount of fees payable shall not exceed INR 5,00,000.

    –  For an entity with only listed non-convertible debt securities or non-convertible redeemable preference shares: A fee at the rate of 0.1% of the amount of outstanding debt of the listed/ transferee/ resulting company, whichever is higher, post the sanction of the scheme by the NCLT. The total amount of fees payable shall not exceed INR 5,00,000.

    • Method of remittance of fees: The fees shall be paid by way of direct credit to the bank account of the Board through NEFT/ RTGS/ IMPS or any other mode allowed by RBI or by means of a demand draft in favour of “Securities and Exchange Board of India” payable at Mumbai.

    The above amendments have been made to the LODR Regulations vide the LODR Amendment Regulations dated November 14, 2022 (available here).

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Manendra Singh, Associate Partner –ManendraSingh@elp-in.com ;
    Tanvi Goyal, Principal Associate –TanviGoyal@elp-in.com;
    Aditi Ladha, Associate- AditiLadhai@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein