Regulatory updates

SEBI, vide a press release dated 6 May 2022 has constituted an advisory committee on ESG related matters in the securities market. The terms of reference of the committee include:

• Enhancements in Business Responsibility and Sustainability Report (BRSR)
• ESG ratings
• ESG investing

A few key considerations for the committee include:

• In terms of BRSR, the committee would review the leadership indicators that may be made essential -including those related to value chain along with developing sector specific sustainability disclosures.
• Examine evolving disclosures/metrics relevant to Indian context, as well as identifying areas for assurance and a plan for implementation.
• With regard to ESG ratings, the committee would oversee the development of a second or parallel approach for ESG ratings tailored to emerging markets, such as a focus on ‘S’ including employment creation, and so on. This will also include developing uniform indicators of ‘G’ as input to ESG ratings and/or credit ratings.
• In case of ESG investing, the advisory committee would assess the ongoing improvement of disclosures relevant to ESG Mutual Fund Schemes, with a special focus on risk mitigation of mis-selling and greenwashing hazards.

5. As per ICAI announcement, SAE 3410 would be mandatory for assurance engagements for the periods ending on or after 31 March 2024.

To access the text of the press release, please click here

Regulation 36(1)(b) of the LODR Regulations requires companies to send the hard copy of their annual report containing salient features of all the documents prescribed in Section 136 of the Companies Act, 2013⁶ to the shareholders who have not registered their email addresses with the company.

MCA vide circular dated 5 May 2022 had extended the relaxations from dispatching of physical copies of financial statements for the year 2022 (i.e., till 31 December 2022). In view of the same, SEBI also received multiple representations from the listed companies, seeking dispensation from the requirements of sending hard copy of the annual reports to their shareholders. Accordingly, SEBI, vide a circular dated 13 May 2022 has decided to provide relaxation from regulation 36(1)(b) of the LODR Regulations upto31 December 2022

Further, the notice of the Annual General Meeting published by an advertisement in terms of Regulation 47 of the LODR Regulations, should contain a link to the annual report, so as to enable shareholders to have access to the full annual report. It has, however, been emphasisedthat in terms of Regulation 36(1)(c) of the LODR Regulations, listed entities would be required to send a hard copy of full annual report to those shareholders who request for the same.

The circular would come into effect on an immediate basis.

6. As per Section 136 of the Companies Act, 2013, a copy of the financial statement, including consolidated financial statements, if any, auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company , to every trustee for the debenture-holder of any debenture issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than twenty-one days before the date of the meeting.

To access the text of the circular, please click here

Chapter XV of the Companies Act, 2013 deals with compromises, arrangements and amalgamations by any entity, desirous of entering into a compromise or arrangement with its members or creditors. Presently, for schemes of arrangement involving merger, amalgamation, etc., certain safeguards are available in the LODR Regulations to protect the interest of investors of the entities with listed specified securities (equity shares and convertible securities).

While such stipulations exist for entities with listed specified securities, no separate framework is prescribed for entities with only listed debt securities/NCRPS under SEBI (Issue and listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations).

Therefore, the consultation paper proposes to add specific provision in the LODR Regulations, to provide for schemes of arrangement under Chapter XV of the Companies Act, 2013 for entities that have listed only debt securities/NCRPS.

The proposed regulatory framework would be on the same lines as for entities that have listed specified securities. As per the proposed framework, the listed entity would file a draft scheme of arrangement with stock exchange(s) for obtaining a No-Objection Letter (NOL). The stock exchange(s) would in turn, forward the draft scheme received from the listed entity along with NOL to SEBI. SEBI may seek clarifications on the draft scheme from the listed entity, stock exchanges and may seek an opinion from certain experts (including practicing company secretaries, practicing chartered accountants, etc.). The SEBI would then provide comments on the draft scheme to the stock exchange(s), pursuant to which the stock exchange(s) would issue the NOL to the listed entity, incorporating the comments received from SEBI.

The validity of the NOL would be six months from the date of issuance. Upon receipt of NOL from the stock exchange(s), the listed entity must ensure that the same is submitted immediately, but not later than two working days from such receipt to the Court or Tribunal to avoid any delay.

SEBI has proposed the detailed timelines for each step forming part of the filing and processing of schemes of arrangement for entities that are only debt listed and have raised money by way of:

• Public issue of debt securities/NCRPS
• Private placement of debt securities/NCRPS

The consultation paper would be open for comments up to 19 June 2022.

To access the text of the consultation paper, please click here

In terms of regulation 54, read with regulation 56(1)(d) of the LODR Regulations, listed entities are required to disclose the security cover to the stock exchange(s) and the debenture trustee(s), in the prescribed format.

Accordingly, SEBI, vide circular dated 12 November 2020 had specified the format of a security cover certificate, periodical monitoring and disclosures by debenture trustee(s).

However, SEBI received various representations from the issuers, the debenture trustee(s) as well as other market participants on issues related to operational challenges faced in complying with certain provisions of the circulars. Therefore, SEBI, vide notifications dated 11 April 2022, had amended the SEBI (Debenture Trustees) Regulations, 1993, LODR Regulations and NCS Regulations.

In line with the recent amendments, SEBI, vide a circular dated 19 May 2022 has issued the following amendments:

• Revised format of a security cover certificate: A revised format of a security cover certificate has been prescribed⁷ , which provides a holistic picture of all the borrowings and the status of encumbrance on the assets of a listed entity. SEBI has also provided the following:
  1. The manner in which the security cover certificate will be prepared by a listed entity. This inter aliaincludes certification of the book values of assets included in the security cover certificate by the statutory auditor on a quarterly basis, separate certificates to be issued to each debenture trustee, etc.
  2. The manner in which security cover certificate will be prepared and submitted by the debenture trustees. This includes a requirement to carry out a due diligence by the debenture trustee or its appointed agencies.
  3. Formulas have been prescribed tostandardisethe calculation of the security cover ratiosas mentioned in the security cover certificates.
  4. Certificates certified by the statutory auditor of the issuer company and by the empaneled independent chartered accountants of the debenture trustee should have the Unique Document Identification Number (UDIN)generated in the manner prescribed by the relevant regulatory authority.
  5. Debenture trustees to take corrective action where qualifications/disclaimersaffect the rights of debenture holders.
• Monitoring of covenants: On a quarterly basis, listed entities are required to furnish the compliance status with respect to financial covenants of the listed debt securities certified by the statutory auditor of the listed entity to debenture trustees. Debenture trustees are required to monitor the breach of covenants by following the prescribed procedures.
• Revision in timelines for submission of documents: SEBI has revised the timelines for listed entities for submission of security cover certificate, valuation report and quarterly compliance report and regulatory compliance by debenture trustees.
• Recovery Expense Fund and other disclosures: Debenture trustees to monitor Recovery Expense Fund and other disclosures.

The provisions of the circular with respect to ‘Revised format of the security cover’ and ‘Monitoring of covenants’ would be applicable with effect from 1 October 2022. Other provisions of the circular would come into effect with immediate effect.

7. Accordingly, the security cover format prescribed in the November 2020 circular has been rescinded

To access the text of the circular dated 12 November 2020, please click here

To access the text of the circular dated 19 May 2022, please click here