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23 May 2018

Importance Of Disclosure Norms In The Context Of SEBI Examining ICICI Compliance

Most of business newspapers recently carried reports on the action of Securities and Exchange Board of India and Central Bureau of Investigation probing ICICI Bank in respect to its compliance with disclosure norms and irregularities committed in business transaction with Videocon Industries.

The investigation is stated to have been started when one of the ICICI bank shareholder Aravind Gupta, sent a letter to Prime Minister alleging as against ICICI bank for extending loan to debt laden Videocon Group despite of dubious track record mainly due to business relationship between Dhoot and Deepak Kochhar, husband of Ms. Kochhar, C.E.O of ICICI bank as reported by The Economic Times. Gupta’s prime allegation was that the company’s ownership was transferred as quid pro quo for loan.

News reports have also quoted about SEBI’s initial investigation on the issue ‘whether ICICI bank has failed to make adequate disclosure to the board of directors and thereby to respective stock exchange.’

These developments in investigation requires consideration on three issues. The first issue is whether C.E.O is aware of the Videocon’s application for loans with ICICI bank and if she is aware of such application, has she actually disclosed her husband’s relationship with the debtor to the board of directors. Assuming such disclosures being actually made to listed company, the second issue would arise as to how the listed company is supposed to handle such disclosures. The third issue would be how the listed company can address such issues arising in future.

These issues basically require an examination of general corporate principle which is embedded in Section 166 of Companies Act, 2013. It mandates the duty upon the director to act in the interest of the company. The section also requires a director of company from abstaining from taking advantage to himself/herself or his/her relatives or partners and make undue gains. If the director is found guilty of making any undue gains, he/she is liable to pay an amount equal to that gain to the company. However, these obligations may not draw the attention of SEBI, as in any case, it is a look out of Central Government to administer section 166 of Companies Act, 2013

SEBI while drawing its powers under Section 24 of the Companies Act, 2013 read with powers to frame regulations under SEBI Act, 1992 has laid down SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[1] (LODR Regulations, 2015) governing various aspects pertaining to the listed companies. The matters governing corporate governance and disclosure requirements is also covered under LODR Regulations, 2015.

The LODR Regulations, 2015 mandates the Listed Companies to provide adequate and timely information to recognised stock exchange(s) and investors (Regulation 4(d)). It specifically mandates the disclosure of ‘material information or events’ to Stock Exchanges. (Regulation 30). In order to determine as to what constitutes material information, LODR Regulations, 2015 has provided certain guidelines such as a) omission of such an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; b) omission that is likely to result  in significant market reaction if the said omission came to light  at a later date, c) in any other circumstances where the  Board of Directors of listed entity considers the same as material. Additionally, those event or information which may affect the business or that other information which is exclusively known to the listed entity which may be necessary to enable the holders of securities of the listed entity to appraise its position and to avoid the establishment of a false market in such securities shall be disclosed.

Similarly, the LODR Regulations, 2015 lays down certain norms regarding Corporate Governance such as, the duty of board of directors of a Listed Company to lay down a code of conduct for all members of board of directors and senior management of the listed entity. (Regulation17(5)). The Board of Directors shall also require to constitute Risk Management Committee, in which, they may delegate monitoring and reviewing of the risk management plan to such committee. (Regulation 21)

In this present scenario, it is not publicly known as to the fact that if the CEO was aware of the application filed by Videocon for availing loan. However, assuming that she was aware of such information the general corporate principles and corporate governance norms discussed above may demand for a disclosure of such conflict of interests to Board of Directors of the listed company.

The Board of Directors may in turn seek a report from Risk Management Committee before clearing such transactions where such conflict of interests is disclosed by the Directors to the Board. After reviewing the above issue, it is recommended that all the listed companies expecting similar events have to develop a strong code of conduct addressing conflict of interests of Directors of the Board.

In respect to the disclosures to stock exchanges for dissemination of event or information, it is observed that the LODR Regulations, 2015 envisages listed company to make disclosures after determining as to whether they are material in nature. It is also relevant to note that, Regulation 30(4)(ii) requires them to frame a policy to determine materiality of such events or information and guiding principles. The aforesaid provisions and interpretation made may help them to frame such policy. As of now, it is not in public domain as to whether ICICI Bank had a robust policy to determine materiality. The said issue may play a vital role for effectively addressing a probable investigation as one in hand.

After considering the aforesaid issues and provisions, in order to avoid ICICI like charges and allegations, listed companies have to periodically review policies regarding monitoring and reviewing of risk management, the code of conduct prescribed for Directors and the policy for determining materiality of events or information and keep them updated. The listed companies may also strictly enforce and adhere to such policies.

[1] Please see https://www.sebi.gov.in/legal/regulations/feb-2017/sebi-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-february-15-2017-_37269.html

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