One regulation to rule them all: new LODR regulations will compel more transparency in listed companies

DeekshaSinghOnce a company is listed on a stock exchange, it is subject to a number of on-going conditions and disclosure requirements. It must comply with them in order to maintain its status as a listed company. While some of these conditions can be found in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements), 2009, the majority can be found in the listing agreement between the company and the stock exchange on which the securities of the company are listed.

According to Section 21 of the Securities Contracts (Regulation) Act, 1956, when securities are listed on any recognised stock exchange, the issuing company must comply with the conditions of the listing agreement of that stock exchange. Simply put, a listing agreement is a statutorily mandated contract, between the listed company and the stock exchange where it is listed, which sets out various obligations of the company to protect the interests of the public shareholders and the capital markets at large. The Securities and Exchange Board of India (“SEBI”) has prescribed the format for a model listing agreement (“Model Listing Agreement”). You can find a version of the listing agreement that is substantially the same on the website of the National Stock Exchange here.

It is natural to wonder how listing agreements—which are private agreements between stock exchanges and the companies listed on them—can have the force of law. Even though they do not have the authority of law behind them, they have been treated as such so far.

To properly codify the requirements laid out in the listing agreement, the SEBI, in September, issued the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). The LODR Regulations serve to consolidate and streamline the provisions of the various listing agreements in operation for different segments of the capital markets, such as equity listings, listing of debt instruments, preference shares, Indian depository receipts, securitised debt instruments, units of mutual funds, and any other securities that the SEBI may specify. Further, by issuing these regulations, the SEBI is ensuring that there is no overlap between regulations, as there used to be with listing agreements. All pre-listing requirements have been excluded from the LODR Regulations. They only deal with post-listing requirements.

BombayStockExchangeThe LODR Regulations have been divided into two parts. The substantive provisions are incorporated in the main body of the regulations and the procedural requirements are incorporated in the form of Schedules to the regulations. The LODR Regulations also capture the corporate governance principles found in Clause 49 of SEBI’s Model Listing Agreement.

Listed companies will still have to enter into a listing agreement within six months after the LODR Regulations come into effect. This version however, likely to be shorter than the one currently in use.

With the LODR Regulations and the listing agreements, the intent is to ensure that once a company is listed on a stock exchange and its shares are easily accessible to the public, the shareholders and the public should be able to evaluate the position of the company, and to avoid establishment of a false market in its securities. Investors must be informed of all significant decisions affecting the performance and future viability of listed companies. The LODR Regulations ensure this by providing a comprehensive disclosure framework that companies need to comply with to maintain their status after their listing.

Immediate effect of the LODR Regulations  

The LODR Regulations will become effective on December 1, 2015, with the exception of two regulations—Regulation 23(4) and Regulation 31A—that became effective on September 2, 2015, when the LODR Regulations were notified.

Regulation 23 deals with related party transactions, and sub-clause (4) of this regulation states that:

All material related party transactions shall require approval of the shareholders through resolution and the related parties shall abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not.

This provision has been given immediate effect to bring the requirement for shareholders’ resolution for related party transactions in line with the latest amendments to the Companies Act, 2013.

Regulation 31A relates to disclosures relating to promoters and the re-classification of promoters as public shareholders under various circumstances.

There does not seem to be any apparent reason why these two provisions have been given immediate effect, except perhaps to indicate that active steps are being taken to meet corporate demand on the relaxations on these issues, as was done to amend the Companies Act, 2013 earlier this year.

Deeksha Singh is part of the faculty on


Companies Bill – Of public offers and private companies

The inclusion of two definitions — “private company” and “listed company” — in the Companies Bill, 2012 (“Bill”) raises some questions. Our current understanding of company law suggests that the two terms cannot apply to the same company at the same time. Let us see how the Bill has changed that.

Private company

Under Section 3(1)(iii) of the Companies Act, 1956 (“Act”), a “private company” cannot have more than fifty members. The definition in Clause 2(68) of the Bill says a “private company”:

… means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred…

So the Bill has proposed that the limit on the maximum number of members that can constitute a private company be increased from fifty to 200.

When is a public offer necessary?

There is a problem when this proposal is read with Clause 42 of the Bill. Clause 42 is part of Chapter III, which deals with the allotment of securities by companies and features in Part II of Chapter III, where private placement is discussed. It states that:

42. (1) Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issued of a private placement offer letter.

(2) Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.

Explanation I. – If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.

Publicoffer_PrivateCompanyClause 42(2) will therefore create a contradiction when it becomes law. Private companies are permitted to have more than fifty members but any offer to more than fifty people will amount to a public offer and trigger all the requirements to be fulfilled under Part I of Chapter III of the Bill, which deals with public offers.

Listed company

Another question arises when we consider the definition of “listed companies” in the Bill. Currently, Section 2(23A) of the Act defines the term “listed public companies”. The Bill, however, defines the term “listed company” in Clause 2(52), thus proposing an increase in the scope of the current definition. The new definition is not limited to public companies and includes any company that has any securities listed on a recognised stock exchange.

Securities-LawThe proposed change will impact companies that have so far listed securities like debentures without technically falling within the ambit of the definition of “listed public companies”. Additionally, where such companies are private companies and have offered these securities to more than fifty people, it will be difficult to determine how they are to be treated under the proposals of the Bill.

The proposed definitions therefore, can create a dichotomy in the law — a company can be a private company and still be forced to make a public offer, while remaining a private company under the provisions of the same law. Until this position is clarified, it remains to be seen how securities lawyers and companies issuing securities will tackle it once the bill is notified.

(Deeksha Singh is part of the faculty on