Disclosure Regime: SAT lays down parameters for timely disclosures

Gaurav Pingle, Practising Company Secretary and Renucka Vaiddya, Research Associate, Gaurav Pingle & Associates

The ‘Principles Governing Disclosures and Obligations of Listed Entity’ have been prescribed in Chapter II, Regulation 4 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. According to the provisions, a listed entity shall provide adequate and timely information to recognized stock exchange(s) and investors. However, what is adequate information is not very easy to determine and prescribe. It is very subjective – depending upon the nature of the transaction, the volume of transaction, and the company. Further, the Regulations provide that a listed entity shall refrain from misrepresentation and ensure that the information provided to recognized stock exchange(s) and investors is not misleading. A listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders. The listed entity is also under an obligation to abide by all the provisions of the applicable laws including the securities laws and also such other guidelines as may be issued from time to time by SEBI and the recognised stock exchange(s) in this regard and as may be applicable.

Disclosure of information ensures a level playing field for all the market participants. For the purpose of identifying information that is required to be disclosed, there is no requirement for testing it with the finer legal examination. For listed entities, the materiality of information and the time of disclosure has always been a point of discussion and debate. “When in doubt, please disclose” was the policy followed by Mr. Narayan Murthy at Infosys. This philosophy gave the company a lot of credibilities. Securities Appellate Tribunal (SAT), in a recent judgment[i] has taken a similar view in the case.

This article discusses and appreciates the SAT judgment with respect to the timing of disclosure of price sensitive information. A very pertinent question has been resolved – whether the regulator can penalize a person for non-compliance even after many years have passed since the non-compliance or is there any time limit for the regulator to take action? The article discusses this question as well as the other questions discussed by the judgment.

Brief facts of the case: The executive director of ICICI Bank entered into a binding agreement with the dominant shareholders of Bank of Rajasthan on May 18, 2010 at 4:30 a.m. On the same day Bank of Rajasthan informed NSE and BSE at 5:12 p.m. and 5:25 p.m. respectively, regarding a board meeting to decide on the proposal of amalgamation of Bank of Rajasthan with ICICI Bank. The intimation also stated that the meeting of the board of directors of ICICI Bank was scheduled on the same day to discuss this issue.  At 5.57 p.m. the power of attorney from the dominant shareholders was received by the legal advisors to the parties. The board of directors of the ICICI Bank Ltd. met at 6. p.m. and concluded its meeting around 7.30 p.m. Disclosures relating to the merger/amalgamation were made to NSE at 8.10 p.m. and to the BSE at 8.18 p.m. respectively.

Timeframe of events on 18 May 2010 for ease of understanding

Issues involved: The question raised in the appeal was, whether the information relating to the signing of a binding agreement by an authorized executive director of ICICI Bank Ltd. with the dominant shareholders of Bank of Rajasthan was liable to be disclosed on an ‘immediate basis’ under clause 36 of the erstwhile Listing Agreement and under SEBI (Prohibition of Insider Trading) Regulations, 1992?

Whether disclosure required under the erstwhile Listing Agreement? According to Clause 36 of the erstwhile Listing Agreement, a listed company shall keep the stock exchange informed of events such as strikes, lockouts, closure on account of power cuts, etc. both at the time of occurrence of the event and subsequently after the cessation of the event. The object was to enable the shareholders and the public to appraise the position of the company and to avoid the establishment of a false market in its securities. In addition to the said provision, the companies were required to furnish to the stock exchange on request such information concerning the company as the stock exchange may reasonably require. It was also required that the company will immediately inform the stock exchange of all the events, which will have bearing on the performance/operations of the company as well as price-sensitive information. Clause 36 of the erstwhile listing agreement provided for a list of material events (which includes ‘Acquisition, merger, de-merger, amalgamation, restructuring, scheme of the arrangement, spin-off or selling divisions of the company, etc.’, relevant in this case).

Whether disclosure required under erstwhile SEBI (PIT) Regulations, 1992? Under Regulation 2 of the SEBI PIT Regulations, ‘Price Sensitive Information’ means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of the company. Certain information shall be deemed to be price sensitive information – which includes amalgamation, mergers, or takeovers – relevant in this case. Taking into consideration the facts of the case and sequence of events, SAT observed that the signing of the Binding Agreement was material and price-sensitive information under PIT Regulations that warranted requisite disclosures.

Summary & analysis of SAT’s observations: ICICI Bank argued that the binding agreement was entered between the dominant shareholders holding 28.61% of shares of the Bank of Rajasthan and not the Bank itself. Further, the agreement was contingent upon its confirmation by the board of directors. With there being little certainty on the contract being carried forward, it’s non-disclosure could not be an offense. While comparing the certainty of the contract with its materiality, SAT stated that though certainty is paramount for a contract, materiality of an event is what is tested in disclosure. Taking into consideration the facts of the case and sequence & timing of events, SAT observed that it was “a well-planned and well-executed plan suiting professional companies leaving no element of practical uncertainty regarding the Binding Agreement, though legally many a hornets’ nest can be raised about its binding, contractual nature, which is though not the basis of the disclosure law.”

Taking into consideration the contents of the disclosures made by ICICI Bank Ltd., SAT observed that the Binding Agreement was a material event regarding the performance of the Bank. SAT observed that the ICICI Bank Ltd. was aware of the potential risk and hence the impact the proposed amalgamation could have on its share prices clearly making it price-sensitive information. Therefore, the disclosures regarding the potential synergy and performance of the amalgamation and its risk factors would make it both material and price-sensitive information. On the point relating to relevance for disclosure, SAT stated that that materiality and the ex-ante possibility of impacting prices of the securities, which may not come true ex-post due to several other factors affecting the company concerned or/and the securities market in general. SAT further observed that “The reason why disclosure regulations are more onerous and continuous in nature in a disclosure-based regime is because of this market dynamics which factors in every single bit of information which is material to the security of an entity continuously on real-time basis.”

SAT referred to the BSE’s Circular dated September 30, 2014 which provided a guideline for companies to comply with clause 36 of the erstwhile listing agreement. It provided for additional details to be disclosed at the time of making disclosures. In terms of amalgamation or an agreement to acquire, the BSE Circular specified that this decision is required to be intimated even when a committee authorized by the board approves this decision. Since the parties signing the binding agreement included the executive director of ICICI Bank who was authorized signatory for the board, SAT has treated him to be akin to a committee entering into the agreement and stated that disclosure was mandatory.

SAT rejected the contention that the Binding Agreement was premature to be disclosed and that it was liable to be disclosed only after the condition precedent was met.

Taking into consideration the principles underlying contingent contracts, SAT stated that if such disclosures had to await finality/complete certainty of material corporate decisions not only disclosure laws become redundant but consequently even core PIT Regulations to help prevent insider trading, a major bane of the securities market, will also become a casualty. The purpose and spirit of the disclosure in a disclosure-based regulatory regime is simple and clear:

  • Disclose all material and price-sensitive events/information,
  • Disclose even when one is in doubt,
  • Such disclosure shall not be tested with the finer legal examination, hairsplitting arguments or semantics.

Therefore, although there was due weightage given to the fact of non-disclosure, SAT has given importance to the unduly delay caused by SEBI in taking action at this non-disclosure. SAT noted that “The submissions that final investigation report was approved only in 2015 (3 years delay even thereafter), no prejudice has been caused to the appellant etc. cannot be accepted since a company, that too a banking company, being a dynamic entity grows organically and inorganically and learns by doing. Given that a violation committed at an early stage of an organizational life cycle, and which was known to the Regulator, cannot be invoked to punish it several years down the line when the organization has reached a different stature and position.”

Other relevant judgments on ‘disclosure of information’: In New Delhi Television Ltd. v. SEBI (Appeal Nos. 358 of 2015 & 150 of 2018, August 7, 2019), SAT emphasized the importance of forthwith disclosure to the stock exchanges and stated that “Clause 36 of the Listing Agreement read with the Guidance Note make it apparently clear that the company is required to intimate the Stock Exchange with regard to the material events immediately, which information is required to be made to the public immediately…. disclosure under Clause 36 of the Listing Agreement, in our opinion, information was required to be given to the Stock Exchange at the earliest without any undue delay”. However, in a different case, Jubilant Stock Exchanges Holding Pvt Ltd & Ors v SEBI – Appeal No. 174 of 2018, it was held that Memorandum of Understanding entered into for the sale of a hospital did not constitute ‘price sensitive information’ on its mere execution as it was not a transfer or sale and was merely an offer which was not enforceable as it was subject to completion of due diligence and the determination of actual consideration.

Conclusion: SAT judgment highlights the importance of a disclosure-based regime in a world where disclosures seem burdensome. Where the purpose of disclosure is kept in sight, whether to disclose a particular event becomes clear. The SAT judgment elaborately covers the purpose and determining factors in the case of disclosures. While doing so, it also provides a guideline for SEBI about taking timely corrective action. The judgment has guidelines for listed entities as well as SEBI.

[i] ICICI Bank v. SEBI, Appeal No. 583 of 2019, order dated July 8, 2020.


Contact details of the authors – gp@csgauravpingle.com , renucka.vaiddya@gmail.com

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