The law must be created on the anvil of foresight, but the most backward foresight cannot prevent it from being burdened with loopholes and ambiguities that unscrupulous people could take advantage of. This is why legislators often have to engage in reform processes. However, in order to make the laws harmless, sometimes laws can become too complex or too burdensome for those who are governed by them. Therefore, legislators must regularly assess the feasibility of the norms set and consider toning them, when necessary.
It would be an unfair consequence to impose the burden and stigma of non-compliance on those who intend to follow the law but are unable to do so because of its overly strict or ambiguous nature. Any reform or toning of such laws, especially regulatory framework type laws, must be done after consultation with the stakeholders and the public in order to have the intended effect.
The budget speech for FY2023-24 rightly put forward the proposal to simplify and facilitate compliance in the financial sector through a comprehensive review of the regulatory frameworks after consultation with the public and regulated entities. As a result, market regulator Sebi issued a press release on October 4 seeking suggestions from stakeholders towards simplifying the framework under 25 regulations related to listing, takeover and those governing intermediaries and market infrastructure institutions. Surprisingly there is no place here in the regulations for the prevention of insider trading despite the May consultation paper revisiting the definition of unpublished price sensitive information pending action. Sebi has constituted 16 working groups under the standing advisory committees to review compliance requirements.
There are some areas that are becoming more complex and may need some simplification. Among the requirements for the disclosure of related party transactions and relevant events, including the verification of rumours, the regulations appear to have become more complex and difficult to comply with.
Sebi has already started the industry standards forum mechanism to work on standardization of practices in four areas: verification of rumours, disclosure of relevant events, ESG declaration under the listing regulations and structured digital database under prohibition of insider trading regulations. Although this measure will provide more clarity on how to comply, the regulated entities must take into account during the current consultation process information on whether some regulation is too burdensome. This is similar to a situation where a doctor prescribes medication in good faith, but if the patient develops unexpected complications, he must inform the doctor promptly to enable timely intervention.
For example, the term ‘related party transactions’ has been given a very wide import under the listing regulations, but more clarity is needed in relation to concepts such as transactions with unrelated parties ‘whose purpose and effect is for the benefit of a related party’. This may not need to be simplified, but guidance is certainly needed to facilitate compliance. On the other hand, although provided for in the definition, whether unpriced transactions are actually captured in the disclosures made by corporations is a million dollar question. This needs to be emphasized through appropriate guidance.
Sebi may consider automating some additional disclosures on the lines of system-driven disclosures currently in place under the takeover regulations and prohibition of insider trading regulations. For example, by requiring mandatory real-time information on offline investor complaints, Sebi can pave the way for automated, consolidated and real-time disclosure of the overall status of investor grievances instead of quarterly grievances.
A centralized monitoring mechanism to verify rumors may be considered so that companies with a lot of effort could verify rumors. Clarity may be given regarding the disclosure of relevant events, especially regarding actions taken and orders passed by the authorities, since these should be disclosed without applying materiality thresholds.
Sebi gives detailed instructions regarding compliance through its circulars and they are being consolidated as master circulars under specific regulations. Just like how Sebi updates its regulations promptly, it may consider updating the master circulars with every change in the circulars to enable ease of reference. Proposals can be sent until 6 November.
Usha Ganapathy Subramanian is a practicing company secretary and Dr.Ranjith Krishnan is an academician.
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Updated: 01 November 2023, 09:57 PM IST
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