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[Dhruv Kohli and Sanya Singh are 5th year students at Gujarat National Law University]
Dissemination of information is universally considered to be the appropriate method for regulation of the securities market. The role of the regulator herein is to decide the level of disclosure that is required by the listed entities. While timely disclosures help in ensuring symmetry of information; a necessary waste product of disclosures is the excessive duplication of information. One such domain of disclosure is that of show cause notice(s). The authors in the present article argue that not only are public listed entities in India not required to disclose show cause notice(s) received by them, but also the continuous disclosure of the same harmful for the growth of the Indian securities market.
Disclosures under the SEBI LODR Regulations
Regulation 30 of SEBI’s Listing Obligation and Disclosure Requirement Regulations. 2015 (hereinafter referred to as “SEBI LODR”) provide for the disclosure requirement that have to be adhered to by listed entities under Indian Law. Within the same, regulation 30(2) assumes importance as it provides for certain events and information under schedule 3, which are deemed to be material and hence have to be mandatorily be disclosed. Clause 19 and Clause 20 of the same assume significance herein. While both these clauses deal with disclosure of regulatory action; however, they are minutely different from each other. A disclosure under clause 19 is to be made upon ‘the initiation of an action’ such as initiation of an investigation, etc…whereas under clause 20, the stage for disclosure arises when an appropriate order has been passed against the listed entity. Despite the seemingly plain wording of the clauses, the same have been subject to different interpretation(s), which shall be showcased in the forthcoming sections.
Show Cause Notice under the SEBI LODR
A show cause notice (hereinafter referred to as “SCN”) is “a requisition to produce a satisfactory explanation or excuse, in connection with a motion or application to a court[1].” In Umanath Pandey v. State of UP, the apex court explained the importance of a SCN by stating that “in absence of a notice and a reasonable opportunity of being heard, the order passed becomes void.” Similar observations were reiterated in CCE v. ITC Limited, albeit in respect of tax SCN.
With respect to the nature of a SCN, in Union of India v. Kunisetty Satyanarayana, the SC observed that “show-cause notice does not give rise to any cause of action, because it does not amount to an adverse order which affects the rights of any party unless the same has been issued by a person having no jurisdiction to do so.”
With the above position in mind, the question that arises is whether a SCN is to be disclosed and if yes, the under which clause of SEBI LODR. In opinion of the authors, a SCN is not required to be disclosed under clause 19 or clause 20 as mentioned above. This is because what clause 19 or clause 20 contemplate is a situation after the SCN is issued. It contemplates a situation when the SCN has been issued and reply to the same has been given and it is only after it that an order is passed which ought to be declared by a listed entity.
The theoretical argument as given above also finds support in the judgment of the Bombay HC in New Delhi Television Limited v. SEBI. This case assumes importance as herein, SEBI issued a notice to the applicant for non-disclosure of a tax notice that they had received. The primary defence taken up by the applicant was that it was not legally obliged to disclose the same. While the Bom HC did not adjudicate on merits, the notices issued by SEBI were set aside on procedural grounds.
The case before the Bom HC assumes significance as it reflects seemingly different interpretations adopted by market regulator and listed entities. While SEBI wants every disclosure irrespective of whether it is following within the ambit of the provision or not to be disclosed; the listed entities adopt a more cautious approach and do not just mechanically disclose information. The approach, as adopted by SEBI herein is not only mechanically but also has the potential of resulting in an information dump in the market.
Effects of Excessive Disclosure
While maintenance of symmetry of information is an important duty of the regulator, the same is to be performed with an application of mind. Disclosures made by certain public listed entities and reproduced herein showcases the mechanical nature with which entities are forced to disclose regulatory communication. While access to more information would certainly assist the investors in making more informed commercial decisions, excessive disclosure has the opposite effect as it can hamper profits, productivity, and innovation. In a study conducted in the South Korean securities market, it was found that a reduction in disclosure requirements gave listed entities an added incentive to innovate. Further, in a study conducted in 2023 with respect to American stock exchange, it has been found that in situations wherein there is an overload of information in the stock market, not only does investor attention decreases but they are also found to be more distracted. This in turn aligns with the finding that investors have a limited capacity to process information.
Another impact of excessive disclosures; especially that of show cause notice(s) is that not necessarily every communication received by a listed entity from a statutory or regulatory authority is material in nature. Authorities such as Income Tax authorities often issue show cause notice for a varied set of reasons; not all of which are material in nature. Forcing disclosures such as that of a show cause notice however has the effect of turning a non-material information into a material one, thereby negatively impacting the listed entity.
Conclusion
An important duty of SEBI as the market regulator is to ensure symmetry of information so as to allow investors in making informed choices. However, protection of investors in the securities market should not come at the cost of a burden imposed on the listed entities. While disclosure of regulatory actions is certainly important on part of listed entities; the coverage of clause 19 and 20 coupled with existing market practice and SEBI’s actions have vastly expanded the scope of the disclosure. This not only results in an information dump; but can also result in incorrect disclosure. For instance, recently, a listed entity disclosed a tax demand under clause 20. This disclosure in the opinion of the author is incorrect as clause 20 requires an order being passed whereas a mere tax demand would not fall under clause 19 or 20. Such incorrect disclosures may expose entities at risk of legal actions at the hands of SEBI.
In the opinion of the authors, what is required is an amendment to the language regulation 30(2) wherein, it is specifically provided that only when an event as mentioned under clause 19 or 20 takes place at the hands of a statutory or a regulatory authority would a listed entity be required to disclose the same. This would serve threefold purpose; firstly, actual material information would be disclosed thereby accomplishing the intent behind regulation 30(2); secondly, it would also prevent an information dump in the market and thirdly, it would prevent listed entities from making incorrect disclosures.
[1]Black’s Law Dictionary, 8 th edn. 2004.
