Clarity Amid Complexity: Navigating SEBI’s Disclosure Mandates on Litigation and Disputes

Introduction

In an era where transparency and disclosure are crucial for investor confidence and regulatory compliance, Securities and Exchange Board of India (SEBI) recently amended its Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015¹. This includes the insertion of Item 8 in Para B of Part A of Schedule III, which mandates disclosure of “pendency of any litigation(s) or dispute(s) or the outcome thereof which may impact the listed entity”.

This article examines SEBI’s Amendments, specifically addressing the debate over disclosing incidents like FIR(s) (first information report) and criminal complaints. The article navigates the complexities of interpretation, the implications for listed entities, and the broader impact on stakeholders in India’s securities market.

Overview of the Amendment

SEBI’s recent Amendment², effective from 14-7-2023, to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, marks a significant update aimed at bolstering transparency and investor protection in India’s securities market. This Amendment introduces crucial modifications to Regulation 30 “disclosure of events or information” which mandates the companies to disclose information. Its appendices, notably Part A of Schedule III. One of the key revisions is the insertion of Item 8 in Para B of Part A of Schedule III,

8. Pendency of any litigation(s) or dispute(s) or the outcome thereof which may have an impact on the listed entity mandates the disclosure of litigation or disputes that could potentially impact listed entities. This includes both the pendency of such litigations and their outcomes, such as court orders or settlement agreements. By requiring timely disclosure, SEBI aims to ensure that investors receive relevant and material information promptly, thereby enhancing market integrity and investor confidence.

A significant debate surrounds whether incidents such as FIRs or criminal complaints against the company or key management personnel (KMPs) should also be disclosed. This highlights the challenge of interpreting terms like “litigation” and “dispute” under the regulatory framework. The lack of clear definitions has led to discussions within corporate circles and regulatory bodies on determining the materiality and scope of legal proceedings that require disclosure.

Complexities and ambiguities

Despite its intentions, the Amendment introduces complexities and uncertainties. It does not provide specific criteria for determining which litigations must be disclosed, leading to ambiguity for companies in assessing their disclosure obligations. Furthermore, the absence of a defined monetary threshold means that even litigations with relatively minor financial implications may require disclosure, potentially increasing administrative burdens for listed entities.

SEBI’s broad discretion under Item 8 to demand disclosure of any litigation or dispute that could materially affect listed entities raises significant compliance concerns. This ambiguity extends to incidents like FIRs or criminal complaints involving the company or its KMPs, where clarity on disclosure requirements remains lacking.

The lack of clear definitions and criteria places a substantial burden on companies to interpret and adhere to the requirements consistently. This could result in varied disclosure practices and potential regulatory challenges, undermining the objective of promoting uniform and transparent reporting standards across India’s securities market.

Litigation

When defining the term “litigation” within the context of SEBI’s disclosure requirements, it is important to consider both regulatory guidelines and judicial interpretations. Para B of Annexure 18 to SEBI Circular No. SEBI/HO/CFD/PoD2/CIR/P/2023/120 (Master Circular) dated 11-7-2023³ provides guidance regarding disclosures related to litigation, disputes, and regulatory actions. Specifically, Item 8 of Para B of Part A of Schedule III mandates that a listed entity must notify the stock exchange if it or its key management personnel, promoter, or ultimate person in control becomes a party to any litigation, assessment, adjudication, arbitration, or dispute. This includes any interim or ad interim orders passed against or in favour of the listed entity, provided the outcome can reasonably be expected to have an impact.

However, the term “litigation” itself remains undefined in the Circular. According to Black’s Law Dictionary, litigation means “a judicial controversy; a contest in a court of justice for the purpose of enforcing a right”. This definition emphasises that litigation involves proceedings in a court of law. In Paramjeet Singh Patheja v. ICDS Ltd.⁴, the Court distinguished between litigation and disputes, describing litigation as “a legal action, including all proceedings therein, initiated in a court of law”.

When considering criminal complaints and FIRs, it is crucial to understand their role in the legal process. An FIR is the initial step in initiating criminal law but is not a substantive piece of evidence. Judicial proceedings in criminal cases commence not with the FIR but with the filing of a charge-sheet under Section 173(2) of the Criminal Procedure Code, 1973 (CrPC)⁵, which brings the matter before a Magistrate. In R.R. Chari v. State of U.P.⁶, the term “cognizance” was interpreted as the point when a Magistrate first takes judicial notice of an offence. The Court further clarified that taking cognizance involves the application of judicial mind for proceeding under specific sections of the CrPC, as seen in State of W.B. v. Abani Kumar Banerji⁷.

Given these interpretations, it is clear that an FIR alone does not constitute “litigation” since it does not involve judicial proceedings but rather initiates an investigation. Judicial proceedings formally begin when a charge-sheet is filed, and the Magistrate takes cognizance of the offence. Therefore, under SEBI’s Regulations, it is not explicitly required to disclose an FIR unless it evolves into a formal judicial proceeding or has a material impact on the company’s reputation or operations. This interpretation aligns with the regulatory framework which emphasises the disclosure of material events that can significantly impact the company. Consequently, unless the FIR leads to the filing of a charge-sheet or has other substantial implications, it may not necessitate immediate disclosure under SEBI’s current guidelines. Nonetheless, companies should evaluate the materiality of the FIR and seek legal counsel to ensure full compliance with SEBI Regulations.

Suggestions

Industry experts emphasise the need for clear guidelines on the disclosure of FIRs and criminal complaints under the amended SEBI Regulations. If such incidents are deemed “material” as per the Listing Obligations and Disclosure Requirements (LODR), they must be disclosed. CS (Dr) K.R. Chandratre, FCS, in one of his articles on the amendments,⁸ advises adopting a “disclose rather than avoid/hide” approach to ensure compliance and transparency.

To address the existing ambiguities, it is suggested that SEBI should issue a circular that clearly defines the term “litigation” and establishes specific criteria for determining what constitutes material litigation. This should include a monetary threshold that triggers the disclosure requirement. Without such definitions, companies face significant uncertainty about which litigations or disputes need to be reported, potentially leading to inconsistent disclosure practices and regulatory challenges.

Furthermore, SEBI should provide explicit guidelines on whether complaints against KMPs in their private capacity need to be disclosed. The current lack of clarity leaves companies uncertain about the extent of their disclosure obligations, particularly in cases where the personal actions of KMPs may impact the company’s reputation and operations.

Clear and detailed guidelines from SEBI would help listed entities navigate the complexities of compliance more effectively. By providing a precise definition of “litigation” and setting clear monetary limits, SEBI can ensure that disclosures are consistent, relevant, and truly reflective of material impacts on the company. Additionally, clarifying the disclosure requirements for complaints against KMPs would help companies maintain transparency and uphold investor trust without overburdening them with excessive reporting obligations.

The consensus among industry experts is clear: transparency and adherence to the spirit of the regulations should guide the decision-making process regarding the disclosure of FIRs and criminal complaints. This approach not only ensures compliance but also supports the broader goal of maintaining market integrity and investor confidence.

Conclusion

The recent amendments to SEBI’s Disclosure Requirements Regulations particularly the insertion of Item 8 in Para B of Part A of Schedule III, mark a significant step towards enhancing market transparency and investor protection. These changes mandate the disclosure of pending litigations or disputes and their outcomes if they impact the listed entity. However, the broad and somewhat vague nature of these requirements has introduced several complexities.

The lack of clear criteria for what constitutes “litigation” and the absence of monetary thresholds for disclosure have raised significant concerns within the industry. The mandate to disclose potentially minor or petty litigations places a heavy burden on companies to interpret the requirements accurately. Furthermore, the ambiguity regarding the disclosure of FIRs and criminal complaints against companies or their KMPs adds to the regulatory uncertainty.

Ultimately, the heading of Part B highlights that the materiality of the impact, as referred to in sub-regulation (4) of Regulation 30’, is the key factor. Companies must carefully assess the material impact of FIRs or criminal complaints, as SEBI can use its authority to hold companies accountable for non-disclosure of materially adverse consequences. Clear guidelines from SEBI would greatly assist listed entities in navigating these regulatory requirements, ensuring that disclosures are both relevant and in the spirit of enhancing market integrity and investor confidence.