Simplifying Compliance: SEBI's Initiative to Harmonize ICDR and LODR Regulations

In the current regulatory landscape, managing compliance is crucial for maintaining transparency and protecting stakeholder interests. However, the costs associated with adhering to these can often become burdensome. To address these challenges, the Securities and Exchange Board of India (SEBI) has recently released a consultation paper [1] aimed at simplifying and harmonizing two key regulations: the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, and the Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018. This initiative seeks to ease the compliance management requirements, making it easier for companies to meet regulatory standards efficiently. Our compliance management software, Komrisk, can help you comply with all SEBI compliances and help you stay on top of your compliance requirements.

This blog explores the key recommendations from SEBI's Expert Committee and highlights how they aim to facilitate ease of doing business while maintaining vigorous compliance frameworks.

The backdrop for this initiative comes from the Union Budget 2023-24 announcement, which emphasized simplifying regulatory compliance across sectors. To act on this, SEBI formed an Expert Committee, which was asked to review the LODR and ICDR regulations to ease compliance burdens and harmonize the provisions between these two regulatory frameworks. Now, to ensure that proposed changes meet the expectations and needs of all stakeholders, the final recommendations have been published seeking public comments.

The Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, set out guidelines for listed companies to ensure transparent, timely, and fair disclosure of information to stakeholders, promoting good governance practices. The Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018, govern the process for issuing securities, detailing the standards and procedures companies must follow for public offerings, including disclosures, pricing, and eligibility requirements. Together, these regulations aim to protect investor interests and uphold market integrity by setting clear standards for corporate disclosures and capital issuance.

The Expert Committee's recommendations aim to streamline various aspects to harmonise both these regulations. Let us understand some of the major highlights:

1. Filings and Disclosures

• Single Filing System: Enabling a single filing system through API-based integration between stock exchanges. This will help listed entities avoid duplication and enhance transparency.
• System-Driven Disclosures: Automating the disclosure of critical information such as shareholding patterns and credit rating revisions will reduce manual errors and ensure timely updates.
• Website Disclosures: Entities will now be allowed to disclose important information via curated links to stock exchanges, easing the navigation of essential data for investors.

2. Board and Governance-Related Changes

• Board Vacancies: A 3-month period has been recommended for filling vacancies in board committees, providing flexibility to companies dealing with sudden changes.
• Director Approvals: Delays caused by regulatory or statutory approvals will no longer count toward the timeline required for shareholder approvals, ensuring smoother governance transitions.

3. Promoters and Controlling Shareholders

The committee suggests streamlining the reclassification process for promoters, helping companies manage transitions more smoothly. Promoters, directors, and key managerial personnel will also be required to disclose relevant information, ensuring better compliance with LODR regulations.

4. Related Party Transactions (RPTs)

• Exemptions for Routine Transactions: Certain routine transactions, like those that apply uniformly to all shareholders or involve statutory dues, will be exempt from related party transaction scrutiny, reducing unnecessary compliance burdens.
• Audit Committee Flexibility: The committee recommends permitting the ratification of RPTs under specific conditions and expanding the use of omnibus approvals, making the process more efficient.

5. Shareholder Participation

A forward-looking change is the recommendation to permanently allow virtual or hybrid shareholder meetings, ensuring wider participation and more transparent governance, especially in the post-pandemic world.

The recommendations under the ICDR regulations are aimed toward simplifying the capital-raising process, making it more accessible to businesses, especially those in need of equity financing. Such recommendation include:

1. Issue Advertisements

To combine the pre-issue and price-band advertisements into a single advertisement, along with adding Quick Response (QR) codes for more accessible information retrieval.

2. Voluntary Disclosures of Proforma Financials

Issuers can voluntarily disclose proforma financials, which help investors better understand how acquisitions or divestments will impact the company’s financials. This fosters transparency while reducing mandatory disclosure requirements.

3. Promoter Lock-in Period Clarifications

The committee has suggested clarifying the lock-in requirements for promoters when loan repayment is a key objective of the issue. This change is expected to ease the process for promoters seeking to raise capital while complying with existing norms.

4. Simplifying IPO Eligibility

Issuers with outstanding Stock Appreciation Rights (SARs) will now be allowed to file draft offer documents, broadening access to the capital markets for companies with unique capital structures.

One of the primary goals of the Expert Committee’s recommendations is to harmonize the provisions of LODR and ICDR. This will eliminate inconsistencies between the two frameworks, improving ease of compliance and reducing areas of conflict. Some notable changes include:

1. Material liability Disclosures

Aligning the disclosure requirements for material litigation under ICDR with those of LODR ensures that investors receive consistent information.

2. Subsidiary-Related Compliance

Thresholds for identifying material subsidiaries and compliance requirements for transactions between wholly-owned subsidiaries will now be aligned, reducing confusion and enhancing operational clarity.

Corporate Governance: A Focus on Transparency

In addition to easing procedural compliance, the committee also recommends on enhancing corporate governance, which include:

Compliance officers will now be required to be full-time employees designated as key managerial personnel, ensuring better oversight and accountability.

b. The committee encourages listed entities to enhance diversity in the institution of independent directors, which will lead to more balanced and effective decision-making.

The recommendations of the Expert Committee mark a significant move toward simplifying regulatory compliance while ensuring the integrity of India's capital markets. By aligning the ICDR and LODR regulations, SEBI aims to reduce duplicative efforts, clarify obligations, and ease compliance burdens, particularly in the areas of capital raising and shareholder participation. This balanced approach is expected to foster a more efficient regulatory framework that both supports businesses in meeting their obligations and protects stakeholder interests in India’s evolving capital markets.  Only time will tell whether this attempt succeeds in fostering a more efficient and business-friendly environment.

Author: Sanchita Agarwal Amiya Mukherjee

[1] SEBI | Consultation Paper on Recommendations of the Expert Committee for facilitating ease of doing business and harmonization of the provisions of ICDR and LODR Regulations <a href='https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComments=yes' target='_blank' style='color:#007ffc'> Click here to provide your comments </a>