Top guns to be in Sebi’s line of fire

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Promoters & directors, not firms, to pay penalty

Top guns to be in Sebi’s line of fire
In a major shift in penal procedure, a new listing regulation being put in place by the stock market regulator seeks to punish individuals rather than companies for violations.

This means penal action will be targeted more at promoters, directors or officials who commit violations as against the current practice of imposing penalties on companies, like suspension of trading and delisting of shares.

The new regulation called Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2014 provides for penal actions like freezing of promoter shares and levying of heavy penalty on directors and officials for violations of rules.

According to sources, Sebi is giving final touches to the regulations, which will be taken to the Sebi board soon for final approval. Earlier this year, it had sought feedback from the public.

The new regulation will replace the current listing agreement through which listed companies are being governed by stock exchanges. By plugging loopholes, Sebi hopes to improve corporate governance as well as provide protection to investors.

MS Sahoo, former Sebi whole-time director commented, “In the hierarchy of laws, regulations get precedence over agreement. The process of formulating regulations, and administering and enforcing them is more rigorous than that associated with agreement and hence the outcome is superior and robust. Besides bringing uniformity across exchanges, this would enable Sebi to take a variety of enforcement actions itself without intervention of court or indulgence of stock exchanges if any listing norm is violated.”

Sahoo adds that this move is in line with modern trends to penalise individuals behind violations rather than the company, which does not have a mind of its own.

Under the current practice, the stock exchange takes action like suspension of trading in the shares of the company and in worse cases orders delisting of shares.

Prithvi Haldea, Prime Database chairman said “This is a long due measure: good that Sebi is doing it now. It will act as a deterrent if Sebi penalises the persons behind the wrongdoing. Any action against companies like delisting will end up harming small investors.”

It also adopts standard operating procedure in case of violation of any norm by a listed company.

The new regulation seeks to update and consolidate provisions relating to listing and disclosure requirements in respect of all kinds of securities, including debt securities. It lays down the principles governing disclosures and listing obligations.

Apart from detailed provisions for enforcement of violations, it assigns specific responsibilities to each constituent such as listed company, board, compliance officer, stock exchange and others under the regulations.

It also includes a revised corporate governance fram­ework such as the requirement that firms get shareholders’ approval for related party transactions, promotes electronic filing through technologically updated platform, disclosures on pay packages and setting up of a whistleblower mechanism.

Mahesh Singhi, MD at Singhi Advisors says, “This is a welcome step as it can improve corporate governance at companies. The promoter will personally be driving better practices at his company to ensure that regulatory compliances are met so that his skin is not mired in controversies. As our economy matures and our companies become more globalised and work with many multinationals, our regulators should make India Inc more and more transparent and responsible to their shareholders.”

It is expected that bringing in a regulation in place of listing agreement would improve enforceability of norms. Earlier exchanges were reluctant to go after promoters and officials, saying that the listing agreement was signed between stock exchanges and firms.

“Enforcement becomes a problem when rules are in the form of an agreement," Ambit Corporate Finance managing director Gautam Gupte said. “Penalty of violations need to be clearly spelt out. All that the exchanges could do was suspension and delisting of shares, which is detrimental to retail and other investors. So taking action against promoters and directors would improve compliance levels.”

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