Imposition of Fines by Stock Exchanges for Non-Compliance under LODR

Imposition of Fines by Stock Exchanges for Non-Compliance under LODR

Imposition of Fines on issue of listed NCDs, NCRPs or Commercial papers for Non-Compliance under SEBI – LODR 

Executive Summary:

* The stock exchanges have the major responsibility of ensuring effective enforcement of continuous disclosure obligations by issuers of listed Non-Convertible Debt Securities (NCD’s) or non-convertible redeemable preference shares (NCRPS) or Commercial Papers. In order to ensure compliance with the disclosure requirements under the SEBI-listing obligations, the stock exchanges have decided to lay down a uniform structure for imposing fines for non-compliance with continuous disclosure requirements after discussion with market participants.

* The fine ranging from Rs.1,000-50,000 per day could be levied for non-compliance with disclosure norms related to payment obligations, non-submission of deviations in utilization of issue proceeds, and failure to obtain prior approval of the bourses for any structural change in terms of NCDs or NCRPS.

* The fines would continue to accrue till the time of rectification of the non-compliance and to the satisfaction of the recognized exchange concerned.

* Such accrual will be irrespective of any other disciplinary or enforcement action initiated by exchange.

Introduction:

Stock exchanges are entrusted with the responsibility of monitoring compliances of the provisions of the Listing Regulations along with the power to impose fines in case of contravention.

In view of the aforesaid, the Securities and Exchange Board of India (SEBI) had issued a Circular on 22nd January, 2020 specifying a uniform structure for imposing fines for issuers of specified securities for non- compliance with certain provisions of Listing Regulations and empowering stock exchanges to take necessary actions such as, imposing of fine, suspension of trading, freezing of promoters’ stake etc. On similar lines, the SEBI has come out with another Circular on 13th November, 2020 (Circular/ recent Circular), in exercise of the powers conferred under sections 11(1) and 11A(2) of the SEBI Act, 1992 read with Section 9 and 21 of Securities Contracts (Regulation) Act, 1956. This time, the structure of fines is provided for the issuers of Non-Convertible Debt Securities (NCDs), Non- Convertible Redeemable Preference Shares (NCRPSs) or Commercial Papers (CPs).

Highlights of the Circular:

* Applicability of the provisions: The Circular is issued to:

* All Recognized Stock Exchanges;

* All Depositories;

* All issuers of listed Non-Convertible Debt Securities and/or Non-Convertible;

* All issuers of Redeemable Preference Shares; and

* All issuers of listed Commercial Papers

* Effective Date: The circular shall come into force for compliance period ending on or after December 31, 2020.

* In case a non-compliant entity is listed on more than one recognized stock exchange, the concerned exchanges will have to take uniform action in consultation with each other.

* The exchanges shall take necessary steps to implement this framework and will disclose on their website the action taken against the entities for non-compliance, including the amount of fine levied.

* The amount of fine realized as per the structure provided in Annexure I of this circular shall be credited to the “Investor Protection Fund” of the concerned recognized stock exchange.

Non-compliance provisions & Penalty:

* Fine to be levied in case of non-compliances by issuers of listed Non- Convertible Debt Securities and/or Non-Convertible Redeemable Preference Shares:

> Delay in furnishing prior intimation with respect to date of payment of interest/redemption amount or intimation regarding board meeting affecting the rights or interest of holders of NCDs/NCRPS, Non-disclosure of information related to payment obligations – Rs.1000/- per ISIN (International Securities Identification Number).

> Non-submission of the financial results within the period prescribed under this regulation – Rs.5,000 per day.

> Non-disclosure of half-yearly/annual financial results or non-disclosure of items pertaining to NCRPS as notes to financials – Rs.1000/- per day.

> Non-submission of a Certificate signed by the Debenture Trustee, Non-submission of deviations/variations in the utilization of issue proceeds, – Rs.1000/- per day.

> Failure to obtain prior approval of stock exchange for any structural change in terms of NCDs/ NCRPS – Rs.50,000 per instance.

> Delay in submission of the notice of record date – Rs.10,000 per ISIN.

> Non-compliance with norms pertaining to functional website – Advisory/warning letter per instance of non-compliance per item, Rs.10,000 per instance for every additional advisory/warning letter exceeding the four advisory/ warning letters in a financial year.

* Fine to be levied in case of non-compliances by issuers of listed Commercial Papers:

> Non-submission of financial results within the prescribed period – Rs.5000/- per day.

> Non-disclosure of line items prescribed under Regulation 52(4) of SEBI LODR Regulations along with the half yearly / annual financial results – Rs.1000/- per day.

> Non-submission of certificate regarding fulfillment of payment obligations – Rs.1,000/- per day per ISIN.

* Action to be taken in case of non-compliances by issuers of listed Non-Convertible Debt Securities and/or Non-Convertible Redeemable Preference Shares and/or Commercial Papers:

> Every recognized stock exchange shall issue notices to the non-compliant entities within 30 days from the due date of prescribed timeline.

> If the non-compliant entity fails to comply with the fine or penalty requirement and to pay fine levied within the stipulated period as per the notice stated above, the concerned recognized stock exchange shall, upon expiry of the period indicated in the notice, issue reminder notices to such non-compliant entities, to ensure compliance with the requirements and pay fines within 10 days from the date of such notice.

> If the non-compliant entity fails to comply with the notice requirement and to pay fine levied within the stipulated period as per the notice, the concerned recognized stock exchange shall send intimation to other recognized stock exchanges and all entities allowed acting as electronic book provider, regarding failure of compliance of such entity.

*  The recognized stock exchanges and other entities allowed to act as electronic book provider, thereafter, shall not allow:

> Issuance of any securities, as defined under SEBI circular no. SEBI/HO/DDHS/CIR/P/2018/05 dated January 05, 2018 by such noncompliant entity on EBP Platform;

> Further listing of Non-Convertible Debt Securities or NCRPS or Commercial Papers of such non-compliant entity.

* The recognized stock exchanges shall also advise the non-compliant entity to ensure that the subject matter of non-compliance which has been identified and indicated by the recognized stock exchanges and any subsequent action taken by the recognized stock exchanges in this regard shall be placed before the Board of Directors of the entity in its next meeting. Comments made by the board shall be duly informed to the recognized stock exchanges for dissemination. 

Conclusion:

This new circular brings additional fines by the SEBI for the non-compliances by issuers of listed Non-Convertible Debt Securities and/or Non-Convertible Redeemable Preference Shares and/or Commercial Papers. Hence, companies are required to be more stringent regarding their legal compliances.

Further, all non-compliances made, fines payable shall also be disclosed on the website of the company as well as on the website of the stock exchange. Hence companies are bound to follow all rules & regulations. Any kind of negligence may lead to damage the brand value (goodwill) of the company.

Regards,
Legal Team

Proind Business Solutions Private Limited
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Email: info@proind.in, website: www.proind.in