A predicament that often faces listed companies in India is the timing and extent of disclosure of adverse information. The intent of a “disclosure-based” regime is to enable shareholders and the public to appraise a company’s position and avoid the establishment of a false market in publicly traded securities. In terms of clause 36 of the equity listing agreement, a listed company is obliged to inform the stock exchanges where it is listed immediately “of all the events which will have a bearing on the performance/operations of the company as well as price sensitive information”.

Media reports

Raids by enforcement agencies are a reality of today’s business world. Such raids are reported in the media, but at times are not immediately disclosed by the listed company to stock exchanges. Indian stock exchanges typically conduct, on a daily basis, a “rumour verification” process, which involves asking listed companies to confirm or deny media reports. The question which begs consideration is whether clause 36 of the equity listing agreement requires the company to disclose a raid to the stock exchanges where it is listed.

Outline of clause 36

Clause 36 requires information pertaining to material events to be disclosed immediately to the stock exchange. These material events include: (1) change in the general character or nature of business; (2) disruption of operations due to natural calamity; (3) commencement of commercial production/commercial operations; (4) developments with respect to pricing/ realization arising out of change in the regulatory framework; (5) litigation/ dispute with a material impact; (6) revision in ratings; and (7) any other information having bearing on the operation/ performance of the company as well as price sensitive information.

Price sensitive information includes: (a) issue of any class of securities; (b) acquisition, merger, demerger, amalgamation, restructuring, scheme of arrangement, spin-off or selling divisions of the company, etc.; (c) change in market lot of the company’s shares and subdivision of the company’s equity shares; (d) voluntary delisting by the company from the stock exchange; (e) forfeiture of shares; (f) any action which will result in alteration in the terms regarding redemption/cancellation/retirement in whole or in part of any securities issued by the company; (g) information regarding opening/closing of status of American or global depository receipts or any other class of securities to be issued abroad; and (h) cancellation of dividend, rights, bonus, etc.

The disclosures required in terms of clause 36 of the equity listing agreement are indicative and inclusive in nature, and are not exhaustive. Companies are required to keep the stock exchanges informed of certain events both at the time of occurrence of the event and subsequently after the cessation of the event.

Analysis

Clause 36(5) of the equity listing agreement provides that: “The Company will promptly after the event inform the Exchange of the developments with respect to any dispute in conciliation proceedings, litigation, assessment, adjudication or arbitration to which it is a party or the outcome of which can reasonably be expected to have a material impact on its present or future operations or its profitability or financials.”

To analyse whether the occurrence of a raid by a revenue authority would fall within disclosures required to be made, it is important to note that the terms used in clause 36(5) are “conciliation proceedings”, “litigation”, “assessment”, “adjudication” and “arbitration”. Arguably, a raid is based on information, allegation or suspicion and any charge which could lead to “conciliation proceedings”, “litigation”, “assessment”, “adjudication” or “arbitration will be a consequence of such a raid. Consequently, it may be argued that a raid does not fall into any of these categories which warrant disclosure to the stock exchanges.

Even assuming for the moment that the company is required to disclose a raid or of its own volition is desirous of making the disclosure of the raid, it is possible that such a disclosure itself might create a false market in its securities, because the outcome of raid may not lead to any charge. Taking a position that a raid is akin to a charge may not be in the best interests of the shareholders and the company.

A view may be taken that a raid by a revenue authority merely involves assimilation of facts and preliminary analysis of a company’s records, and therefore need not be disclosed, because it is the show-cause notice that would be ordinarily issued after the raid which will level allegations against the noticee. Hence at the stage of raid, even if the company desires, it will be difficult for the company to determine material adverse impact and pre-empt the outcome of the raid.

Disclaimer: This article was first published in the July/August 2014 issue of the India Business Law Journal magazine. It has been authored by Yogesh Chande, who is an Associate Partner and Manendra Singh, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at yogeshchande@elp-in.com or manendrasingh@elp-in.com for any comment or query. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. The contents of this article/update are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.