Monthly Newsletter January 2015

Governance Watch

Monthly Newsletter

SEBI Discussion Paper - Amendments for Restrictions on Wilful Defaulters SEBI floated a discussion paper on proposed amendments to regulations framed under SEBI Act, 1992 for Imposing Restrictions on Wilful Defaulters. Following are the rec- ommendations made to impose restrictions on willful defaulters from accessing the capital market:

Recommendation 1 No issuer shall make a public issue of equity securities, if the issuer, its pro- moter, group company or director of the Issuer of such securities, is in the list "Whether you think you can or whether you think you can’t, you’re of the Wilful defaulters, published by the Reserve Bank of India. right” - Henry Ford Recommendation 2 Inside this Issue: No issuer shall make a public issue of the debt securities, if the issuer, its pro- moter, group company or director of the Issuer of such securities, is in the list

SEBI Discussion Paper - of the Wilful defaulters, published by the Reserve Bank of India or it is in de- Amendments for Restric- fault of payment of interest or repayment of principal amount in respect of tions on Wilful Defaulters debt instruments issued by it to the public, if any.

SEBI Discussion Paper - Reclassification of Promot- Recommendation 3 ers as Public No issuer shall make a public issue of non-convertible redeemable preference

shares , if the issuer, its promoter, group company or director of the Issuer of On Focus: Sustainability Reporting such securities, is in the list of the Wilful defaulters, published by the Reserve Bank of India or it is in default of payment of interest or repayment of princi- About Us pal amount in respect of debt instruments issued by it to the public, if any.

We are in the News! Recommendation 4 Existing listed companies / its promoter / group company / director of the Issuer categorized as 'wilful defaulter' may make a rights issue / private place- ment to qualified institutional buyers, with full disclosures in the offer docu- ment.

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SEBI Discussion Paper - Amendments for Restrictions on Wilful Defaulters (continued)

Recommendation 5

Existing listed companies / its promoter / group company / director of the Issuer categorized as 'wilful de- faulter' should not be allowed to take control over other listed entity in accordance with SEBI (SAST) Regula- tions, 2011.

Recommendation 6

Existing listed companies / its promoter / group company / director of the Issuer categorized as 'wilful de- faulter' should be allowed to make counter offer in case of a hostile bid.

The comments/ suggestions should be given in the following format:

Name of the entity/ person / intermediary Name of the organization/ investor

Sr. No. Pertains to Recommendation num- Proposed changes Rationale ber

The comments should be emailed on or before January 23, 2015 to [email protected] or sent by post to:

Mr. Anindya Kumar Das, Deputy General Manager, Corporation Finance Department, Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, G-Block, Bandra Kurla Complex, Bandra East, Mumbai 400051

The link for SEBI proposal is: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1420453707061.pdf

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SEBI Discussion Paper - Re-classification of Promoters as Public

SEBI floated a discussion paper on re-classification of promoters as public after many promoters have expressed a desire to re-classify their holding as public. The discussion paper proposes a policy framework which details the various scenar- ios and conditions under which a promoter can be re-classified as a public shareholder:

Proposed Policy Framework

An entity belonging to promoter / promoter group of listed companies may re-classify its shareholding to public category under the following three scenarios, subject to certain conditions as stated thereafter:

I. Pursuant to an open offer under the SAST Regulations or on account of an exemption granted by SEBI under the said Regulations.

II. In case of a separation agreement - The said agreement shall be duly registered under the Registration Act, 1908 or the material terms of the separation agreement should be disclosed to the stock ex- changes, prior to the reclassification.

III. The promoter along with the entire promoter group to which the promoter belongs, taken together, holds less than 5% shares in the company (including any convertibles/outstanding warrants/ADR/ GDR Holding).

Common Conditions with respect to Scenario I, II and III: Post reclassification, no shareholding agreement shall exist and all past agreements between (i) outgo- ing promoter / promoter group entities and the continuing promoter / promoter group entities and (ii) outgoing entities and the company, shall be made null and void. In other words, such outgoing entities shall have only such rights as any other public shareholder. No special rights shall be with the outgoing entity through any formal or informal arrangements

Outgoing entities shall not hold any Key Management Personnel (“KMP”) position in the company and the other group or associate companies. Further, in case the promoter is a corporate entity, KMP‟s of such corporate promoter shall not hold any KMP position in the company and the other group / associate companies

The outgoing entities and/or company should not have been debarred from accessing the capital market

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SEBI Discussion Paper - Re-classification of Promoters as Public (continued)

Such outgoing entities shall not exercise, directly or indirectly, any control over the affairs of the com- pany or any of the group / associate companies

If such outgoing entities want to classify themselves as promoters again in future, they shall be re- quired to make an open offer to the public and would not be eligible for exemption from the said obli- gation

Additional conditions with respect to Scenario II and III: The promoter group entity / company shall give intimation to Stock Exchanges for the re- classification along with all the relevant details including reason for re-classification, shareholding of the said promoter group, copy of agreements and other relevant documents. The re-classification shall be permitted after expiry of 1 year from such intimation

Post the initial 1 year, such promoter group entity may be classified as public. However, they shall not be considered to be part of public shareholders for another 3 years for the purpose of compliance with minimum public shareholding requirements under Securities Contracts (Regulation) Rules, 1957

Further additional conditions with respect to Scenario III: Such promoters should have been disclosed as promoters since at least 3 financial years prior to the year in which the said promoter/promoter group entities desires to re-classify its holding as public

Such outgoing entities shall not fall within the definition of „promoter group„ category in respect of the continuing promoter

Conditions with respect to disclosure and procedures: As per the disclosure in the Offer Document, all entities falling under promoter and promoter group shall be disclosed separately on the Stock Exchange‟s website along with the specific relevant head (e.g. family member of the promoter, corporate entity where promoter holds more than 10%, person in control of the issuer, etc) under which the said entity has been disclosed. For existing listed compa- nies, the said information should be submitted to all the recognized stock exchanges where the com- pany is listed.

The said list shall be allowed to be updated by the Stock Exchange where the securities are listed, only after receipt of a request from the company / promoter along with all relevant documentary evi- dences

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SEBI Discussion Paper - Re-classification of Promoters as Public (continued)

Stock Exchanges shall satisfy themselves with the above mentioned conditions and only thereafter, shall allow any update to the list

SEBI or Stock Exchanges shall have the right to specify any other condition on a case to case basis

SEBI may, for reasons recorded in writing, relax any of the conditions specified above, on a case to case basis

The comments/ suggestions should be given in the following format:

Name of the entity/ person / intermediary

Name of the organization/ Sr. No. Pertains to serial number Proposed changes Rationale

The comments should be emailed on or before January 16, 2015 to [email protected] or sent by post to:

Mr. Amit Tandon, Deputy General Manager, Corporation Finance Department, Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, G-Block, Bandra Kurla Complex, Bandra East, Mumbai 400051

The link for SEBI proposal is: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1419934886654.pdf

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On Focus: Sustainability Reporting

The short and medium-term success of any company depends upon its financial results. However, the long- term success depends upon many other factors, which, along with better financial results, play a major role in sustenance of the company. Since the business operations of the company is affected by multiple factors, both from within or outside its scope, the company should strive to create conditions that negates any future ad- versities and capitalizes on opportunities. Any activity that has a negative impact on the society and the envi- ronment has to be mitigated. Companies need to make sure that they are profitable and sustainable at the same time.

Companies utilize many different kinds of resources in their day-to-day operations. The resources may be in the form of human workforce, water, electricity, land, machinery, building, raw materials, etc. Some of these resources are renewable, others are not. Most of the resources are limited in supply and hence, need efficient utilization to avoid their depletion. As per the Oxford dictionary, „sustainability‟ means „able to be main- tained at a certain rate and level‟ and „conserving an ecological balance by avoiding depletion of natural re- sources‟. Paul Hawken, environmentalist and a well-known campaigner for sustainability, says that sustain- ability is a state where demands placed upon environment by people and commerce can be met without re- ducing the capacity of the environment to produce for future generations. “Leave the world better than you found it, take no more than you need, try not to harm life or the environment, make amends if you do.”

As corporate citizen, companies have a social responsibility towards the environment and the society. They should adopt responsible business practices across economic, social and environmental parameters. In addi- tion, they should disclose their efforts, in being sustainable, to the stakeholders through a sustainability re- port. This report can be in the form of Corporate Social Responsibility report, an Environmental Social Gov- ernance report and a Triple Bottom-line report. The Triple Bottom-line are Profits, People and Planet.

The report should highlight engagement of stakeholders of the company in identifying the sustainability re- sponsibilities of the company, identification of the material aspects and topics and the activity of monitoring and reporting these material aspects. Stakeholders of the company can be the staff, suppliers, marketers, ven- dors, investors, local communities, etc. They should have a say in identification of the material aspects. The material aspects can be generation of economic value, client satisfaction, information security, compliance with regulations, code of conduct and ethics, intellectual property, equal opportunity to employees, occupa- tional health, climate change, energy, water and waste management, etc. Company should disclose how it performs with respect to each of these material aspects and what steps it has taken to eliminate shortcomings, if any.

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On Focus: Sustainability Reporting (continued)

Systematic sustainability reporting helps organizations to measure the impacts they cause or experience, set goals, and manage change. A sustainability report is the key platform for communicating sustainability per- formance and impacts – whether positive or negative. To produce a regular sustainability report, organiza- tions set up a reporting cycle – a program of data collection, communication, and responses. This means that their sustainability performance is monitored on an ongoing basis. Data can be provided regularly to senior decision makers to shape the organization's strategy and policies, and improve performance.

As a minimum, the company should align its sustainability report with the G4 sustainability reporting guide- lines by Global Reporting Initiative (GRI). GRI is a non-profit organization that has developed a sustainabil- ity-reporting framework that is used by companies around the world. The framework enables organizations to measure and report their economic, environmental, social and governance performance. The G4 sustain- ability reporting guidelines list out various reporting principles to be followed and disclosures to be made by the company. As of 2012, more than 80 Indian listed companies were undertaking sustainability reporting under the framework developed by the GRI.

In 2011, PUMA established – as the first company ever – an Environmental Profit & Loss Account (EP&L). This has set a new benchmark in reporting practices.

References:

“Infosys Sustainability Report 2013-14” by Infosys Limited “Sustainability reporting – What you should know” by KPMG “G4 Sustainability Reporting Guidelines” by Governance Reporting Initiative

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