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Sebi's Policies For Listed Companies: Ensuring Tranparency, Upholding Market Integrity And Investor Trust

Policies are created to achieve specific objectives, address issues, or regulate certain activities. Policy provides framework for decision-making and establishes a consistent approach to deal with various circumstances. Policies often reflect the values, priorities, and goals of the entity or group that creates them. Policies can cover a wide range of topics, such as Governance, Security, Human Resource, Health and Safety, Legal and many more.

Generally, A policy is well-documented paper which is communicated to the necessary stakeholders to safeguard its compliance. Policies even undergo frequent updates and reviews to adjust with dynamic external environment and various other things.

Securities and Exchange Board of India (hereinafter referred to as SEBI) is India's central regulatory authority for capital markets and issues related to securities offerings. For Companies listed on stock exchanges in India, SEBI had came out with Listing Obligations and Disclosure Requirement (LODR) Regulations, 2015 to upholdtransparency, corporate governance and investor protection.

Some corporate policies that are relevant under SEBI LODR are Code of Conduct and Ethics Policy, Vigil mechanism, Related Party Transactions Policy, Policy on Materiality of Information, Corporate Social Responsibility Policy, Risk Management Policy and Policy on preservation of documents.

Preservation Of Documents Policy

SEBI mandated the listed companies to primarily have a policy on preservation of various kinds of documents. Companies approach towards document retention and preservation is highlighted in this policy. Types of documents that needs to be preserved like Minutes of the meeting, agreements, statutory records and other such documents are highlighted and identified in this policy.
  • Retention Period:
    Retention period for various types of documents needs to be specified and maintained by the company. This can vary depending on company's specific needs legal requirements and industry standards. Regulation 9 of the LODR obligates company to have two set of documents
    1. documents whose preservation shall be permanent in nature;
    2. documents with preservation period of not less than eight years after completion of the relevant transactions.
  • Storage and Security:
    Crucial question as to how documents will be stored to ensure their integrity and accessibility shall be addressed by the policy. All types of storage including physical storage, electronic storage, or a combination of both can be used under the policy. Another important aspect of this policy is it should address measures for security of documents from unauthorized usage, loss or damage.
  • Destruction and Disposal:
    The policy should also create a framework for procedures regarding disposal and destruction of the documents when they are no more needed.
  • Record Management System:
    The establishment of a record management system may be mandated by the policy in order to enable effective document archiving, retrieval, and tracking. This system might have suitable access controls, version control, audit trails, and indexing.
  • Compliance and Monitoring:
    The policy should place a strong emphasis on observing all applicable laws, rules, and regulations regarding document preservation. To ensure adherence to the policy and spot any areas of non-compliance, it could include measures for recurring audits, internal controls, and monitoring.

Policy On Determining 'Material Subsidiary'

There is a requirement placed on listed companies to have a policy on determining material subsidiaries under regulation 16(1)(c) of SEBI LODR, 2015. This policy determines subsidiaries that are considered material.
  • Definition of Material Subsidiary to be specified:
    It could include any criteria that the firm deems important, such as the subsidiary's share of the company's sales, profits, assets, and liabilities in relation to its consolidated financials
  • Thresholds and Criteria:
    The policy should provide the thresholds or requirements that must be met in order to classify a subsidiary as material. These thresholds may be qualitative, such as strategic importance, operational control, or corporate significance, or quantitative, such as a specific proportion of financial measures.
  • Board Approval:
    The policy may provide that the board must approve the list of material subsidiaries. This makes sure that the decision-making procedure is thorough and includes the board of directors' monitoring.
  • Disclosure Requirements:
    The policy should specify how material subsidiaries must disclose information. The method and timing of the disclosure, such as through stock market filings or annual reports, should be specified. The scope of disclosure, including financial data, business activities, and any other pertinent information, should also be covered by the policy.
  • Review and Updates:
    Proper background for periodical review and updates to the policy must be established to confirm that the material subsidiaries determination must remain up to date and accurate. Regular evaluations of subsidiary performance, modifications to ownership or control, or any other elements that can affect the materiality assessment could be included in this.

Risk Management Policy

Under regulation 17(9)(b) of SEBI LODR (Listing Obligations and Disclosure Requirements) regulations of 2015, there is a requirement for listed companies to have a risk management policy. This policy outlines the company's approach to identifying, assessing, and mitigating various risks associated with its operations. Generally, Risk Management Policy of a company covers the following:
  • Risk Identification:
    The policy ought to lay out a methodical procedure for classifying and identifying the risks the organization faces. Operations risks, financial risks, legal and regulatory risks, strategic risks, and any other risks that might be particular to the company's sector of the market or business strategy are examples of this.
  • Risk Assessment and Measurement:
    The policy should specify how and by what standards the impact and seriousness of risks should be evaluated. Both qualitative and quantitative evaluations, such as likelihood, potential effects on finances or reputation, and the interaction of several risks, may be included.
  • Risk Mitigation Strategies:
    The strategies and steps to reduce recognized risks should be specified in the policy. This can entail creating controls, putting protections in place, conducting training and awareness campaigns, getting insurance coverage, or creating backup plans.
  • Roles and Responsibilities:
    Roles and responsibilities of various stakeholders in the risk management process shall be clearly defined. This includes the board of directors, management, risk management committee, and other relevant personnel involved in identifying, assessing, and mitigating risks.
  • Monitoring and Reporting:
    The policy should lay out procedures for ongoing risk monitoring and reporting methods to make sure that pertinent stakeholders, including the board and senior management, are informed of changes to risks in a timely manner. Regular risk assessments, reporting on risk exposure and mitigation measures, and escalation protocols for serious risks could all be part of this.
  • Review and Updates:
    To guarantee that the risk management framework stays effective and in line with changing risks and regulatory requirements, the policy should contain a process for routine reviews and changes. This could entail ongoing evaluations of how the policy is being applied, adjustments to the business environment, or new hazards.

Code Of Conduct

Under SEBI LODR (Listing Obligations and Disclosure Requirements) regulations, there is a requirement under regulation 17(5) for listed companies to establish a Code of Conduct. This Code of Conduct sets out the expected standards of behavior, ethical conduct, and responsibilities of directors, senior management personnel, and employees of the company.
  • Ethical Standards:
    The company's dedication to moral conduct, integrity, and adherence to relevant laws, rules, and industry best practices should be made clear in the code of conduct. It establishes the standard for ethical behavior within the organization.
  • Conflicts of Interest:
    Conflicts of interest should be covered in the code of conduct, together with advice on how to spot, disclose, and handle them. It could include obligations to stay clear of circumstances that might jeopardize objectivity or integrity as well as rules for settling disputes in an open and equitable way.
  • Insider Trading and Confidentiality:
    Insider trading should be outlawed, and the Code of Conduct should outline rules to prevent unauthorized disclosure of unpublished price-sensitive information. It might describe how to handle private information and the necessity of maintaining data privacy and confidentiality.
  • Compliance with Laws and Regulations:
    The Code of Conduct should emphasize the company's commitment to comply with all applicable laws, regulations, and internal policies. It may include provisions for employees to report any violations or concerns regarding legal and regulatory compliance.
  • Professional Conduct:
    The Code of Conduct should outline expectations for professional conduct, professionalism, and respect among employees. It may cover areas such as workplace behavior, diversity and inclusion, harassment prevention, and equal opportunity.
  • Reporting of Violations:
    The Code of Conduct should establish procedures for reporting suspected violations of the code, unethical behavior, or any other misconduct. It should ensure that employees feel comfortable reporting concerns and provide protection against retaliation for whistleblowers.
  • Disciplinary Actions:
    The Code of Conduct should specify the consequences of violating the code and outline the disciplinary actions that may be taken. It may include provisions for investigations, sanctions, and remedial measures to address non-compliance.
  • Communication and Training:
    The Code of Conduct should be communicated to all employees and stakeholders. It should emphasize the importance of understanding and adhering to the code and may require periodic training and awareness programs.

Vigil Mechanism

Under SEBI LODR (Listing Obligations and Disclosure Requirements) regulations, there is a requirement for listed companies to establish a vigil mechanism, commonly known as a Whistleblower Policy. This mechanism provides a platform for employees and stakeholders to report concerns, complaints, or grievances related to unethical behavior, financial irregularities, or violations of laws or regulations within the company. Here is an overview of the vigil mechanism under SEBI LODR:
  • Objective:
    The vigil mechanism aims to create a culture of transparency, accountability, and integrity within the company by providing a mechanism for reporting and addressing unethical or illegal practices.
  • Coverage:
    The vigil mechanism typically covers all employees, directors, vendors, customers, and other stakeholders associated with the company. It may extend to subsidiaries or other entities controlled by the listed company.
  • Reporting Channels:
    The mechanism establishes multiple reporting channels to encourage reporting in a confidential and secure manner. This may include dedicated helpline numbers, email addresses, online portals, or physical drop-boxes. It ensures that individuals can report concerns without fear of retaliation or victimization.
  • Confidentiality and Anonymity:
    The vigil mechanism emphasizes the confidentiality and anonymity of the reporting process. It ensures that the identity of the whistleblower is protected and that their concerns are handled discreetly and without prejudice.
  • Investigation and Action:
    The mechanism establishes a process for promptly and impartially investigating the reported concerns. It defines the responsibilities of the designated authority or committee responsible for receiving, reviewing, and investigating the complaints. Based on the investigation findings, appropriate actions are taken, which may include disciplinary actions, remedial measures, or reporting to regulatory authorities, as required.
  • Non-Retaliation:
    The vigil mechanism explicitly prohibits retaliation or adverse actions against individuals who report concerns in good faith. It provides safeguards to protect whistleblowers from any form of victimization or reprisal.
  • Awareness and Training:
    The company is responsible for creating awareness about the vigil mechanism among employees and stakeholders. It may conduct training programs to educate individuals about the process, their rights, and the importance of reporting concerns.
  • Reporting and Disclosures:
    The company is required to periodically report the number and nature of complaints received and actions taken under the vigil mechanism. This ensures transparency and allows stakeholders to assess the effectiveness of the mechanism.

Materiality Of Related Part Transactions And On Dealing With Related Party Transactions

Related party transactions (RPTs) are an important area of focus under SEBI LODR (Listing Obligations and Disclosure Requirements) regulations. Listed companies are required to establish policies and procedures to determine the materiality of RPTs and to regulate and disclose such transactions.
  • Materiality Threshold:
    The company's policy should define a materiality threshold for RPTs, which helps determine the significance of a transaction in relation to the company's financials, operations, or governance. The threshold is typically based on quantitative factors, such as a percentage of revenue, assets, or profits, or other criteria as deemed appropriate by the company.
  • Identification and Disclosure:
    The policy should outline the process for identifying related party transactions and ensuring their disclosure as per the requirements of the SEBI LODR regulations. It should cover transactions with entities such as promoters, key managerial personnel, major shareholders, and their relatives or entities controlled by them.
  • Approval and Review:
    The policy should specify the process for obtaining appropriate approvals for related party transactions. This typically involves obtaining approval from the Audit Committee and/or the Board of Directors, ensuring proper review, evaluation, and documentation of the transaction.
  • Arm's Length and Fairness:
    The policy should emphasize that related party transactions should be conducted on an arm's length basis and on terms that are fair and reasonable to the company and its shareholders. This helps prevent any potential conflict of interest and ensures that such transactions do not adversely impact the company's financials or operations.
  • Exemptions and Approvals:
    The policy should address the requirements for seeking exemptions, if applicable, from certain related party transactions. It should outline the procedure for obtaining necessary approvals from the shareholders in cases where exemptions are sought.
  • Reporting and Disclosure:
    The policy should establish mechanisms for reporting and disclosing related party transactions in the company's financial statements, annual reports, and other required disclosures as per the SEBI LODR regulations. The policy should ensure that the disclosures are accurate, complete, and in compliance with the applicable reporting timelines.
  • Monitoring and Compliance:
    The policy should include provisions for ongoing monitoring and compliance with the related party transaction requirements. This may involve periodic reviews, internal audits, and assessments to ensure adherence to the policy and regulatory guidelines.

Criteria For Granting Omnibus Approval For Related Party Transactions Under Sebi LODR

Under SEBI LODR (Listing Obligations and Disclosure Requirements) regulations, companies have the provision to seek omnibus approval for related party transactions (RPTs) from their Audit Committee. Omnibus approval allows companies to obtain approval for a category of RPTs in advance, rather than seeking approval for each individual transaction separately.
  • Nature and Scope of Transactions:
    The company should define the nature and scope of transactions that are eligible for omnibus approval. This could include specific types of RPTs that are recurring, routine, or conducted in the ordinary course of business.
  • Threshold Limits:
    The policy should establish threshold limits for transactions that can be covered under omnibus approval. These limits may be based on quantitative factors, such as a monetary value or a percentage of revenue, assets, or profits, or other criteria deemed appropriate by the company.
  • Duration of Approval:
    The company should specify the duration for which the omnibus approval is valid. This may vary based on the circumstances, but typically, omnibus approval is granted for a financial year and may be subject to renewal or review at regular intervals.
  • Notifiable Criteria:
    The policy should outline the criteria that trigger the need for specific RPTs to be notified to the Audit Committee, even if they fall within the scope of the approved omnibus approval. These notifiable criteria may include factors such as a transaction exceeding a certain monetary threshold or involving conflict of interest situations.
  • Review and Monitoring:
    The policy should establish mechanisms for periodic review and monitoring of transactions conducted under omnibus approval. This ensures ongoing compliance and effectiveness of the omnibus approval process. The Audit Committee should periodically review the transactions and assess their compliance with the applicable regulations.
  • Reporting and Disclosures:
    The company should ensure that the RPTs conducted under omnibus approval are appropriately disclosed in the company's financial statements, annual reports, and other required disclosures as per the SEBI LODR regulations. The disclosures should provide transparency and sufficient information to shareholders and stakeholders regarding the RPTs conducted.

Policy On Determination Of Materiality

Regulation 30 of SEBI LODR (Listing Obligations and Disclosure Requirements) pertains to the determination of materiality of events or information that are required to be disclosed by listed companies. Here follows a general overview of the policy on determination of materiality:
  • Definition of Materiality:
    The policy should provide a definition of materiality specific to the company, considering the nature of its business, industry practices, and regulatory requirements. Materiality typically refers to information or events that have the potential to significantly impact the company's financial condition, operations, or decision-making of investors.
  • Materiality Threshold:
    The policy should establish a materiality threshold, which serves as a quantitative or qualitative criterion for determining whether an event or information is material. This threshold may be based on financial parameters (e.g., a specific percentage of revenue, profit, or assets) or non-financial factors (e.g., strategic decisions, regulatory changes, or litigation).
  • Factors for Determination:
    The policy should outline the factors that are considered in assessing materiality. These factors may include the magnitude of the event or information, its potential impact on the company's financials or reputation, the likelihood of occurrence, and the prevailing industry standards or regulatory requirements.
  • Internal Reporting and Evaluation:
    The policy should establish procedures for internal reporting and evaluation of events or information that may be material. This may involve the reporting of such events or information to the designated department or personnel responsible for determining materiality.
  • Disclosure Requirements:
    The policy should specify the disclosure requirements for events or information determined to be material. It should ensure compliance with the timelines and formats prescribed by SEBI LODR and other applicable regulations. The policy should also consider the dissemination of material information through appropriate channels, such as stock exchanges and the company's website.
  • Updates and Review:
    The policy should provide for periodic review and updates to ensure its effectiveness and alignment with changing circumstances, regulatory requirements, and industry practices. This review may involve assessing the materiality threshold, evaluating the factors for determination, and incorporating any changes necessary to improve the policy.

Dividend Distribution Policy

Top 500 listed entities based on market capitalisation every year shall formulate a dividend distribution policy which shall be disclosed in their websites and annual reports.
  • Purpose:
    The Dividend Distribution Policy outlines the company's approach and guidelines for the distribution of dividends to its shareholders.
  • Factors Considered:
    The policy typically considers various factors in determining the dividend payout, such as the company's financial performance, profitability, cash flows, capital requirements, future growth prospects, legal requirements, and any applicable regulatory guidelines.
  • Decision-Making Process:
    The policy may outline the decision-making process for declaring dividends, including the role of the Board of Directors and any specific committees responsible for reviewing and recommending the dividend payout.
  • Dividend Calculation:
    The policy may provide a formula or methodology for calculating the dividend amount, taking into account factors such as earnings per share (EPS), retained earnings, or a certain percentage of profits.
  • Dividend Payment:
    The policy may specify the timeline and mode of dividend payment, including the record date and payment date. It may also address the procedures for dividend warrant issuance, electronic transfers, or any other methods of payment.
  • Dividend Reinvestment:
    The policy may address the company's approach to dividend reinvestment plans, if applicable, allowing shareholders to reinvest dividends into additional shares of the company.
  • Communication and Disclosure:
    The policy may include provisions for communicating the dividend declaration to shareholders, ensuring timely and accurate disclosures in compliance with regulatory requirements, and facilitating the necessary shareholder resolutions, if any.

Board Diversity Policy

Board diversity has gained significant attention in corporate governance practices, and many companies voluntarily adopt board diversity policies to promote inclusivity and better decision-making. Along with being as a specific regulatory requirement under SEBI LODR, promoting diversity on the board of directors is considered a good corporate governance practice.

A Board Diversity Policy typically includes the following elements:
  • Definition of Diversity:
    The policy may define the concept of diversity, which can encompass various dimensions such as gender, age, ethnicity, race, skills, experience, background, and expertise.
  • Objectives:
    The policy may outline the objectives of promoting board diversity, which may include enhancing corporate performance, fostering innovation, improving decision-making, reflecting the company's stakeholders, and ensuring fair representation.
  • Criteria and Nomination Process:
    The policy may provide guidelines on the criteria for selecting and nominating board members with diverse backgrounds. It may outline the process for identifying qualified candidates, evaluating their skills and experiences, and ensuring diversity in the selection process.
  • Board Composition and Targets:
    The policy may set forth targets or aspirations for achieving diversity on the board. This may include setting goals for gender diversity, representation of underrepresented groups, or other diversity metrics.
  • Board Evaluation:
    The policy may incorporate mechanisms for periodically evaluating the effectiveness of the board's diversity and assessing progress towards achieving diversity targets. This evaluation may involve assessing the composition, skills, and experiences of the board members.
  • Training and Development:
    The policy may highlight the importance of providing training and development opportunities to enhance the capabilities and skills of board members from diverse backgrounds.
  • Reporting and Disclosure:
    The policy may require periodic reporting and disclosure of the company's efforts and progress in achieving board diversity goals. This promotes transparency and accountability to stakeholders.

SEBI LODR has instituted various policies in the companies playing in the stock market. Some of the policies like determination of materiality and code of conduct are at the heart of the stock exchange mechanism anywhere in the world.

Also, It is important to note that specific requirements and details may vary based on the nature of the business, industry, and applicable regulations. Therefore, companies should consult the SEBI LODR regulations and seek legal advice to ensure their policies are in line with the latest requirements.

  1. SEBI (Listing Obligations and disclosure requirements), 2015
  2. What are the Compliances under SEBI LODR Regulations? Taxmann
  3. Compliances under SEBI (LODR) Regulations, 2015for listed companies, Taxguru

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