It was an unusually busy week for Karan, which forced him to miss a key weekend game in the local golf league. When he finally made it to class the following weekend, everyone was curious to know his whereabouts. In response, Karan revealed that he’s been swamped at work as he’s busy working through the details of an upcoming time-sensitive dividend declaration. While it made for casual conversation, since Karan worked for a public company, it had serious unintended consequences. This inadvertent disclosure was treated as unpublished price-sensitive information under the SEBI Act 1992 and resulted in a public disclosure on appearances, a large fine and an embarrassing corporate governance event.
Going public via an initial public offering (IPO) brings great pride to entrepreneurs as they become valued members of an exclusive club of publicly traded companies. 2021 was a record year for IPOs, with 63 companies raising Rs 1.2 lakh crore, the highest sum ever raised in a single year. This frenzy is expected to continue into 2022 as well. Be that as it may, it is important to understand that beneath the glossy facade of an IPO is a massive shift in the legal obligations, reporting requirements and responsibilities of associated individuals, including founders, promoters, key executives, designated employees and their family members; the list can easily number in the hundreds, if not thousands. This list also works backwards, going back six months to establish a link between an Affiliate and a public entity.
In order to instill trust, trust and integrity in the securities market, SEBI has taken various initiatives to ensure fair market conduct and has required all listed companies to comply with several regulations in addition to the Companies Act 2013 and related regulations. These include SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Prohibition of Insider Trading) Regulations, 2015 and various other circulars issued by SEBI, NSE and BSE. This results in the addition of over 200 new compliances on a monthly, quarterly and yearly basis. For example, a public company is required to observe a period of silence from the end of the quarter until 48 hours after the quarterly results are announced. This is also known as the trading window close (or blackout) period. During this period, all related persons and those privy to company information are prohibited from trading in the company’s securities and no qualitative or quantitative information can be disclosed. These include, but are not limited to, discussions of financial performance, earnings expectations, hiring plans, board or key management changes, investment plans.
Company officers, key executives and certain employees must exercise extreme caution when speaking at public or private events. The accidental leak of unpublished price-sensitive information can put the company on the wrong side of the law. During this time, the mantra is “Don’t do it or face a report.” Failure to withhold unpublished price-sensitive information has a high likelihood of being reported to regulators by various intermediaries and agencies. Disclosure of information material enough to affect the price of the scrip that is not available to the general public shareholders should be avoided at all costs.
Perhaps the most difficult aspect of becoming a public company is that responsibility for compliance is spread across a variety of employees within the organization. All associated persons of the company must adhere to the strict requirements of the lock-up period. The Company’s bankers, lawyers, salespeople, accountants, accountants and their immediate family members are also subject to legal restrictions. In the event of volatile scrip price movements in the markets, SEBI may initiate a Suo Moto request. Legal ignorance or accidental oversight cannot be asserted against SEBI.
In a public company, compliance obligations spread from a tight group of executives to several thousand connected individuals, making compliance a cumbersome task. Strong internal processes and technology systems, including Structured Digital Databases (SDDs), are key to maintaining high standards of corporate governance.
Regular awareness and structured education about compliance obligations and the impact of unintentional leaks through online platforms, workshops, seminars and onboarding programs are crucial. In addition, the company must have strong internal controls to keep up with the changing requirements of the legal environment and to report violations to the audit committees and regulators to mitigate the risk arising from unforeseen and accidental non-compliance. Compliance is a journey, not a destination. Systematic and conscious efforts across the board will help maintain the integrity of financial markets and lead a blissful post-IPO life.
FacebookTwitterLinkedinEmail
Disclaimer
The views expressed above are the author’s own.
Comments are closed.