Sebi Reviews Penalty Disclosure Norms

Sebi, the market regulator in India, is reviewing a requirement for listed companies to disclose all penalties imposed by authorities, even an insignificant amount, which increases the compliance burden. The regulator in July 2023 mandated disclosure of all penalties to stock exchanges irrespective of the amount. Earlier, companies could use their discretion in disclosing fines.

Why is Sebi reviewing the norms?

The move to review the norms comes after several companies disclosed trivial penalties that had no material impact on their financials or operations. For instance, Reliance Industries, India’s most valued company at nearly Rs 20 lakh crore, said that it was fined Rs 62,016 under the GST Act. For RIL, the penalty comprised 0.000000314% of its market capitalisation. Yes Bank, which has a market capitalisation of Rs 70,034 crore, said that it was fined Rs 150 by RBI for “discrepancies observed during the processing of soiled notes remitted by it to the central bank”. Sapphire Foods, which operates KFC in India, disclosed that it was fined Rs 10,000 by Dehradun’s municipal council for “non-availability of a dustbin” outside one of its stores in the city.

Sources said a Sebi committee, headed by former Sebi member S K Mohanty, is looking at removing unnecessary disclosure requirements related to monetary penalties to enable ‘ease of doing business’ for companies. The committee is expected to submit a report on this to the regulator soon.

What are the implications of the norms?

The norms were introduced by Sebi as part of its efforts to enhance transparency and corporate governance in the market. The regulator wanted to ensure that investors are aware of any regulatory actions taken against listed companies that may affect their interests. However, some experts have argued that the norms are excessive and create an overload of irrelevant information that may obscure more significant disclosures. They have also pointed out that the norms do not align with the principle of materiality, which means that only information that is relevant and significant for investors should be disclosed.

According to Binoy Parikh, executive director at Katalyst Advisors, an amendment by Sebi mandating the disclosure of penalties without any materiality threshold epitomises regulatory overreach and underscores a disconnect with practical business realities. He said that such regulations should align with the principle of materiality to ensure the focus remains on information that is truly impactful to investors.

Robin Shah, founder of Bodhi Legal, also said that while it is an important step for a ‘disclosure-based regime’ and to strengthen the confidence of market participants, we should be mindful of ‘over-information’ which may not contribute to any real price re-discovery or may not be of relevance to lay market participants, who may not have the wherewithal to comprehensively assess the impact of a venial event/ order.