SEBI – Disclosure of material impact of COVID-19 by listed entities

Recently, on 20

th May 2020, an advisory has been issued to the listed entities by the Securities and Exchange Board of India (i.e., SEBI). The advisory directs the listed entities to make suitable disclosure about the financial impact of COVID-19 on the operations of the entity. The advisory aims to resolve various distortions likely to prevail in the market, on account of the gap of information about the operations of the company. The disclosure of the material impact of COVID-19 would undoubtedly help the stakeholders and investors assess the extent of damage caused by disruption on the business of the listed entity. Under the present article, disclosure requirements under LODR regulations regarding material events and SEBI’s suggestive list of COVID-19 disclosure are highlighted.

Disclosure requirement under LODR regulations

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (from now on referred to as LODR regulations), cover the provisions based on which the listed entities are required to disclose the material events having a bearing on the performance or operations of the entity. The relevant requirements of LODR regulations are detailed hereunder-

Regulation 30(3)-

As per the regulation, the listed entity shall disclose material information on account of natural calamities (like earthquake, fire, flood, etc.) or force majeure event (like strikes, lockouts, etc.) that results in disruption of operations of any one or more divisions or units of the listed entity. On the occurrence of any of the above events, the listed entity is required to disclose within the reasonably possible time and not later than 24 hours of occurrence. In case the disclosure is made after 24 hours, a relevant explanation of delay is to be provided.

Regulation 51(1)-

As per the regulation, specifically for non-convertible instruments (like non-convertible debentures or non-convertible redeemable preference shares), prompt distribution is required to the stock exchange of all information having a bearing on the performance or operation of the listed entity. The listed entities should disclose information like price sensitive information or any action that would affect the payment of interest or dividend. It should be noted here that, based on the above LODR regulations, many entities have disclosed mainly the fact of a shutdown of the entity’s operation due to COVID-19 lockdown, actions taken towards sanitation, and safety. However, a handful of the entities have disclosed the financial impact of COVID-19. As a result, SEBI has come up with the advisory encouraging the listed entities to evaluate and disclose the impact of the COVID-19 on their business, financials, and performance (qualitatively and quantitatively) to the extent possible.

A suggestive list of disclosure

Vide advisory no. SEBI/HO/CFD/CMD1/CIR/P/2020/84 dated 20

th May 2020, SEBI has come up with an illustrative list of disclosure which the listed entities may consider. The summary of the list is as under-

Impact of COVID-19 on the business of the listed entity.
Particulars of the effect of COVID-19 on the following areas of the listed entity-
- Liquidity position.
- Capital and financial resources.
- The demand for the product or service.
- Supply chain.
- Internal financial reporting and control.
- Ability to service debts and other financing arrangements.
- The significant impact of non-fulfillment of any contract or agreement.
Assessment of the future implications of COVID-19 on the operations of the entity.
Schedules for restarting of the operations (if any).
Steps taken to safeguard the smooth functioning of the operations.
Other relevant material updates regarding the business of listed entity.

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Frequently Asked Questions

Common questions about SEBI Disclosure of Material Impact by Listed Entities India.

The advisory aims to ensure that listed entities disclose the material impact of COVID-19 on their operations, financials, and performance. This will help resolve information gaps and enable stakeholders and investors to assess the extent of disruption caused to the company's business due to the pandemic.

Under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, listed entities are required to disclose material information on events like natural calamities or force majeure that result in disruption of operations (Regulation 30(3)). For non-convertible instruments, prompt disclosure of information affecting performance or operations is mandated (Regulation 51(1)).

While many listed entities have disclosed the fact of shutdowns due to the COVID-19 lockdown and measures taken for sanitation and safety, only a few have disclosed the financial impact of the pandemic on their business.

SEBI has provided an illustrative list of disclosures that listed entities may consider, including the impact of COVID-19 on their business, liquidity position, capital resources, demand for products/services, supply chain, financial reporting and controls, debt servicing ability, contractual obligations, future operational implications, restart schedules, and steps taken to ensure smooth functioning.

Disclosing the material impact of COVID-19 is crucial for listed entities to provide transparency and enable stakeholders and investors to assess the extent of disruption caused to the company's business. It helps prevent information gaps and potential market distortions.

Failure to disclose the material impact of COVID-19 on operations, financials, and performance can lead to information gaps and market distortions, as stakeholders and investors may not have a clear understanding of the company's situation and the extent of disruption caused by the pandemic.

Listed entities should carefully evaluate and disclose the qualitative and quantitative impact of COVID-19 on their business, following SEBI's suggestive list of disclosures. They should provide accurate and timely information to maintain transparency and ensure compliance with regulatory requirements.

Disclosing the impact on liquidity position and capital resources is important as it provides insights into the company's ability to meet its financial obligations and sustain operations during the COVID-19 disruption. This information is crucial for stakeholders and investors to assess the financial health of the entity.

By disclosing the impact of COVID-19 on the supply chain and demand for products/services, listed entities can provide stakeholders and investors with a better understanding of the operational challenges faced and potential revenue implications. This information can help assess the company's resilience and ability to navigate the crisis.

Disclosing the steps taken to ensure smooth functioning of operations is essential as it demonstrates the company's preparedness and efforts to mitigate the impact of COVID-19 on its business. This information can instill confidence in stakeholders and investors regarding the entity's ability to adapt and recover from the disruption caused by the pandemic.