New listing regulations proposed by the capital markets regulator to reinforce its enforcement powers and improve corporate governance may not go far enough in achieving their objectives, analysts say.
The reason: Penalties proposed for violations are so insignificant that they may well end up undermining the effectiveness of Listing Regulations 2015, drafted by the Securities and Exchange Board of India (Sebi).
A copy of the draft rules being considered by Sebi shows that penalties for the violation of provisions laid down by the listing regulations run only into a few thousand rupees; in very few cases do they add up to lakhs of rupees. Mint has reviewed a copy of the draft rules, which are under Sebi’s consideration.
Sebi did not respond to Mint’s emailed request for a comment.
For instance, if a company fails to appoint a compliance officer or company secretary, the regulator proposes to issue a warning. If the non-compliance continues for 30 days, a penalty of Rs.1,000 per day will be levied until the violator complies with the clause.
This appears to be much tamer than the penalty proposed for a similar transgression under the Companies Act, 2013.
“Under Section 203 of the Companies Act, the (violating) company will have to pay a minimum fine of Rs.1 lakh and (the penalty) can go up to Rs.5 lakh,
“Every director and key managerial personnel of the company, who is in default, will also attract a fine of up to Rs.50,000. In case the contravention is a continuing one, there is provision to impose a daily fine of Rs.1,000. Sebi’s proposed fine is lower in this case as compared to rules by the ministry of corporate affairs,
Another instance where Sebi’s proposed fine pales in comparison with that mandated by the Companies Act is in case of non-constitution of committees that deal with issues such as audits, nomination and remuneration.
Under the Companies Act, such a violation would lead to a minimum fine of Rs.1 lakh and can go up to Rs.5 lakh. It also has a provision for the imprisonment of violators if the contravention extends up to one year. Sebi proposes to levy a fine of Rs.5,000 per committee per quarter.
To be sure, in certain cases, Sebi has prescribed tougher rules than the Companies Act.
In case a company fails to put in place a policy for materiality (a policy that determines what is materially price-sensitive information), Sebi’s draft rules prescribe a maximum penalty of Rs.10 lakh. Continued violation could also lead to freezing of voting rights.
The Companies Act doesn’t have a specific provision for this violation. However, a residual penalty that may extend to Rs.10,000, and where the contravention is a continuing one, with a further fine that may extend to Rs.1,000 for every day.
Failure to appoint independent directors/female directors will attract a penalty of Rs.50,000 every quarter, without an upper limit being prescribed. The Companies Act levies a maximum fine of Rs.5 lakh for violating independent director rules.
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