Periodic disclosures to stock exchanges by listed entities are necessary to ensure that shareholders are kept well-informed. The market regulator has been trying to address gaps in this area, which is covered by the Listing Obligations and Disclosure Requirements (LODR) regulations and has floated a series of discussion papers pertaining to this. But in its zeal to ensure that companies comply with the LODR diligently, the regulator should take care not to make regulations which impinge on basic rights of individuals. SEBI has recently mooted the idea of freezing all the securities in the demat accounts of managing directors, whole-time directors and CEOs of a non-compliant listed entity.  

As per existing regulations, listed companies which do not make regular disclosures regarding their financial performance, shareholding pattern and related party transactions; conduct regular board meetings, have an audit committee, compliance officer etc are first fined for not complying with regulations. If the company continues to be lax in its compliance, the securities could be suspended from trading. If this too does not have the desired effect, then the promoter’s holding of the shares of the company and the group companies are frozen. SEBI tightened these rules further in 2018 specifying that besides the promoter shareholding in the non-compliant listed entity, all other securities held in the demat account of the promoter will also be frozen. The recent consultation paper has taken this a step forward by stipulating that all the shares in the demat accounts of MDs, CEOs and whole-time directors should also be frozen if a company does not meet its LODR obligations consistently. This is apparently meant to help in the case of professionally run companies with no promoters. Since the day-to-day operations are overseen by these office-bearers, the regulator is suggesting that they should be held responsible for reviewing and filing the compliance reports and adhering to relevant laws. 

The market regulator’s latest proposal appears excessive though. If a company is consistently failing to comply with the rules, then imposing a fine on the company, or suspending trading in the security ought to be enough as a punishment. Investors will get wary of companies facing trading suspension and move away from such stocks. Two, profit-making and well-run companies will not be tardy in meeting their LODR obligations. SEBI could be serving investor interest better by allowing the non-compliant companies to cease trading and eventually delist from exchanges. Three, freezing the entire demat accounts of the promoter, MD, CEO and whole-time directors appears unfair as personal demat accounts could hold assets accumulated over the years, which could be quite unrelated to the listed entity’s business. Demat accounts could also contain securities held on behalf of other family members. Four, such stringent regulations will make it difficult for companies going through a difficult phase to get competent executive directors.