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    • New criteria for determining market capitalization under SEBI regulations (LODR)
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    New criteria for determining market capitalization under SEBI regulations (LODR)

    Mars Posted on

    Summary: SEBI has amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, revising the manner in which market capitalization is determined for listed entities. Previously, market capitalization was calculated based on a single daily value (March 31). However, from December 31, 2024, the new criteria will take into account the average market capitalization over a six-month period (July 1 to December 31), thus providing a more stable valuation. The amendment also introduces a “sunset clause” that exempts companies from certain compliance requirements if they fall below the relevant market capitalization threshold (rankings of 100, 250, 1,000 or 2,000) for three consecutive years. This is intended to ease the long-term compliance burden for companies whose market value is steadily declining. Additionally, SEBI has granted a three-month window to companies to ensure compliance with the applicable provisions, thereby providing flexibility to adapt to these regulations. Key provisions based on market capitalization include, among others, the appointment of independent female directors, risk management committees and dividend distribution policies. These changes are part of SEBI’s efforts to align regulatory obligations with market realities while easing the process of compliance with fluctuating market values.

    Market capitalization overview

    Market capitalization is the total market value of a company’s outstanding shares. It is calculated by multiplying the current stock price by the total number of shares outstanding.

    However, under the Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI (LODR) Regulations), many provisions would apply to the Company based on its market capitalization.

    Currently, the market capitalization as of March 31 of each year is used to determine the applicability of the said provisions.

    However, the Securities Exchange Board of India (SEBI), by amending Regulation 3 of the SEBI (LODR) Regulations, 2015, has laid down new criteria for determining market capitalization along with a sunset clause which would apply to determine the eligibility of numerous regulations. which would apply if the Company fell under the ranking 100/250/1000/2000 market capitalization.

    Let’s discuss OLD CRITERIA vs NEW CRITERIA to determine market capitalization.

    Old criteria New criteria
    How to calculate

    Market capitalization currently calculated by the stock exchange on the basis of a single day, i.e. March 31.

    Purpose of modification

    The market capitalization of a listed entity continues to fluctuate on a daily basis depending on market dynamics and therefore, averaging of market capitalization figures over a reasonable period of time (6 months) is required.

    		 Market capitalization will be determined by the stock exchange based on the average market capitalization from July 1 to December 31 of that calendar year or December 31, 2024.
    Introduce a sunset clause (cooling off period) as well as a provision relating to an interim period

    Currently, the provisions of the SEBI (LODR) Regulations, 2015, which become applicable to listed entities based on market capitalization criteria will continue to apply to these entities even if they fall below these thresholds.

    Precisely

    Once applied, respect is still required.

    Aim

    Make it easier to do business and recognize the cost associated with long-term compliance for listed entities whose market capitalization falls and continues to remain below the enforceability threshold.

    Therefore, it is suggested to have a sunset clause of 3 consecutive years (during which the classification of the entity remains outside the threshold of applicability) after which the provisions will no longer be applicable to these companies until that they remain outside the threshold of applicability.

    		 However, SEBI has amended Regulation 3(2) of the SEBI (LODR) Regulations, 2015 and introduced the provision of sunset clause for compliance with applicable provisions on the basis of market capitalization.

    Sunset clause

    Sunset clause means that if the market capitalization of the listed entity falls such that its ranking (means ranked 100/250/1000/2000 based on market capitalization) remains outside the range of applicability for three consecutive years, the listed entity is then not required to comply with the provisions of the regulations that are not applicable to it due to its current classification.

    Let’s understand with the instance:-

    There is a provision in the SEBI (LODR) Regulations, 2015 which provides that The top 1,000 listed entities based on market capitalization must have at least one independent female director on their board.

    For example: – there is the company ABC Ltd whose market capitalization on December 31, 2024 is such that the Company ranks 990.

    According to this, the Company must comply and ensure that it has at least one female director on its board of directors from the 2025-2026 financial year.

    Then, the Company based on its market capitalization as of December 31, 2025, December 31, 2026 and December 31, 2027, ranks 1010, 1200 and 1021 respectively, and then, in this scenario, as the Company for the next three consecutive years. years did not correspond to the rank required for the applicability of the said provisions.

    Thus, the Company from the financial year 2027-2028 is not required to comply with the said provisions until the Company falls again and ranks below 1000 on the basis of its market capitalization.

    However, a one-time request does not require ongoing compliance.
    Introduce a minimum period of 3 months to ensure compliance

    Currently, as the market capitalization is determined as of March 31, the Company must therefore, from the start of the next financial year (i.e. April 1), ensure the applicability of the provisions applicable according to the market capitalization.

    Aim

    Allow sufficient time to ensure compliance with applicable provisions.

    However, SEBI, while amending the provisions, provided a time limit to ensure compliance of the provisions which would apply on the basis of market capitalization.

    Applicability: – After a period of three months from December 31 (i.e. April 1) or from the start of the following financial year, whichever is later.

    As the market capitalization would determine as of December 31, if a company has the same capitalization, the company would benefit from a minimum period of 3 months to ensure compliance with the applicable provisions.

    Let us discuss the provisions of the SEBI (LODR) Regulations, 2015, which apply based on market capitalization.

    S.no. Regulations Requirement Applicability by market capitalization
    1. Reg. 17(1)(a) At least one independent female director on the Board of Directors Top 1000
    2. Reg. 17(1)(c) No less than six directors on the board of directors Top 2000
    3. Reg. 17(2A) Quorum for board meetings – 1/3 of its total membership or 3 directors, whichever is greater Top 2000
    4. Reg. 21(5) Risk Management Committee Top 1000
    5. Reg. 25(10) Directors and officers insurance for all independent directors Top 1000
    6. Reserve to Reg. 30(11) Rumor check Top 250
    7. Reg. 34(2)(f) Business Responsibility and Sustainability Report Top 1000
    8. Reg. 43A Dividend distribution policy Top 1000
    9. Reg. 44(5) General Meeting within 5 months from the end of the financial year Top 100
    10. Reg. 44(6) Live, one-way webcast of AGM proceedings Top 100

    Conclusion:- The recent amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 mark a significant change in the way market capitalization is determined and its regulatory implications for listed entities. Previously, market capitalization was calculated based on a single day (March 31), which did not account for fluctuations in a company’s value over time. The new criteria, effective from December 31, 2024, adopt an average market capitalization over a six-month period, providing a more stable and realistic assessment. This change aims to facilitate better compliance management, recognizing the challenges arising from market volatility.

    A key amendment introduces a sunset clause, ensuring that if a company falls below the applicable threshold for three consecutive years, it is no longer required to comply with certain provisions. This clause addresses the long-term compliance burden for companies whose market capitalization consistently falls below the threshold. Additionally, a three-month compliance period has been provided, giving businesses ample time to adapt to the new regulations and ensure they meet the necessary requirements.

    In summary, these changes aim to provide more flexibility and predictability for businesses, aligning regulatory obligations with market realities and reducing the long-term compliance burden when a company’s market capitalization declines. These changes are a step towards greater ease of doing business while maintaining necessary governance standards.

    Mars
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