SEBI Guidelines on Business Responsibility Reporting

Varun Hariharan

24 Nov, 2020

Every organization should have a framework for governance in an organization. Governance can be understood as the relationship between the internal components and the external components of the business. Governance plays a crucial role, as it directly affects the goodwill of the organization. Therefore every company must make sure to have a good governance system in place. However, it is not enough to have a governance system in an organization. The governance system of an organization should also be accompanied by internal controls and a proper policy of monitoring. Monitoring can be done internally and externally. Apart from internal monitoring, there is a requirement to compulsory adopt the policy regarding external monitoring and reporting.

What is the Business Responsibility Report (BRR)?

In 2011 there was a discussion headed by the Ministry of Corporate Affairs (MCA) on certain requirements such as the National Voluntary Guidelines on the Social, Economic, and Environmental aspects which corporate has to take into consideration. With this consultation, the Government of India considered that certain responsibilities have to be adopted by companies voluntarily. In the consultation, some of the main considerations of companies were related to the social responsibility of organizations. 

This was considered by the monitoring agency, SEBI, to come up with certain guidelines regarding the reporting standards of the business.  SEBI took a view of the continuous failures of the governance mechanism of Indian corporate in spite of having stringent regulations. Because of this, the SEBI brought out the system of Business Responsibility Reporting (BRR). Companies have to submit a business responsibility report as per the requirement of the SEBI. However, this was only limited to the companies that were listed in a recognized stock exchange. Apart from this, the overall picture of the Business Responsibility Report is for effective compliance for corporate governance norms of listed entities.

The Business Responsibility Report, which was required to be submitted by companies, had to be approved and implemented in a phased manner. In order to avoid confusions regarding the division, the SEBI had divided the requirement into two stages. These stages, also called phases are as follows:

Stage I- In this phase, the SEBI had considered the requirement of mandatory submitting a Business Responsibility Report. The requirement of submitting the business responsibility report was only for the top 100 listed Entities.  This was included in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the SEBI LODR Regulations. In the above Act, under Regulation 34(2) f – the top 100 entities must include the Business Responsibility Report in their Annual Report as per the prescribed format.

Stage- II- In this phase, the extension of the Business responsibility reporting was on the basis of the Market Capitalisation of the top 500 listed entities. This phase was brought out in the year 2016.

Apart from the above two phases as mandated by SEBI, there were many such notifications and regulations brought about to improve the requirement of a company when submitting the business responsibility report.  These notifications were introduced and have an effect now.

Principles Related to the Business Responsibility Report

A Business Responsibility Report must portray the following core elements:

• Ethics, Transparency, and Accountability- From a broad perspective, an entity must portray all the values of being ethical. Besides this, the departments and organizations must be transparent and accountable for their actions.
• Services/ Product Sustainability- The business entity should ensure that the goods and services provided by it are sustainable in the long run.
• Employee Development and Well Being- The business entity must act in a way to carry out the interests of the employees.
• Stakeholder Development- Without stakeholders in a business, there would be no business. Therefore the stakeholder’s interest plays a crucial role in the development of the company.
• Human Rights- Human Rights have to be enshrined in the values of the organization.
• Environment and Public Advocacy- Sustainable development should be promoted at a national level and regional level. Through a business can engage itself more in environmental development activities.
• Customer Value- Companies should understand the importance a customer plays in the development of the business. 
• Equality and Inclusive Development- Promotion of equality would come under the requirement of the Business Responsibility Report.

Through the above principles, a business can effectively contribute to society. The values and principles of business responsibility reports have been incorporated in the SEBI format of the business responsibility report.

Previous Amendments regarding the Business Responsibility Report

• 22 December 2015-This was a significant change in the regulation regarding the SEBI LODR. The main change in this notification was the requirement of the top 500 listed companies based on market capitalization to have Business responsibility reporting mandatorily.
• 25 May 2016- SEBI brought out some necessary changes for the requirement of Business responsibility reporting that was carried out by a company.
• 08 July 2016- This amendment brought out the need for proper dividend distribution with certain parameters.
• 04 January 2017- In this amendment, there was a requirement that no director or shareholder of a listed entity will enter into any agreement for dealing with securities of the listed entity.
• 09 May 2018- This amendment brought out many changes; however, the crucial change was the requirement of Non- Executive Directors in a listed entity.

From the above amendments, it is clear that there are provisions related to the framework regarding the management and governance of an organization. Therefore corporate governance reporting is one of the central and mandatory provisions of the Business Responsibility Report. For effective implementation of the above provisions, companies are given 90 days.

Features of the SEBI LODR Regulation

Since the SEBI has brought out various amendments regarding listing regulations and reporting standards of listed entities, there would be effective harmonization of the previous and present regulations related to listed companies. The features of the SEBI LODR regulations are as follows:

• Companies have to comply under the SEBI LODR Regulations. These regulations would only apply in respect of a listed entity. A listed entity means that its securities (shares and debentures) are present or listed in a recognized stock exchange. The stock exchange would manage the securities of the listed entity.
• While framing the SEBI LODR Regulations, the government has consulted various international regulations regarding the management of securities. One such institution is the International Organisation of Securities Commissions (IOSCO). Specific values have been considered from this institution and incorporated in the LODR regulation.
• Corporate governance values are in line with the governance requirements of the Organisation of Economic Corporation and Development (OECD).
• If there is any confusion regarding how the regulations apply, then one can consult the values established by international institutions.
• Under these regulations, all listed entities have to comply according to the requirement of the SEBI laws. The requirement of providing a report and electronic filing are some of the compliances.
• The regulations apply to all securities.
• Under these regulations, stock exchanges are given independence in monitoring the compliance provisions for listed entities. There are strict penalties imposed on listed entities for non-compliance with the rules.
• Specific requirements have to be mentioned on a website of the listed entity. Some of the provisions are as follows- such as the listing agreement or price-sensitive information.
• Some of the regulations have been incorporated and harmonized with the provisions of the Companies Act 2013. There are provisions of the SEBI LODR regulation in the Companies Act. Consider the requirement of having independent directors in a company. Some of these requirements come in line with the provisions of the LODR. Similarly, under the Companies Act 2013, a company/ listed entity is mandatorily required to have a Corporate Social Responsibility (CSR) Committee. This committee is supposed to implement CSR activities in the organization. While submitting the Annual Report, the report must mention whether the company has spent some income on CSR activities. If there is no compliance regarding the provisions of CSR, then there are penalties. In light of the above, it can be noticed that the LODR regulations have been harmonized with the Companies Act. The business responsibility report is supposed to have certain activities that come under the purview of social responsibilities.
• Apart from this, there is also a requirement of the entity which wants its securities to be listed on the recognized exchange to enter into the listing agreement.

The above regulations show that entities must not only be compliant with domestic principles regarding listing and governance but also in line with international principles of listing.

Recent Amendment for SEBI LODR Regulation

In 2019, SEBI had increased the limit from 500 companies to 1000 companies.  Due to this notification, the top 1000 companies that are listed in recognized stock exchanges have to mandatory publish in their annual report, the Business Responsibility Report (BRR).  This was brought for transparency in an organization. The objectives of the organization must be in line with that of the stakeholders of the business. Companies have to be more socially responsible to their stakeholders.  The main requirement for carrying out the business responsibility report is for companies to balance their priorities. By submitting the business responsibility report in the annual report, monitoring institutions such as the SEBI would have information on companies that have complied with the LODR regulations.

Format of the BRR

The BRR has five sections:

1. General Information of the Company- This will include company formation details.
2. Financial Information of the Company- Information such as capital and turnover of the business will be present.
3. Other information- Specific information if the company has subsidiaries and associate companies.
4. Business Report Information- Specific information regarding the director of the company and the principles of Business Reporting.
5. Principle Wise Performance- This part of the Business responsibility report will indicate whether the compliances and reporting standards have been according to the principles stated in Business Responsibility Reporting.
6. Apart from this, there are Annexure attached to the form, which contains the principles regarding BRR.

Whenever a company submits its annual report, it must fill in the information regarding the compliance with the Business Responsibility Report. In case there is non-compliance with the provisions of the Business Responsibility Report, then there are separate penalties under specific regulations.

Conclusion

Every organization requires corporate governance. Having a proper governance framework would provide transparency and clarity in the dealings of the organization. It would improve the relationship between the shareholders, stakeholders, and the employees of an organization. However, without proper monitoring and reporting standards, such governance frameworks cannot be maintained. The MCA has brought out listing regulations that have been regulated by SEBI. SEBI has made certain amendments regarding these regulations, including the change regarding increasing the number of listed entities from 500 to 1000. These entities are required to submit a business responsibility report with the annual return.  Through the BRR, the monitoring body will know if the business is compliant with the necessary provisions by listed entities. By submitting such a report, a listed entity will be not only compliant with reporting, but also compliant with the rules related to corporate governance.