Improving disclosures

The Securities and Exchange Board of India’s proposals aimed at improving the quality of disclosures by listed Indian companies deserve to be welcomed. While companies do provide exhaustive information to investors at the time of making public offers, they tend to get tight-lipped post-listing, even about events that significantly impact earning prospects. SEBI has now sought to modify Clause 36 of the listing agreement, which deals with information to be filed with exchanges relating to non-recurring events. These include such things as plant closures due to a strike, the occurrence of a natural calamity, a change in the nature of business, litigations and other information that could be price-sensitive.

In its present form, Clause 36 is much too general and vague, giving companies enough room to get away with making scant disclosures, or sometimes none at all. The rules merely provide an indicative list of events while being silent on the nature of information to be divulged. Besides, there is no clear definition of the term ‘material’. Companies, therefore, enjoy the flexibility to deem any event as immaterial and not inform exchanges about it. As a result, investors are kept in the dark and are at the mercy of the company managements in this regard. To address this lacuna, a SEBI discussion paper has recommended that companies inform exchanges about any material events within one day of their occurrence. The idea here is to limit the scope for insider trading from privileged access to price-sensitive information. Also, it is good that SEBI wants all information filed with overseas exchanges to be simultaneously filed in Indian exchanges.

Equally important is the quality of company filings on events when reported. It doesn’t throw much light if, for example, a fire in a company’s plant is the subject of a terse statement. Investors need to be kept abreast of its financial impact, the extent of insurance claims, and the likely date of the plant being restarted. SEBI has proposed to flesh out a list of material events — from companies applying for corporate debt restructuring to arrest of key managerial personnel — and detailed information pertaining to each event that needs to be divulged. Apart from seeking to define what constitutes a material event, this will go a long way in reducing the ambiguity that provides companies the leeway to restrict investors from having relevant information. But SEBI’s suggested threshold for identifying an event as material — something which amounts to over 5 per cent of the gross turnover or more than a fifth of a company’s net worth — is far too high. After all, events with far lesser value, too, can have far-reaching impact on a company’s prospects. On the whole though, the recommendations in SEBI’s discussion paper are worth implementing.

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