New deal for investors

Of the many decisions taken by the Securities and Exchange Board of India this week, the regulation to tighten disclosure requirements for companies post-listing is likely to have the most significant impact on investors. Presently, a company seeking to go public for the first time is subject to onerous disclosures through a prospectus, which discusses threadbare the firm’s financials, business prospects, risks and regulatory issues. But the information flow often dries up the moment the company is listed. Though Clause 36 of the listing agreement requires firms to regularly intimate material and price sensitive information to the bourses, such disclosures are piecemeal, discretionary and short on information critical to investment decisions. Some companies interpret the clause narrowly, religiously disclosing events such as natural calamities, fire and strikes which physically disrupt their operations, but ignoring far more material developments such as acquisition attempts, fraud by key employees or regulatory actions which affect them.

In its new regulations, SEBI has done away with such discretion and ambiguity by clearly listing out 16 broad types of material developments that companies must report to the bourses. This will ensure that public shareholders have more regular and meaningful updates about the companies they own and are not disadvantaged when compared to brokers and institutional investors, who have a cosy relationship with company managements. A full-fledged regulation that mandates such disclosures is better enforced than a listing agreement, which is only in the nature of a contractual obligation. The change should empower the regulator to take more stringent action in cases of default, which is rampant today. Forget material events, a significant number of listed companies presently skip even basic disclosure of financial results and shareholding patterns. If SEBI’s new disclosure rules aim to reduce information asymmetry, the redrafting of the insider trading regulations of 1992 attempt to improve market integrity. Though India’s insider trading laws are quite stringent, successive amendments to them to plug loopholes over the last two decades have led to drafting errors and inconsistencies. The law has been strengthened by expanding the definition of ‘insider’ to include not just employees but all those who deal with a listed company. SEBI has also laid down tests for price sensitive information and mandated prior disclosure by insiders planning to trade on a stock. SEBI is also tweaking its delisting regulations to specify clear milestones for completion of the process by companies and reducing the time for this from 137 to 76 working days.

These measures supplement the effort in the new Companies Act to strengthen the governance structure for listed companies and afford greater protection to small investors. But past experience suggests that strengthening the regulatory framework alone does not improve compliance. SEBI and the exchanges need to work on prompt detection of rule violations and take quick punitive action against offenders if companies and market participants are to stop taking the retail investor for granted.

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