‘Material disclosure’ is imperative at this time

Even as most sections of the economy shut down operations in April and May, financial markets have been functioning without a break. In fact, according to brokerages, trading activity has increased in this period, as movement was restricted to contain the Covid-19 pandemic. But this trading is taking place amidst information asymmetry, since listed entities have not been very forthcoming about the impact of the lockdown on their operations. The market regulator, Securities and Exchanges Board of India, is not wrong in attempting to set this right by asking listed companies to reveal the true state of affairs to investors. The Listing Obligations and Disclosure Requirements regulations, 2015, lay down that companies should inform the exchanges about disruption of operations of any one or more units or division of a listed company due to natural calamity, force majeure or events such as strikes and lockouts. With the ongoing pandemic being an unforeseeable and unavertable event, companies have to let investors know how they are coping with it.

According to the regulator, only few companies have informed the exchanges about shutdown of operations due to the pandemic, sanitation of premises, safety of employees and so on. This is in contrast to other countries, where companies have given detailed disclosures on the impact of the pandemic on financial conditions, operations, liquidity and demand for products. With the lockdown in its third month, and many companies having suffered severe erosion in revenue in April and May, the quantitative impact of the lockdown on FY21 earnings should be quite obvious to all companies by now. Since listed entities are among the largest in the economy, they have manpower as well as technology to gauge the impact of the pandemic on their finances. This information needs to be shared with investors. They need to be told about the number of days the operations were stalled and the plans to re-start operations. With most companies grappling with the need to pay fixed costs amidst nil or sharply reduced revenues and mounting debt, full disclosure on the liquidity position, moratorium facility availed and the ability to service future debt becomes very important. The extent to which supply chain is disrupted for inputs as well as products and labour shortages, if any, also should be included in the disclosure, to help investors take informed decisions.

This is perhaps the right time for the regulator to take a closer look at why listed entities in India get away with disclosing very sketchy details regarding material events. Companies are required to disclose all information that is ‘material’ to the stakeholders, but the loose definition of what constitutes material information gives companies the room to get away with scant or nil disclosure. SEBI needs to tighten this definition by perhaps introducing a quantitative parameter in it. Exchange announcements also need to be made more elaborate and comprehensive to reduce the incidence of insider trading, that occurs due to this uneven dissemination of information.

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