Investors in the stock market are often disadvantaged by information asymmetry which results in a few people benefiting unfairly from stock price movement. While regulation 30 of SEBI’s LODR Regulations, mandates that listed companies should disclose material events or information to the stock exchanges, there are many gaps in the rules.
SEBI mandates that some events such as acquisitions and other corporate restructuring, split or consolidation of shares, buybacks, revision in ratings, outcome of Board meetings and so on need to be mandatorily disclosed by all companies irrespective of their materiality. But for other events — such as commencement or postponement of commercial operation of any division, capacity addition, product launch, disruption in operations of one or more units due to natural calamities, litigations, fraud or default by directors — it allows companies to decide on disclosure based on their respective materiality policies. These policies are often vaguely worded to give room for non-disclosure. Companies have been tardy in meeting the timelines prescribed for making the disclosures. It is welcome that SEBI is trying to tighten and standardise the regulatory framework for disclosure of material events, going by its recent discussion paper.
SEBI has rightly mooted a quantitative threshold for determining materiality of an event. The threshold suggested in the paper — lower of 2 per cent of latest standalone turnover, 2 per cent of networth or 5 per cent of three-year average net profit — seems fair. This will result in more disclosures as many listed companies either had no defined quantitative threshold in their materiality policies or pegged the limit quite high, at 10 per cent of turnover or profits. Besides this, SEBI should also prescribe that disclosures should be elaborate, containing details relevant for investment decisions. Reducing the timeline for disclosure from 24 hours to 12 hours from the occurrence of the event is welcome, as an extended time lag again creates a window for insiders to make unfair gains. The suggestion that the top 250 companies should confirm or deny any information reported in print and digital media is a sound one. Companies seldom issue clarifications of their own accord and need the exchanges to nudge them. The regulator could link such mandatory clarifications to events or information that results in stock price movement of more than 10 per cent.
In the existing regulation, disclosure of notices received regarding regulatory, enforcement or judicial actions initiated against the company, its key personnel and promoters is not compulsory. The discussion paper says that such disclosures should be mandatory, without application of materiality test. While many are criticising this provision, stating that it will lead to a flood of disclosures confusing investors, such details are important for tracking governance. Similarly, mandating disclosure of new credit rating scores, even when not commissioned by the listed company or withdrawn by it, will provide valuable information to investors.