Batting for transparency

The stock market regulator has been on an overdrive, releasing a slew of discussion papers on issues that, while not exigent, are nevertheless important for the efficient functioning of the market. Two of these — relating to decreasing the offer size in large issuances and addressing the information asymmetry in disclosure by listed companies — can help broaden the market and enhance the trust of market participants in the system. SEBI’s proposal to reduce the public offer in large issuances where the post-issue market capitalisation exceeds ₹10,000 crore to 5 per cent from the current 10 per cent can pave the way for larger companies approaching the capital market more readily. Large offers have been few in recent past and the regulator needs to encourage such issues to deepen the market. The regulator can, however, lay down some rules regarding the minimum number of shareholders and the proportion of shares to be held by retail investors to ensure that the company’s stock is liquid enough.

The regulator has finally decided to address the information asymmetry that currently exists in the dissemination of price sensitive information. Most companies do not divulge all the details of the post-earning conference call held with institutional investors or analysts on their websites and limit the disclosure to uploading the presentations alone. Minority shareholders who do not attend these meetings are, therefore, unaware of the information shared by the company with select analysts. Similarly, there are other meetings that companies hold with larger investors and select analysts, details of which are not made public. Not only does this enable a few investors to gain an unfair advantage over the smaller shareholders, it is also a violation of the insider trading rules wherein unpublished price sensitive information is made available to a few. While it is good that SEBI has finally addressed this important issue, the recommendations fall short on many counts.

Requiring the audio or video recording of the post-earnings conference call to be uploaded on the website and disclosed to stock exchanges before the next trading day is a good move as it can prevent trading based on information leaked at these calls. But SEBI should not leave the decision — whether to let everyone attend these conference calls or to limit it to their shareholders — to the companies. Most companies are likely to adopt the latter option, thus continuing the opacity. SEBI should enforce global best practices in opening these conference calls to everyone. Also, allowing listed companies to just give the number of one-to-one meetings with select investors every quarter, along with a disclaimer that no price sensitive information was divulged, is not satisfactory. Such meetings should be disallowed if the content is not made public. Free availability of information, is after all, essential for protecting the interests of the small investors and for efficient price discovery.

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