SEBI leads in guiding firms on disclosures

Effective corporate disclosure must tick these boxes: Adequate, accurate, explicit, timely, and presented in a simple language the public cn understand. This principle is adapted by India and all jurisdictions across the globe.

The impact of Covid 19 is so profound that issuers need to make significant judgments and estimates whose outcomes are likely to be more uncertain than usual while preparing financial statements.

And such potentially imperfect information could change after the financial information is made public.

Investors and other stakeholders need high quality information about the impact of Covid 19 on the issuer’s entity-specific operating performance, financial position, liquidity, and future prospects.

Issuers are now in a Catch-22 situation as good governance demands disclosures, but they are unsure whether the disclosures made will stand good due to uncertainties infused by Covid.

Thrust on transparency

IOSCO (International Organisation for Securities Commissions), the leading international policy forum for securities regulators, is recognised as the global standard-setter for securities regulation.

The organisation regulates more than 95 per cent of the world’s securities markets and is responsible for the oversight of capital markets and disclosure regulations. On May 29, 2020, IOSCO issued a statement on ‘Importance of Disclosure about COVID-19’.

Nine days earlier, SEBI, India’s capital markets regulator, issued a guidance on disclosures to be made during these difficult times.

Quality of disclosures

SEBI’s circular appears to be based on its observation on the quality of disclosures made by listed entities as it stated that “while such a lockdown and disruption is unforeseen and beyond the control of the entities, such events can lead to distortions in the market due to the gaps in information available about the operations of a listed entity. Hence, it is important for a listed entity to ensure that all available information about the impact of these events on the company and its operations is communicated in a timely and cogent manner to its investors and stakeholders.”

Both the IOSCO “statement of importance of disclosures” and SEBI’s observations on need for transparent disclosures address the same objective.

The Table summarises the guidance given by IOSCO and SEBI at a granular level.

While the guidance issued by both are on same lines, IOSCO is for making futuristic statements but SEBI refrains from it.

The OECD issued a report, ‘National corporate governance related initiatives during the Covid-19 crisis — A survey of 37 jurisdictions’, on May 28, 2020, that provides an overview of some corporate governance and capital market-related measures that the 37 jurisdictions have taken in response to the economic crisis caused by the Covid outbreak.

The survey focussed on three main areas of regulation that are relevant to the principles of corporate governance where Covid-related adjustments have been common: conduct of annual general meetings; frameworks for insolvency; and disclosure requirements. The survey included jurisdictions comparable to India and even developed jurisdictions.

It is interesting to note that the measures taken by India are as comprehensive as those taken by other jurisdictions covered under the survey.

The standard regulatory response has been to extend the last date by which annual general meetings is to be held, hold these meetings on audio-visual medium and, in some countries, the rules relating to quorum for general meetings were relaxed.

Focus areas

The disclosure guidance issued by various regulators was on the lines of what was issued by IOSCO and SEBI and generally covered the following:

Financial reports should reflect the economic consequences of Covid-19;

Evaluation of business continuity

Make transparent and objective statement relating to dividend distribution and buyback programmes, if any.

By and large, in economies that extended government support to any corporate entity, such corporate entities were barred from distributing dividends.

Disclosures about changes in ownership structures with particular reference to whether any foreigner acquired any ownership interest in the corporate, etc.

It is heartening to note that India is in pole position with respect to regulatory guidance to listed entities in making disclosures — both in terms of timing (SEBI announced on May 20, as against IOSCO’s statement of May 29 and OCED survey report of May 28) and granularity of guidance.

The writer is Dean with NISM. Views are personal

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