Prompt disclosures

Sebi's suggestions will reduce information asymmetry

The Securities and Exchange Board of India (Sebi) recently released a consultation paper asking for feedback on new proposals to tighten the disclosure requirements for listed firms. This would imply changes in the Listing Obligations and Disclosure Regulations 2015 (LODR). There are multiple material events, defined under the LODR, which the firm in question is required to disclose. Under the LODR, for example, companies need to state the acquisition, merger, demerger, restructuring, or sale of any unit and so on, which will have an impact on the business. However, as things stand, listed entities are often left to define their own “materiality policy” and they may or may not consider a given event material.

The regulator now proposes to define “material events” more broadly and generically by using combinations of thresholds on turnover, profit, and net worth as benchmarks. It is also considering cutting the deadline for the time-bound mandatory disclosures of such events. This is in response to multiple investor complaints the regulator has received where companies allegedly made disclosures that are inadequate, inaccurate, misleading, or delayed. On their part, listed entities have also asked for hard and fast uniform guidelines for defining the “materiality” of events or information. In addition, listed entities are often the subject of rumours, which affect trading at the stock exchanges, and they should confirm or deny such rumours, which are often virally spread on social media. The thresholds suggested are as follows: Any event that affects at least 2 per cent of the last audited standalone turnover, 2 per cent of the net worth, or 5 per cent of the three-year average of the absolute value of profit or loss according to audited figures. Companies are to be encouraged to add any additional criteria they think important to their materiality policy but this must be mandatory.

Sebi is also proposing that material information emanating from a board meeting must be disclosed within 30 minutes of the end of the meeting. It is considering halving the time for other material disclosures to 12 hours from the current 24. It also proposes that the top 250 listed firms mandate confirmation or denial of any rumour or material information reported by the media. Further, the regulator is considering setting up a guidance mechanism or guidelines for disclosing confidential information. This is pertinent since, for example, there may be communications from regulatory, statutory, enforcement or judicial bodies, which contain confidential information and have a material impact. In these cases, guidelines as to what may be disclosed would be helpful since it may not be possible to release the entire text of such a communication.

In cases of cyber-breaches, or other forms of data leak or loss, incidents should be mandatorily disclosed in the quarterly corporate governance report. The delay in such events takes into account the fact that immediate disclosure (before the incident has been dealt with) may lead to further vulnerabilities. It is believed that a quarterly disclosure of such events would enable investors to gauge the risks and impacts. The paper also mentions that there have been multiple incidents where firms have been fined for late/inadequate disclosures or where they have waited for the stock exchanges or Sebi to raise the issue before responding to verify rumours. The new proposals are sensible and they would help in reducing information asymmetry.