Optimal disclosure

Sebi's consultative approach should be welcomed

The market regulator is asking businesses to suggest areas where it could fine-tune regulations to ease the compliance burden on listed companies. The Securities and Exchange Board of India (Sebi) has indicated that it will make the process of evaluating the performance of boards and board members voluntary. It is also looking to develop and publish “implementation standards” for certain regulations to remove potential ambiguities and, thus, make compliance easier. India Inc should welcome this initiative since Sebi has released a slew of regulations recently, and many of these are couched in terms open to interpretation. As the regulator is reported to have said, corporations may “over-engineer” the compliance processes, and so it is attempting to define the regulations more narrowly, and set implementation standards.

Where board evaluations are concerned, the Sebi Listing Obligations and Disclosure Requirements Regulations demand the evaluation of individual directors, chairperson, committees, and the board as a whole. This includes specifying the responsibilities of individuals on the board and conducting an evaluation. These could serve as a basis for the extension or continuation of an independent director or others in key positions along with their remunerations. The Companies Act, 2013, also prescribes annual evaluation of the performance of the board, committees, and directors. Sebi is said to be making these evaluations voluntary rather than mandatory. Initial opinion of this change appears to be mixed. This could mean a dip in disclosure and transparency since many corporations may cease to undertake this exercise. However, companies that do voluntarily undertake evaluations may display higher governance standards. On the other hand, there has been criticism of the current process as a mindless exercise, where corporations just check required boxes and award all directors an “excellent” rating on the mandatory performance review.

Other recent measures taken by the regulator include ones designed to broaden the scope of mandatory disclosures by incorporating the disclosure of prior family agreements, including secret agreements that may affect future stakes and management control in a company. This is defined very broadly and mentions that even “indirect impact” should be disclosed. It could be interpreted to mean the disclosure of wills, for instance, since these could affect successions and, therefore, impact management control. Implementation standards and clarifications on the scope of such disclosures would be welcome. Sebi has also said it will establish a regulatory framework for environmental, social and governance (ESG) rating providers in the securities market, along with guidelines for ratings and disclosures. Alongside this, a core business responsibility and sustainability report is to be introduced, with key performance indicators. The purpose is to introduce more transparency in these areas. Implementation standards on these would be very useful since these reports could otherwise also turn into mechanical exercises where every company files boilerplate reports that reveal nothing. 

It is a positive step to embark on this exercise of setting standards because disclosures often become formalities, involving a huge amount of unnecessary paperwork, without giving any material detail that enables better investment decisions. After all, the regulator’s job is to support capital formation and facilitate the ease of doing business. However, in the furtherance of these objectives, the regulator could consider consulting stakeholders in more detail before formulating regulations to ensure there is less ambiguity in the first place.