Sebi’s tougher disclosure regime could be a challenge for India Inc

Sebi should reconsider its proposal to mandate companies to confirm or deny media reports impacting business, citing concerns.

The Securities and Exchange Board of India (Sebi) should reconsider its proposal to ask top Indian companies to either confirm or deny reports in mainstream media that could in any way impact their business, according to an opinion piece on the Financial Express news website. Corporate governance may not be one of India Inc’s strong points, but this is simply an unfair ask. The business environment today is keenly competitive and asking companies to part with sensitive information on a merger & acquisition deal, or a corporate restructuring exercise, is impractical, to say the least. Simply because a newspaper or a website or a television channel is speculating on a possible transaction cannot be the reason for a mandatory disclosure. Companies need to be allowed to keep relevant information under wraps until the regulatory filings are made to the exchanges.

Whether the impact of a transaction is small or meaningful, companies should have the prerogative of completing a transaction before responding to any media reports. Until the agreement is reached with the counter-party, it is not really an event that should trigger disclosure under Regulation 30 of the Sebi (Listing Obligations and Disclosure Requirements). A conversation on its own cannot be material. Of course, should the company want to scotch any rumours, of its own volition, it should be free to do so. The suggestion that the impact be measured quantitatively to decide whether it is material or not, needs some thinking through. Sebi has said that an event or information should be disclosed if the expected impact in terms of value exceeds the lower of 2% of stand-alone turnover, 2% of the stand-alone net worth or 5% of three-year stand-alone average of absolute value of the profit/loss after tax. The threshold being proposed is low, and if indeed Sebi wants to go ahead with the new rules, it needs to be raised to at least 10%. Moreover, reducing the time for a company to respond to the reports from 24 hours to 12 hours is onerous—it is simply too small a window. To illustrate, if a claim has been raised against a company and legal advice may be needed to ascertain the seriousness of the claim, 12 hours is too short a time.

Also, one is not sure why the regulator has shortlisted only the top 250 companies. Why is media speculation on transactions taking place in the rest of the companies less relevant or not relevant? There are minority shareholders in those companies too. After all, if the objective of asking for disclosures is to ensure a level playing field with all shareholders—including institutional and retail investors—getting access to the information, the rules should ideally be uniform across corporate India. One can understand Sebi’s frustration at companies failing to comply with regulations and trying to find ways around them. It is true they don’t always come up with proper disclosures and, on occasion, may even be delaying the notices to the exchanges. That is unacceptable. But these need to be addressed differently, by pulling up the company concerned. By making it mandatory for all companies to disclose competitive information, the regulator is painting them all with the same brush. What Sebi also needs to do is to keep track of transactions in the market and watch for any signs of insider trading. Indeed, the regulator already has expertise in surveillance and it must use this to spot any errant behaviour.