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India Inc. Must Review Disclosure Policies!

Published on Thu, May 07,2015 | 10:52, Updated at Thu, May 07 at 11:22Source : 


By: Amrit Singh Deo, Senior Director - Strategic Communications Practice, FTI Consulting

Corporate Disclosure in India – And Why Boards of Directors Must Review Disclosure Policies
How will India become the third-largest economy in the world by 2030 if Indian listed companies continue to operate as they did 15 years back? Can an Indian company continue to raise capital from foreign investors purely on the strength of the India growth and domestic consumption story? Why did SEBI include ‘Disclosure and Communication’ within the remit of board oversight within the amended Clause 49 of the Equity Listing Agreement?

Historically, private and publicly-listed companies in India have disclosed only as much information as is mandatorily required. The justification and argument for this approach — that the provision of additional information would be of greater interest to competitors rather than investors — has often been repeated by Indian companies. Today, however, increasing regulatory activism and international institutional investors are demanding additional disclosures from India’s 9,000+ listed companies, in the interest of improving corporate governance and removing information asymmetries in the capital markets.

We reviewed publicly available information disclosed by leading publicly-listed companies in India to ascertain current practice and identify trends that would be helpful to boards of such companies. Combining information parameters that are mandated by law with additional information parameters that are offered voluntarily by publicly-listed companies in the interest of greater transparency, we, created a weighted, Composite Disclosure scoring system (more in Methodology section), with six Mandatory Disclosure parameters and five Voluntary Disclosure parameters; and applied it to the Bombay Stock Exchange (BSE) Top 100 index constituents. The result, the INDIA DISCLOSURE INDEX, is a quick view of disclosure practices by Corporate Inc. and some inferences about the sources of information asymmetries in the Indian capital markets.

How Indian Companies fare on Mandatory & Voluntary Disclosure
It is a telling statistic that that the top 100 listed Indian companies scored a median Mandatory Disclosure score of 2.5 out of a maximum score of 4, with over half of them scoring less than the median, as per the India Disclosure Index 2015 report. It is an issue that has been highlighted by SEBI and a possible justification for the amended Clause 49 provision that puts a greater emphasis on disclosure. Only 41 of the 100 companies in the BSE 100 Index had a full 4/4 score for Mandatory Disclosure, with the remaining 59 falling short on either one or some of the mandatory disclosure parameters. When a majority of listed Indian companies are falling short of legally mandated behavior, one knows that transparency concerns as expressed by institutional investors in the past is a matter that needs a closer look. The average Composite Disclosure Score was a deceptive 6.7 out of 10 – deceptive because it combines mandatory disclosure and voluntary disclosure scores. At a 100% compliance on mandatory disclosure scores, companies should have had at least a score of 7/10 (4/4 for mandatory disclosure and at least half the maximum score of 3/6 for voluntary disclosure).

A deeper look at what pulled down the scores revealed unavailability of updated analyst transcripts and sufficient public information regarding analyst engagements as the single largest reason for low Mandatory Disclosure scores, with 51% of Indian companies not providing analyst transcripts on their corporate websites. This goes against the principle of Fair Disclosure to all investors and majority and minority shareholders irrespective of class. While the median voluntary score, according to the India Disclosure Index was 3.5 out of 6, a third of all BSE 100 index constituent companies have Voluntary Disclosure scores of three or less.

Only eight of the 100 companies in the BSE 100 Index had a full 6/6 score for Voluntary Disclosure, reflecting the low priority placed on providing additional information in the interest of greater transparency by a majority of the companies. 57% of companies currently did not provide adequate strategy-related information on their corporate website and 68% of BSE 100 index constituents did not provide adequate information on debt-related information.

‘Disclosure’ as a Board-level responsibility
On the regulatory side, Indian capital market regulator Securities and Exchange Board of India (SEBI) introduced an amended Clause 49 in the Equity Listing Agreement last year that demands board-level oversight for ‘disclosure and communications,’ while acknowledging weak enforcement of mandatory disclosure standards. This is a compliance issue that needs to be fixed immediately and it is relatively easy to do so with a stricter adherence to Fair Disclosure principles when engaging with the investment community.

It’s more difficult to raise the scores for Voluntary Disclosure as it requires a shift in strategic thinking at the board-level and in the senior management teams of publicly-listed Indian companies. Low scores for Strategy Articulation and Debt-related Information are proxies for an opinion on Management Quality. This is also an indication of the currently-prevalent focus on financial metrics over non-financial ones, and needs to be revisited by boards of Indian companies when finalizing corporate disclosure policy.

With the India Disclosure Index, we looked at disclosure in a holistic manner, covering voluntary as well as mandatory practices, to get an accurate picture of current practices amongst Indian companies. At the heart of it, more disclosure and transparency are excellent proxies for better corporate governance as well as an investment filter for risk-averse institutional investors who may pick another emerging market asset that discloses corporate information better, even if it is from an emerging market other than India.

A better appreciation the Boards of Directors of Indian companies about weak disclosure and how it increases the company’s risk profile, when viewed from the investor’s perspective as well as from the regulatory perspective is critical.  Boards that understand and adapt to mitigate these risks will be rewarded by investors, particularly institutional investors, and that in the medium and long term could be worth significant amounts of money.


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