14 August 2008

SEBI Board meeting - II. Integrated disclosures

The shortening of the rights issue cycle has been pending for some time and there is scope of some more improvements as well. In fact there is a dramatic scope of improvement in all public offerings. As has been criticised in DNA Money, several important things have been left out by the Board for which public comments had been sought several months back. One of which is the concept of integrated disclosures. Something with which I have been associated with and which has achieved finality in content after over 3 years of work. I had written a working paper on the subject, based on which Mr. Malegam had appointed a sub-committee on integrated disclosures (a sub-committee of the SEBI committee on disclosures of which he was Chairman) which I headed. After over 3 years of work at both the committee and the sub-committee level and also the views of independent experts, the report was finalized in draft form along with the contents of the work done and put out for public comment in late Jan 2008. To put it in brief the implementation of integrated disclosures would have the following benefits on capital raising in the country (from the report):

"Every disclosure made by a regulated entity has an effort and cost attached to it.
To the extent disclosures are detailed at the time of an issue and become
sketchy or inaccessible on a continuing basis after a company has got listed, the
paradox is clearly a matter of concern. To the extent the disclosures are
duplicative, the added cost of disclosures has no value addition and such
duplication needs to be removed. To the extent the disclosures are made but are
not fully or easily accessible by the public, there is a need to enable such
disclosures to be available in the public domain in an easily accessible manner.
To the extent disclosures are unnecessarily complex, lengthy and full of jargon,
the disclosures can become a tool of defense for an issuer and not a means of
dissemination of information, and such disclosures need to be simplified.

The pursuit of integrated disclosure refers to two objectives. First, to make
disclosures meaningful, non-duplicative and non-burdensome to the extent
possible. All disclosures must pass the test of relevance and non-duplication.
Second, to make disclosures truly available and accessible; particularly when
filings with a regulator makes a document theoretically public but the process of
access is made so cumbersome that the information fails to effectively enter the
public domain. This is aggravated when an investor must go to more than one
place to collate public information about a single company.

Reduced duplication of disclosures would reduce wastage of time by companies
which complain of being over-burdened with filling of huge amount of information,
many times repetitive and to multiple organizations. To the extent there is
unnecessary duplication, the company is distracted from its main economic
purpose into paper pushing to dozens of authorities and running the risk of
potential technical violations.

The streamlined and reduced filing would enable the regulator to use its powers
more effectively. The regulator would also be able to catch fraud and noncompliance
more easily as it would need to tap only one source to check data.
Fewer bottlenecks would also result in improved speed, reduced risk and more
agile corporates with reference to raising capital.

In other words the implementation of the report will: a) Improve the quality and frequency of disclosures by companies b) make companies more accountable to investors and indirectly improve corporate governance c) make all capital offerings 'shelf' in nature i.e. instead of a 500 page prospectus, only incremental information in say 50 pages is supplied - as the company information (as opposed to the transaction information) is already in the public domain d) make capital raising substantially faster e) make the continuous disclosures of high quality and less fragmented across various platforms like company website, Edifar, stock exchange website, RoC filings etc. This is as opposed to today's disclosure requirement which put lot of emphasis on quality of primary market disclosures but a leaner and less strict requirement on continuous disclosures f) reduce the burden on the regulator to sift through dozens of sources to investigate facts. g) introduce plain English disclosures instead of the jargon ridden disclosures of today which seem to be designed to hide information rather than disclose them.

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