Integrated disclosure

I have a piece in today's ET on integrated disclosures - a rather technical sounding reform of SEBI - something with which I have been involved in for nearly a decade. The cryptic sounding reform is explained in my piece, it will have a deep impact on disclosure by listed companies - improving disclosures while reducing costs. Here is the full piece:

"The most innocuous and cryptic announcement of SEBI in its August board meeting was one which stated "To provide updated information to investors, listed entities shall file a comprehensive annual disclosure statement in addition to the existing requirements on the lines of 20F filing prescribed by the US SEC. Such filings, updated by the prospectus, shall also serve as a reference in the offer documents for further capital offerings."

This is of course not clear and doesn't even begin to signify the huge step taken by SEBI with this announcement. Since I was involved with the exercise, some plain English insights would highlight the high impact changes sought to be brought about by SEBI.

In February 2005 the SEBI Committee on Disclosures and Accounting headed by Mr. Y H Malegam, created the sub-committee on integrated disclosure of which I was a part. The sub-committee which had members from the then two exchanges, BSE and NSE,  investment bankers, market professional and SEBI officials poured over thousands of pages of disclosures which fall within SEBI's domain and came out with a report (the report and annexures can be found at bit.ly/NdZw51). To give some examples, SEBI sets disclosure standards not just in an IPO prospectus, but also in the listing agreement on an annual and quarterly basis, takeover regulations, insider trading regulations to name a few. In addition, disclosures are also made by the same listed companies under the Companies Act, 1956.

The disclosures are fragmented across a variety of laws and regulations. This creates two problems. Duplication and inconsistency. Laws written by different people at different times to address different issues are bound to create both these problems. Regulations drafted by SEBI itself at different points of time would suffer from these problems. Duplication of disclosures adds to costs of compliance without any benefit accruing to the investors and inconsistencies would mean that compliance with one provision results in violation of another provision. Statutory law cannot be modified except by Parliament, so that must be a given and any inconsistency must be ironed out keeping this in mind. Thankfully, 95% of disclosure laws in the listed companies’ sphere is written by SEBI and can easily be modified.

This was not the only or even the main purpose of the exercise. When we looked at the disclosures which are provided by companies, when they come out with capital raising plans, in particular public offerings, the quality of the disclosures contained in the prospectus was of very high quality and was comparable or even better than international standards set in Europe and America. Sadly, the same couldn’t be said of the continuing disclosures made by listed companies. The quality of continuing disclosures, many of which are made through the SEBI approved listing agreement between the exchange and the listed company are a) inadequate b) vague and c) not disclosed with the consistency seen in public offer documents. So companies make poor disclosures or make disclosures which are not even remotely comparable to disclosures made by their peers. So the second idea of the committee was to bring up the quality of the disclosure on a continuing basis to the level of the disclosures in a public offering. There was no reason SEBI ought to treat primary market investors on a higher pedestal than investors who are investing in the exchange market.

The third purpose, which flows from the second one, created what is a crucial benefit from the integrated disclosures. If a company were to make superior and consistent disclosures on a continuing basis and if the quality was at par with the prospectus, there was no reason for the prospectus to exist in its current form for subsequent public offerings of capital. In other words if a company was already listed and sought to raise more capital from the market all company information was already in public domain and there was no need to come out with a 500 page prospectus giving details about the company. Those details were already contained in the last annual report of the company. All a company needed to do was come out with updates since its last major disclosure (annual report) and come out with transaction information i.e. how much capital was to be raised, the kind of instruments, premium attached etc. A 5 page document annexed with the last annual report rather than the back breaking 500 page one currently prescribed would keep the quality of information at par with the current prospectus and also substantially improve the quality of disclosures even when no capital raising took place. The effort which goes into capital raising could come down in terms of time, effort and money. This is the method adopted by the US SEC and it is timely for SEBI to adopt this high standard which also reduces the cost of compliance for capital raising."