Sebi orders closer scrutiny of corporate disclosure:

India’s capital market regulator Sebi on Monday ordered stock exchanges to step up monitoring of disclosures by listed companies in an attempt to improve corporate governance standards and enhance investor protection.

The Securities and Exchange Board of India (Sebi) ordered the exchanges to closely scrutinize compliance by companies with their listing agreements and corporate governance norms and act swiftly to deal with any violations.

Sebi chairman U. K. Sinha on Friday indicated that the regulator was putting in place more stringent disclosure standards for listed firms to ensure that investors are able to take prudent decisions based on information revealed by them to the exchanges.

The market watchdog acted after it found as many as 1,100 listed firms to be non-compliant with their listing agreements and as many as 900 to be deviating from corporate governance rules. These norms relate to shareholding pattern, public and promoter ownership, procedures of share transactions, filing of financial results and price-sensitive information, corporate governance and so on.

Sebi directed the stock exchanges to monitor disclosures by publicly traded firms by comparing them with their filings in the previous quarter. Such a comparison will include changes with regard to the promoters, their shareholding, encumbered shares, persons holding more than the required percentage in public investors’ category and so on. 

 

The exchanges have to ensure that all the disclosures made are in compliance with Sebi’s insider trading and takeover rules as well.

In order to enable the exchange and listed entities to put in place an adequate infrastructure to ensure compliance with requirements, stock exchanges were directed to start by monitoring the disclosures made by the top 500 listed companies (by market capitalization as on 31 March 2013) in compliance with various clauses of the listing agreement for the quarter ending 31 December 2013.

Stock exchanges have failed to check violations of clause 49 of the listing agreement by companies, which relates to corporate governance norms, said Anil Singhvi, co-founder of Institutional Investor Advisory Services India Ltd, a corporate governance research firm.

 

“They need to set up monitoring cells and also declare what punitive action needs to be taken in case of violation,” he said. “Stock exchanges need to improve surveillance and work closely with Registrar of Companies to achieve this.”

Improved corporate governance is necessary for India to “attract serious capital,” Singhvi said.

Although the latest directive does not make much of a change in existing capital market norms, the mandated format for disclosures to be made by listed firms will help curb the scope of non-compliance by enhancing clarity in disclosures and make companies pay for non-compliance or delays in compliance.

Sebi found that although listed firms make disclosures to exchanges within the time frame stipulated under the listing agreement, the contents of the disclosures are not always adequate and accurate. Investors are unable to take informed investment decisions based on such disclosures, Sebi said.

“….It is felt that the current monitoring mechanism of stock exchanges to ascertain the adequacy and accuracy of disclosures made in compliance with the listing agreement need to be made more effective,” the regulator said. 

 

For effective supervision on compliance with the latest requirements, Sebi directed stock exchanges to form a special cell. They were asked to augment their workforce, if required, to monitor the adequacy and accuracy of corporate disclosures and devise a framework that helps detect any violation of Sebi rules immediately.

In line with this, exchanges will be required to submit an ‘Exception Report’ with details of companies that were non-compliant or did not respond to calls by the exchanges for clarifications.

Some experts said Sebi’s directive will be effective only if it is implemented in a phased manner.

“Sebi needs to follow a phased approach to regulation as it would be more effective and implemented more meaningfully. We should limit such monitoring for companies which matter for market indices and only when they set a benchmark should we extend this regulation to other thinly traded companies,” said N. Venkatram, managing partner, audit, at Deloitte, Haskins and Sells, an audit firm.

 

The capital market regulator ordered stock exchanges to initiate actions against non-compliant firms in a time-bound manner to ensure that listed firms take Sebi seriously when it comes to investor protection.

Stock exchanges were directed to update themselves with all media reports appearing about listed firms and ensure that there is no mismatch with disclosures made by them on exchanges.

Exchanges will be required to follow up with the listed firms at every stage for updates on material events reported. And in case there is any discrepancy in the information, they have to seek clarification from a company within two working days of the disclosure. Exchanges will have to report to Sebi regularly about actions taken by them against non-compliant companies.

Gauri Kesarwani.
PGDM- 1st (sem)
Source: Live Mint.
Date: Nov. 19, 2013.