Can SEBI’s New Disclosure Norms Improve Corporate Governance?

The lack of proper corporate governance among listed companies has been a cause of concern for investors for years.

While corporate governance issues plague companies globally, the presence of large controlling shareholders (promoters) among Indian companies, and the lack of shareholder activism has resulted in a situation where many companies are run like personal fiefdoms.

As a result, minority shareholders have often received the shorter end of the stick. Since it is rather difficult to lower promoter influence on companies, SEBI has asked companies to disclose granular details about various material events, and other disclosure that would help investors make better decisions.

These rules kicked in on Saturday (29 July), and are expected to help investors make better-informed decisions. 

To be sure, India has the best disclosure norms among emerging markets, by a large margin. Even countries like China, that see hundreds of billions dollars’ worth of inflows every year into their public markets, have materially poorer disclosure norms.

However, most Indian businesses have a single promoter family holding a controlling stake in the business. As a result, external shareholders have a limited influence over the company.

Some promoters are well-connected and complaints filed against them have a limited effect in containing their dubious activities. In some cases, even honest promoters and managements have often disregarded shareholder advice as needless criticism.

The security offered by a large shareholding in the company ensures that promoters can often get away with self-serving deals or by ignoring shareholder suggestions.

Emerging markets often face similar issues, and regulators usually try to catalyse a shift towards more balanced power dynamics through regulatory changes.

Earlier, companies had significant leeway in terms of deciding whether the even was ‘material’, when to report it, at what stage the event should be reported, and the information to be disclosed. With the new rules, a numbers of possible loopholes have been cut short, and have increased specificity.

These regulations have been brought into force help disseminate correct information among investors. Last, SEBI had fined a large conglomerate and its compliance officers for not confirming or denying rumours about an investment.

It believed that the conglomerate should have responded to the rumours, especially since mainstream media was reporting about it. One of the steps taken in this regard is the introduction of shorter time limits to report material events.

For instance, a board meeting’s decision details would have to be disseminated within 30 minutes of the end of the meeting.   

Further, deals between family members and shareholders over control of a company need to be made public as well, including deals where the listed entity is not a party.

The regulation is retrospective, and companies have been asked to make details of such deals public. Even frauds and defaults made by directors, would be reported within 24 hours.

This rule was only limited to promoters earlier, but has now been extended to include directors as well. An event would be considered material if its value would be higher than 5 per cent of average absolute net earnings or loss, or two per cent of turnover or two per cent of net-worth, which could lead to a larger number of disclosures going ahead.

SEBI’s new disclosure norms had initially seen some opposition by several listed companies, possibly because it could expose skeletons in the closet. While companies have cited genuine reasons like proprietary secrets being leaked, or an increased compliance load, some might have more sinister reasons to oppose the move.

While no regulation is fool-proof, such details would help investors make better informed in an environment where their ability to influence a company is limited.