Sucheta Dalal :Early Warnings and Disclosures
Sucheta Dalal

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Early Warnings and Disclosures  

September 24, 2009


According to Salman Khurshid, minister for corporate affairs, the government now has identified 50 companies for a pilot project on an early-warning system to detect corporate frauds in the aftermath of the Satyam scam. It works through a sophisticated computer network and involves multiple regulators. The initiative sounds extremely laudable, but we need to tell Mr Khurshid why we are sceptical about its success.

In 2006, long before Satyam, Securities and Exchange Board of India (SEBI) put in place an expensive Inter-Market Surveillance System (IMSS), which promised real-time surveillance of the secondary market to detect insider trading, price rigging and manipulation. IMSS seems to have delivered very little and while SEBI is silent about its inefficacy, a USAID report attributes its virtual failure to employee attrition and the lack of trained staff to conduct effective surveillance and investigation. The USAID report on deepening of financial markets also points out that SEBI does not have a centralised database along the lines of the US Central Registration Department. Further, information collated by SEBI is scattered and not accessible. We think that SEBI’s consent orders are in a similar disarray. The regulator needs a sophisticated system that provides investors properly assembled and searchable information on SEBI’s regulatory and punitive actions or consent orders dealing with market intermediaries or individuals.


In fact, SEBI does not even have a centralised statutory database for corporate filings like the Securities Exchange Commission’s EDGAR. Investors, researchers and analysts are thus forced to run from pillar to post to access detailed annual reports or stock exchange filings (under the listing agreement), if they have no access to private commercial databases. Moneylife has repeatedly pointed out that EDIFAR, a reporting system started a decade ago, remains defunct. SEBI has neither revived it nor found an alternative to it.

Interestingly, SEBI now wants a half-yearly audit of corporate accounts. Demanding such audits is a good idea but not adequate; the regulator must act on the information. So far, we have seen no action on our report about the quick change of auditors by Prithvi Information Solutions, when Pricewaterhouse refused to sign the balance sheet. Also, unless all market-related information is put in the public domain through an effective electronic platform and reporting system, it will be of little use to the investor community. This applies to the bourses as well. We had to write to the entire SEBI board in early September to find out why the NSE had suspended trading in Ambica Agarbathies (it was for delayed corporate results).


The absence of any such initiative is all the more surprising since SEBI chairman CB Bhave had earlier headed the National Securities Depository Limited, India’s largest database company. A further irony is that SEBI has

TV Mohandas Pai, Infosys director, on its board. Infosys pioneered the declaration of quarterly results in India and that too voluntarily. If the government can use Nandan Nilekani to create unique identification numbers for all Indians, SEBI can surely use Mr Pai’s expertise to set up a sophisticated system for corporate reporting, consent orders, penalties and the status of investor complaints.


-- Sucheta Dalal