Sucheta Dalal :Sensitive Leaks And Proper Disclosure (29 Sep 03)
Sucheta Dalal

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Sensitive Leaks And Proper Disclosure (29 Sep 03)  

Some time ago, a reader, Rajesh Doshi wrote to me saying, “like many in the financial markets, I find that there is absolutely no mechanism of transparent reporting in the Indian Corporate Sector”.

True. But although Mr Doshi was speaking about takeover regulations, what he said is truer of corporate reporting on price-sensitive issues. The quick dissemination of price sensitive information is part of the broad set of rules governing market manipulation and insider trading, but it remains mired in confusion despite the efforts of stock exchanges and regulators.

A couple of years ago, the National Stock Exchange (NSE) and later the Bombay Stock Exchange (BSE) began to write to companies in order to verify the accuracy of news reports, about improved performance, restructuring, acquisitions and mergers and new business orders/contracts. In attempting to verify information published by the media, the bourses hoped to clarify information that was not officially disclosed by companies and to suppress price manipulation based on false and speculative reports.

At another level, it was a gentle hint to companies that the answers to their questions ought to have been made available to all investors.

But the confusion persists. In fact, it gets worse in a raging bull market. All good news leaks out through the business press and is seldom confirmed or denied by companies and stock prices invariably shoot up. It is only bad news that gets a quick official reaction.

Lets look at a recent example. Last week, we wrote that three directors of Global Trust Bank (GTB) had resigned due to differences over loan loss provisioning even when the company was in the midst of negotiating to sell-off 49 per cent of its equity to foreign investors. Those who resigned included Venkappa M Agadi, chairman of the bank’s board audit committee.

However, GTB, which had reported to stock exchanges the induction of a new director to the board, failed to mention the resignations. In fact, after our report, the Managing Director even claimed to an economic daily that he did not think it was necessary to inform the bourse about the resignations; but it did subsequently inform stock exchanges about the departure.

Interestingly, GTB was in the news everyday when the resignations were tendered, but since the information about its restructuring plans became public through a series of media leaks, the bank cannot be held accountable for selectively failing to disclose material information.

GTB’s subsequent disclosure raises another question. If Venkappa Agadi has apparently resigned as per the recommendations of the Ganguly Committee on having attained the age of 70, what about JV Shetty (former chairman of Canara Bank) and Satya Brata Ghosh (former Sr Partner of PriceWaterhouse)? What prompted their resignations, even if the board did not accept them? We still don’t have the answer.

The question then is, should the media be more responsible in its reporting and insist on sourcing information to the company? Yes, it should. But when the alternative is to miss a newsbreak because one insists on being punctilious about correct sourcing, it would be impossible to convince a journalist to turn finicky.

What about regulatory requirements on the disclosure issue? SEBI made it mandatory for companies to report material events to stock exchanges way back in 1997-98 but a majority of companies continue to report very sketchy information. Most communication to the press is through media leaks or through casually made remarks, usually on the sidelines of important seminars and conferences.

So long as there are no penalties for failing to make full and proper disclosures, there is very little that stock exchanges can do to enforce corporate compliance.

The non-disclosure of material information by DSQ Software would probably form the centrepiece of any case study on the ineffectiveness of disclosure rules and regulatory processes. The company failed to disclose a 50 per cent increase in capital at the height of the 1999-2000 bull run (the Fortuna case), failed to disclose the sale of major contracts to Scandent Network (leading to large scale layoffs) and more recently seems to have failed to disclose the sale of the assets of its US subsidiary.

In fact, disclosures on mergers and amalgamations are invariably scanty even by the best-known companies. Yet, SEBI has gone ahead and tightened good governance rules under the listing agreement of stock exchanges in an attempt to improve corporate reporting and disclosures.

It now wants members of the board audit committee to be financially literate, especially the chairman. Surely then, the resignation of chairman of the audit committee or the external auditor has to be reported with a proper explanation; otherwise there is no point to the disclosure.

Yet, when the firm of SR Batliboi resigned mid-term as auditors to Moser Baer — a highly regarded company, there were no explanations. The stock crashed 20 per cent this August on news of the resignation, but neither the Department of Company Affairs (DCA) nor SEBI investigated this smoking gun on behalf of investors. In fact, we still don’t have any answers expect for the company’s obvious claim that there was no wrongdoing.

My sources in the accountancy profession cite Ramaiya’s Guide to the Companies Act (page 2128 which explains section 224 sub-section 6) to say that until an auditor cites the reason for his resignation, the resignation is not effective. But if the regulatory mechanism does not function, it is unlikely that there can be any answers.

What is the solution to the lack of correct corporate disclosures? The answer lies with the two regulators — DCA and SEBI.

If the regulators follow up on clarifications sought by NSE and BSE, then companies would be forced to provide better answers; especially if they are quick to punish defiant obfuscation.

Finally, SEBI and the stock exchanges need to work with industry associations such as CII, FICCI and the IMC to explain the concept of ongoing disclosure of price sensitive information by holding a series of seminars or classroom sessions on the subject. Otherwise, corporate governance and disclosure will be reduced to a lot of meaningless reporting requirements that harass the better managed companies and are simply ignored by unscrupulous ones.

-- Sucheta Dalal