Professional Documents
Culture Documents
Corporate Disclosure
Introduction
Role of capital market in the economy
Information is the key to the effective
operations of the capital market
Information is needed by investors and
creditors for making rational economic
decision
Further, This information should help
them to assess the amounts, timing and
uncertainty of future cash flow.
-Conceptual framework, FASB
Why Disclosures ?
Corporate
Governance
Market
Forces
Voluntary
Disclosures
Industry
Practices
Cost of
Disclosures
Regulatory
Environment
Voluntary Disclosures
Are those that are left to the discretion of the company, the
level of which is determined by the managers/ SHs by
balancing the benefits and costs of disclosure.
Superior in the hierarchy of disclosure environment
Benefits of voluntary disclosures
Reduction in the cost of capital
Promote more liquid/ efficient capital markets and efficient allocation
of resources
Serve managerial interest by reducing the possibility of hoetile
takeovers, to ward off SH litigation and to correctly signal managerial
talent.
Other benefits include large analyst following, reduction in the cost of
investors search for the information thus reducing transaction costs
Mandatory Disclosures
Benefits
Better informed SHs which enable them to exercise their
voting powers more effectively (particularly with Large
Shareholders) create positive externalities
To force managers to share information that would bring
about the information parity between the management
(specifically board) and shareholders curtail the
opportunism for earnings mgmt, and RPTs
Increases the efficiency of capital markets with share prices
reflecting true value of the firm which in turn increases
the effectiveness of market for corporate control, reduces
the riskiness of equity-linked compensation schemes,
improves capital allocation, and lowers the cost of external
finance.
Mandatory Disclosures
Costs
Financial costs of setting up a regulatory
system
Opportunity costs associated with human
capital
Q & Q of Disclosures
Some disclosures are quantitative in nature
such as financial statements, RPTs and
Segment reporting while some are
qualitative in nature such as MD&A, notes
and supplementary schedules and
CEO/CFO certification Wipro 13 pages in
1947 to 236 in 2012-13
Quality of Disclosures
Desirable disclosures should disclose information
that are timely, relevant, verifiable, reliable, unbiased,
comparable and consistent (FASB)
Particularly in respect of financial reporting, quality
entails setting up of accounting and auditing standards.
Accounting standards accords credibility to the
disclosed information which forms the basis of
designing and enforcing contracts, such as
compensation, debt covenants and enforcement of
securities laws protecting investor rights.
Companies Act
List of directors, the directors report, annual audited
accounts, financial statements, segment reporting,
RPTs, auditors report, notes to accounts, employee
particulars, significant accounting policies.
Annual reports to be sent to SHs, SEs, MCA, and RoC
(Sec 210(1))
Rationalisation of Schedule VI
RPTs interested directors sec 297, 299 and 300
Setting up of audit committees Sec 292 A
Conduct of AGM Sec 166 and timings and means of
disclosure
SEBI - Clause 49
Separate section on CG in annual reports
Independent directors, constitution of independent
audit committes
Disclosure of material information to SHs pertaining
to remuneration of directors, board procedures,
MDA, RPTs, appointment and re-appointment of
directors, disclosure of accounting treatment, risk
mgmt, proceeds from public issues, among others
SEBI - others
Clause 35 - Disclosure of ownership and
control structure in a prescribed format
SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations
SEBI (ISSUE OF CAPITAL AND
DISCLOSURE REQUIREMENTS)
REGULATIONS
SEBI (PROHIBITION OF INSIDER
TRADING) REGULATIONS
Accounting Standards
Sec 211 (3C) mandatory for all companies to
follow the standards notified by GoI on the
recommendations of NACAS (National
Advisory Committee on Accounting
Standards)
Principle-based ASs guided by prudence,
substance over form and materiality.
Specific to CG disclosures AS 17, AS 18 and
As 21
Enforcement
In the absence of strict enforcement, investors
will demand unusually high premium for
supplying external finance, increasing the cost of
capital, hindering the development of financial
market and subsequently resulting in lower
economic progress of the country
Firms faced with weak enforcement environment
will respond by moving to more concentrated
ownership structures to signal investors that their
interest coincide with that of owners/managers.
Private Enforcement
One aspect is self enforcement/ selfgovernance
Three types of private enforcements
Unilateral, Bilateral and multilateral
The scope can become limited when private
parties do not have necessary incentives or
if possibility of reprisal from violator
Public enforcement
Three relevant issues
1. The inter-relationship between the
extensiveness (the scope and detailing in the
written law) and effectiveness of law
2. The positive theory of enforcement and the
related effectiveness and efficiency of
enforcement institutions
3. The relationship between laws, corruption and
enforcement
Investor Protection
Shareholder protection
The corporate governance framework should
ensure the equitable treatment of all shareholders,
including minority shareholders with respect and
not prejudice to the rights of all investors.
All shareholders should have the opportunity to
obtain effective redress for violation of their
rights.
Boards should do their utmost to enable
shareholders to exercise their rights, especially the
right to vote, and should not impose unnecessary
hurdles.
Minority SHs
In the 2011, 3 instances where management
had to withdraw resolutions after minority
shareholders expressed dissent. These
dissensions occurred at lesser known
companies KGN Industries, Seamec,
ARSS Infrastructure, and were not by
institutional investors.
Shareholder Activism
In 2014, Tata Motors proposal of payment of
remuneration to two of its Executive Directors and the
Managing Director in event of inadequate profits was
rejected by public shareholders.
Many proposals of United Spirits to enter into related
party transactions with its promoter Diageo Plc and other
related entities were rejected by its shareholders.
Siemens proposal for selling the metals technologies
business to a 100% subsidiary of Siemens AG, the
German parent company, was rejected by shareholders
Institutional Activism
Foreign institutional investors own 18% and domestic institutional
investors own 11% of the top 500 Indian companies.
(a) Akzo Nobel India: On Feb 7th 2012, at a court convened meeting
of shareholders, many institutional investors either voted against or
abstained as a protest against the amalgamation of 3 unlisted entities
with the listed entity. Though the resolution was passed, the postvote analysis shows that more than 45% of non-promoter votes were
against the resolution. If those institutions who abstained had cast
their vote against, it would have defeated the resolution and set a
precedent.
(b) TCI vs Coal India - Probably for the first time in Indian
corporate history has an institutional investor threatened to sue
individual Board members of a listed entity - The hedge fund is
claiming over Rs 2,12,250 crore in damages on behalf of all
shareholders, the figure it claims is the value of losses suffered by
the company by pricing coal well below market prices between
November 2010 and March 2013.
Activism
Boards of Sesa Goa and Sterlite India
approved a merger of the two companies
along with Vedanta Aluminium Limited
(VAL). Proxy firms highlighted the facts
that VAL had heavily leveraged balance
sheet and a number of human rights
issues. But, it went through
Guidelines
9. Committees and outside directors
10.Approach to corporate governance
11.Position descriptions
12.Audit committee
13.Outside advisors