SEBI has struck the right notes with its recent pronouncements on disclosures and shareholder empowerment. It has called for swifter reporting of developments—board meeting outcome to be disclosed within 30 minutes of it ending and internal developments to be reported within 12 hours.
It has also asked the top 100 corporates to prepare to respond by accepting or denying all queries on market rumours with effect from October 1 this year. The span of this rule will be expanded to cover the top 250 companies by market capitalisation from April 1, 2024.
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SEBI has also attempted to try and prevent subjectivity in determining the materiality of an event to be reported by prescribing quantitative criteria. This even as it looks to give more powers to shareholders by making permanent board seats and perpetual rights to certain shareholders a thing of the past, with their continuation requiring shareholder approval. This even as it has capped the time limit for a listed company to appoint a Director, CXO or Compliance Officer at 3 months, following such a position falling vacant.
These are well-intended moves, looking to set some clear wrongs right. But how their compliance will evolve remains the big question. We look at some scenarios to suggest why this could be a tricky pitch for companies to bat on, and why the aimed objectives may be only partially met.
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Guarded Responses To Queries
SEBI’s stance that rumours and news reports must be confirmed or denied can put corporates in a quandary in certain circumstances, but can also serve to provide vital, timely information to investors in others.
In the instance of M&A discussions, given that there are more-often-than-not binding Non-Disclosure Agreements in place between the engaging parties, it may not be possible for companies to violate these contractual obligations to disclose deals that may still be in the making. It is quite likely, therefore, that companies may respond, but with guarded, non-specific messages till there is a certainty of a deal—read: the deal has been inked and sealed. And, it would also be wrong of SEBI to expect a company to violate a non-disclosure pact. Hence, there may be little obtained in terms of information in the case of M&A transactions.
However, there are several other instances where swift clarity can be most helpful. Like, for instance in the case of big blocks of shares being sold. Swifter responses by corporates on, for instance, the promoters being involved in the transaction can help clear the air.
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Similarly, in instances of regulatory actions like I-T searches or regulatory inspections and actions, an obligation to confirm or deny can go a significant way in providing transparency. Incidents like fire accidents or manpower agitation etc are others where timely dissemination of information can be useful.
There could also be legal developments in India or overseas with significant implications that a timely reply from a company can help offer the right perspective on. Thus, the pros outweigh the cons, and some opacity in particular situations as warranted may continue, but that’s a business necessity.
The Grey In “Material”
It is always good to bring objectivity, read “quantification”, to determining what should be considered material to shareholders’ interests. The rub lies in the assessment of the impact. For news that has a clear and direct bearing on financial aspects or shareholder value of a business, like sales and profits, or equity dilution, such a definition is perfect.
The problem arises when the outcome of a certain development needs to be projected as above or below the indicated threshold. Will companies choose to disclose even less material information, so as not to run afoul of the law or will some choose to underplay adverse events claiming the outcomes will be muted? This remains a tricky aspect.
If, for instance, a company enters into an alliance with another to co-develop a certain product or offer a certain service, its expectation of what the arrangement can deliver will drive the decision to disclose or not disclose. But what will finally be delivered, only time will tell.
Well Begun, But Half Done
Clearly, SEBI is on the right path to address the key ills that ail the capital markets, but there will likely be hurdles along the way and what’s most important is for it to stay on the path. What it shoots for may not be easily achieved, but making significant headway is also an achievement.
As an investor, I’m cheered by more disclosures.
It has also asked the top 100 corporates to prepare to respond by accepting or denying all queries on market rumours with effect from October 1 this year. The span of this rule will be expanded to cover the top 250 companies by market capitalisation from April 1, 2024.
Also Read | SEBI tells mutual funds they cannot double-charge fund investors in the name of total expense ratio
SEBI has also attempted to try and prevent subjectivity in determining the materiality of an event to be reported by prescribing quantitative criteria. This even as it looks to give more powers to shareholders by making permanent board seats and perpetual rights to certain shareholders a thing of the past, with their continuation requiring shareholder approval. This even as it has capped the time limit for a listed company to appoint a Director, CXO or Compliance Officer at 3 months, following such a position falling vacant.
These are well-intended moves, looking to set some clear wrongs right. But how their compliance will evolve remains the big question. We look at some scenarios to suggest why this could be a tricky pitch for companies to bat on, and why the aimed objectives may be only partially met.
Also Read | Clearing company for corporate bond repos may start functioning in 3-6 months: Sebi chief
Guarded Responses To Queries
SEBI’s stance that rumours and news reports must be confirmed or denied can put corporates in a quandary in certain circumstances, but can also serve to provide vital, timely information to investors in others.
In the instance of M&A discussions, given that there are more-often-than-not binding Non-Disclosure Agreements in place between the engaging parties, it may not be possible for companies to violate these contractual obligations to disclose deals that may still be in the making. It is quite likely, therefore, that companies may respond, but with guarded, non-specific messages till there is a certainty of a deal—read: the deal has been inked and sealed. And, it would also be wrong of SEBI to expect a company to violate a non-disclosure pact. Hence, there may be little obtained in terms of information in the case of M&A transactions.
However, there are several other instances where swift clarity can be most helpful. Like, for instance in the case of big blocks of shares being sold. Swifter responses by corporates on, for instance, the promoters being involved in the transaction can help clear the air.
Also Read | A Rs 30,000 crore safety net for India's corporate debt market
Similarly, in instances of regulatory actions like I-T searches or regulatory inspections and actions, an obligation to confirm or deny can go a significant way in providing transparency. Incidents like fire accidents or manpower agitation etc are others where timely dissemination of information can be useful.
There could also be legal developments in India or overseas with significant implications that a timely reply from a company can help offer the right perspective on. Thus, the pros outweigh the cons, and some opacity in particular situations as warranted may continue, but that’s a business necessity.
The Grey In “Material”
It is always good to bring objectivity, read “quantification”, to determining what should be considered material to shareholders’ interests. The rub lies in the assessment of the impact. For news that has a clear and direct bearing on financial aspects or shareholder value of a business, like sales and profits, or equity dilution, such a definition is perfect.
The problem arises when the outcome of a certain development needs to be projected as above or below the indicated threshold. Will companies choose to disclose even less material information, so as not to run afoul of the law or will some choose to underplay adverse events claiming the outcomes will be muted? This remains a tricky aspect.
If, for instance, a company enters into an alliance with another to co-develop a certain product or offer a certain service, its expectation of what the arrangement can deliver will drive the decision to disclose or not disclose. But what will finally be delivered, only time will tell.
Well Begun, But Half Done
Clearly, SEBI is on the right path to address the key ills that ail the capital markets, but there will likely be hurdles along the way and what’s most important is for it to stay on the path. What it shoots for may not be easily achieved, but making significant headway is also an achievement.
As an investor, I’m cheered by more disclosures.
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