DISCLOSURE REQUIREMENTS UNDER INDIAN COMPANY AND SECURITIES LAWS: AN ANALYSIS
Author: Aditi Shakya
IOL, Jiwaji University
INTRODUCTION
Transparency through adequate disclosures is pivotal for efficient functioning of capital markets and enabling informed investment decisions. Indian company and securities laws mandate extensive disclosures by companies to shareholders, investors and other stakeholders. However, concerns have been raised from time to time regarding the efficiency and adequacy of the disclosure regime. This blog examines the key disclosure requirements under Indian laws, issues therein and potential ways to enhance disclosures.
DISCLOSURE OBLIGATIONS UNDER THE COMPANIES ACT, 2013
As the primary legislation governing incorporation, functioning and winding up of companies in India, the Companies Act 2013 contains various provisions mandating disclosures. Section 129 requires preparation of financial statements like balance sheet, profit/loss statement, cash flow statement as per Schedule III of the Act and accounting standards. These must be filed annually with the Registrar of Companies (ROC) as per Section 137. The Board is also obligated under Section 134 to prepare a report on the company's operations, performance, financials, risks, corporate governance etc. and present it to shareholders at the Annual General Meeting (AGM). This Board's report must also be filed with the ROC within 30 days of the AGM as per Section 137. Section 92 mandates filing an Annual Return with the ROC containing details of the company's shareholders, debenture holders, directors, promoters etc. Any appointment, resignation or change in company's auditors has to be intimated to the ROC within 15 days under Section 139. Section 184 requires a director to disclose his direct or indirect interest in any proposed contract or arrangement into which the company is entering. Further, Section 186 stipulates disclosure of any loans, guarantees or investments made or security provided by the company exceeding prescribed thresholds. Related party transactions beyond the prescribed limits also require disclosure under Section 188.
DISCLOSURE OBLIGATIONS FOR LISTED COMPANIES
For companies with listed securities, continuous disclosure obligations arise under securities laws, specifically the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR). Regulation 33 mandates submission of quarterly and annual financial results to stock exchanges within 45 days. Regulation 13 requires filing a quarterly statement giving details of investor complaints. Further, Regulation 27 stipulates that a detailed report on compliance with corporate governance requirements must be submitted along with the annual report. Any related party transactions requiring shareholder approval under LODR norms have to be disclosed as per Regulation 23. Promoters, directors and key managerial persons also have to make disclosures under Regulations 7 and 6 regarding their shareholdings and trading in securities beyond a threshold. Regulation 30 requires prompt disclosure of any events or information that are material or price sensitive such as material investments, collaborations, mergers, delisting, buyback etc.
DISCLOSURE NORMS FOR PUBLIC ISSUES UNDER ICDR REGULATIONS
For companies making a public issue or rights issue of securities, disclosure obligations arise under the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018. The issuer has to file a draft offer document under Regulation 5 containing all material information about the company, proposed issue, risks etc. as specified in Schedule I and II. After vetting by SEBI and issuance of observations, the revised offer document is filed with the ROC and stock exchanges. Regulation 62 also stipulates filing of post-issue reports with SEBI including initial and final post-issue monitoring reports by lead managers. The aim is to monitor that funds are utilized for the stated objectives.
ASSESSING EFFECTIVENESS OF DISCLOSURES UNDER INDIAN LAWS
While Indian company and securities laws have detailed disclosure requirements, concerns around efficiency and adequacy of disclosures have emerged. Some issues are:
Firstly, disclosures seem compliance driven rather than value adding for governance and investment related decision making. Companies take a check-box approach without voluntarily sharing information beneficial for stakeholders beyond mandatory disclosures. Secondly, disclosures often contain standard, repetitive content not tailored to the company's specific situation. Further, the multiplicity of disclosure requirements across various regulations creates confusion. Disclosures are also often long, complex and technical making them difficult for lay investors to comprehend. Regulators face capacity constraints in reviewing disclosures made by thousands of companies. The quality and accuracy of disclosures is not rigorously examined. Another concern is that disclosures overwhelmingly focus on financials rather than non-financial information like intellectual capital, organisational culture, human resources etc. which are increasingly relevant for investment decisions. Finally, absence of standard definitions or key performance indicators makes comparison of disclosures across companies difficult.
ENHANCING DISCLOSURES UNDER INDIAN LAWS
Some recommendations to enhance disclosures under Indian regulations are:
Firstly, the shift from compliance to governance focused disclosures providing relevant information for decision making beyond meeting technical requirements. Secondly, regulators must promote tailored, company specific disclosures rather than boilerplate reporting. Thirdly, stricter scrutiny of disclosures and punitive action for mis-statements and omissions is required for better enforcement. Promoting XBRL based standardized reporting will also facilitate comparison by investors. Companies can be encouraged to provide integrated reporting combining financial and sustainability related information for a holistic view.
Further, leveraging latest technology like blockchains and data analytics can make disclosures more accessible, user friendly and transparent. Finally, regulators should proactively enforce standards of accuracy, adequacy and reliability in disclosures as they are the flag bearers of the disclosure-based regulatory regime. At the same time, companies must view transparency not as an obligation but an opportunity to build stakeholder trust.
CONCLUSION
While India’s disclosure framework has enhanced transparency, there is need for a shift towards qualitative disclosures focused on corporate governance. Tailored and standardized disclosures leveraging technology can provide stakeholders relevant information for decision making and increase investor confidence. However, this requires regulators taking the lead to stringently enforce prescribed norms. Companies also need to imbibe the spirit behind disclosures rather than perceiving it as an compliance burden.
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