The pressing need for standardization in securities market disclosures

The laws do not bestow on shareholders of a company an inherent right to participate in its management; it is the board with which governance and oversight of management is entrusted. Shareholders, especially public shareholders, inevitably have to depend on the disclosures made by entities to the bourses.

When it comes to disclosures, comparability of information is an essential aspect to get a sense of the relative impact and implication. If divergent practices and interpretations exist, it could lead to misinterpretation of the available information. For example, when it comes to disclosure of material events, in respect of those events for which the boards need to apply the test of materiality, what is material for one company’s board may not seem material for another even though they may belong to the same sector. Here is where standardization of practices could lead to better understanding of information.

To draw a parallel, it is because the accounting standards are mandated that the stakeholders can be certain of what the various elements in the financial statements mean. And, most importantly, even if they are not accounting experts, they can be reasonably certain that the elements contained in the statements of different entities are comparable. The auditing standards ensure that the respective information of the entities have been subject to similar rigours of examination by the different auditors. Similarly, when the practices surrounding identification and reporting of disclosures and other essential compliance under the securities market regulations are standardized, and best practices are identified and enforced, reliability and comparability of disclosures is bound to be enhanced.

The Securities and Exchange Board of India (Sebi) took the right step in this direction last month by proposing the formation of an industry standards forum. As per Sebi’s press release, the forum will be formed by industry associations; Assocham, Ficci and CII have already named their representatives and are in the process of selecting a chairperson.

The forum will formulate standards in respect of the compliance process surrounding specific Sebi requirements in consultation with the regulator, industry and stakeholders. The forum will initially focus on four areas: rumour verification requirements, disclosures under regulations 30 and 30A, BRSR Core/ESG assurance requirements, which are part of the listing norms and structured digital database (SDD) under the norms dealing with prohibition of insider trading.

Rumour verification, as introduced in the June amendment to the listing norms for the top 100 entities initially and for the top 250 from the next fiscal, is a tough requirement to comply with as it involves continuous monitoring of the mainstream media, including digital media, and issuing clarification within 24 hours of any reported event. Standards here could involve fixing responsibility on identified personnel to monitor the media, procedures for verifying the authenticity of information in-house before issuing clarification, ensuring all departments are aware of the requirement and are involved in the process, avoiding miscommunication and ensuring no critical information is overlooked. In respect of disclosure of material events under regulation 30, while Sebi’s circular itself details the basic information to be disclosed and provides a general guidance on when a material event can be said to have arisen, standards can be developed to elaborate on the latter. Standards are necessary to provide real guidance here because the policy of materiality developed by many companies are reflective of a tick-box approach and simply adopt the basic requirements of Sebi and rarely go beyond that, thus making it a rather redundant document.

BRSR Core refers the nine key metrics of ESG reporting that need to undergo an exercise of reasonable assurance, mandated initially for the top 150 companies and eventually, on a gliding path, to the top 1,000. There is a lot of space here for issuing standards—right from how data should be collected, collated, recognized, measured and disclosed, to who can act as the assurance providers. In respect of SDD, standards should enable and mandate clear identification of all the persons with whom inside information is shared, including audit staff, support staff, personnel in other departments, which will help sensitize the importance of sharing information on a need-to-know basis.

In essence, investors have reasons to cheer with this Sebi proposal.

Ranjith Krishnan is an academician based in Thane and Usha Ganapathy Subramanian is a practicing company secretary in Chennai