Corporate Disclosures - Legislation-wise
The
providers of capital have a need to know how responsibly their funds were utilized and the goods and services provided to
the society are justified by the inputs taken by the perpetual entity, viz..,
the company. Corporate disclosures on the website/annual reports ensure
transparency and accountability in this regard.
The
main aim of corporate disclosure is “to communicate firm
performance and governance to outside investors” (Haely and Palepu, 2001).
Besides
reporting, managers also communicate information in a less formal way, for
instance by press conferences, by announcement on websites and so on.
In accordance
with the Companies Act, all companies are required to provide details with
regard to the board and its committees in the board’s report (which is
mandatory under the Companies Act and is to be presented by the board to the
shareholders at the general meeting). The board’s report includes, inter alia,
directors’ responsibility statement and a declaration by the IDs verifying
their independence based on prescribed criteria.
In accordance with the Listing
Regulations, listed companies must submit periodic compliance reports to the
stock exchanges containing specified information regarding the board, including
the composition of the board and board committees, remuneration of directors
and RPTs approved by the board, among other things. Furthermore, listed
companies must have a separate section in the annual report containing a
detailed compliance report on corporate governance aspects. Every listed entity
and its material unlisted subsidiaries incorporated in India are required to
undertake secretarial audit and annex with its annual report, a secretarial
audit report, given by a company secretary in practice, in the prescribed form
with effect from the year ended 31 March 2019.
The
Presentations to analysts
As
financial reporting and disclosure are potentially important means for
management to communicate firm s performance and value to outside investors,
increased disclosure practices will help in reducing information gap between
firm and its stakeholders.
Reporting
puts information in the hands of the markets. And markets and investors make
investment decisions based on this information. The markets function best when
they have access to sufficient information to properly assess governance. Good
information helps the markets ascertain the degree to which companies respond
to shareholder needs;
Reveals
risks, and shows the quality of future cash flows.
What
Information Can You Get From Filings?
• Industry Awarenessu Competitive Intelligence
• Strategic Decision Making
• Business Development
• IFRS Reporting / Transition
• Financial Reporting Examples / Trends
• Note Disclosure Examples
• Best Practices
• Investor Relations
• Risk Management
• Precedent Research
Which
Industries Does Corporate Disclosure Affect?
• Financial Services
• Investment
• Government
• Resource Sector
• Legal
• Corporate
• Accounting
Who
Benefits from Corporate Disclosure Filings?
• Marketing
• Who: Communications Experts
• What: Press Releases
• Why: Benchmarking
• Sales & Business Development
• Who: Sales Experts & Analysts
• What: Targeted Prospect Lists
• Why: Create quick, easy, accurate and targeted lists
• Investor Relations
• Who: VPs, Analysts, Associates, Managers
• What: Mergers, Acquisitions, Financing, Press Releases
• Why: Real-time alerts and instant notification
Who
Benefits from Corporate Disclosure Filings?
• Corporate Actions
• Who: VPs, Project Managers
• What: Plans of Arrangement, Take-Over Bids, Director’s
Circulars
• Why: Real-time alerts and instant notification
• Finance
• Who: CFOs, VPs, Controllers, Analysts, Accountants, Auditors
• What: Financial Statements / Note Disclosures
• Why: Benchmarking
Who
Benefits from Corporate Disclosure Filings?
• Legal
• Who: Managing Partners, Associates, Paralegals, Articling
Students, Librarians, Knowledge Management Teams
• What: Precedents & Alerts
• Why: Draft agreements, database of precedents and monitor
prospects
• Client Services
• Who: Managers, Associates
• What: Reports, Contracts, Agreements
• Why: Monitor clients and track documents
The
major three regulations that ensure disclosures are
A. Companies Act 2013
B. SEBI Listing Obligations and Disclosure Regulation 2015
C. SEBI (Prohibition of Insider Trading) Regulation 2015
These
are discussed in the following sections:
A. Provisions of the Companies Act 2013
Section 90 of the Companies act 2013 requires that every
individual who, either by himself or with others (including a trust and persons
resident outside India), qualifies as a significant beneficial owner (SBO) of a
company to make a declaration to that company specifying the nature of his
beneficial interest of at least 10% in shares of a company or has the right to
exercise significant influence or control (as explained in Section 2(27) of the
Act) over a company.
Section
90 of the Act requires every company to do the following, inter alia:
- Maintain a
Register of Interest by SBOs and make it available for inspection by
Shareholders
- Report Details of
SBO Interest in a Return filed to Registrar of companies
- Give notice to
such SBOs
- Apply to
National Company Law Board for an order directing that the
person/company’s shares in question be subject to prescribed restrictions
including those with respect to transfer of shares and suspension of
rights attached to the shares, amongst others.
Corporate
Governance disclosures as per Section 134 of the Companies Act, 2013
- Company’s philosophy on Corporate Governance
- Board of Directors
- Meetings of Independent Directors
- Committees of the Board
a) Audit committee
b) Nomination and Remuneration Committee
c) Risk Management Committee
d) Asset Liability Committee
e) Corporate Social Responsibility Committee
f) Human Resource Committee
g) Stakeholders Relationship Committee
h) Information Technology Strategy Committee
- Attendance of the Committees
- Performance Evaluation of Board, its Committees and Directors
- Related Party Transactions
- General Body meetings
- Postal Ballot
- Shareholding pattern as at March 31
B. Such disclosures give required information for different stakeholders. In addition to the requirements under Companies Act 2013, the clause 49 of listing agreement also insists certain disclosures by companies listed on the stock exchanges.
B. Clause 49 of the Listing Agreement
An
addition to the Listing Agreement and was inserted as late as 2000 consequent
to the recommendations of the Kumar Mangalam Birla Committee on CG constituted
by SEBI in 1999. Intended to introduce some basic CG practices in Indian companies
and bring in a number of key changes in governance and disclosures.
In
late 2002, the SEBI constituted the Narayana Murthy Committee to “assess the
adequacy of current corporate governance practices and to suggest
improvements”. Based on the recommendations of this committee, SEBI issued a
modified Clause 49 on October 29, 2004 (the “revised Clause 49”) which came
into operation on 1st January, 2006.
Requires
all listed companies to file every quarter a CG report. The key mandatory
features of Clause 49 regulations :
Composition
of the board of directors, the composition and functioning of the audit
committee, governance and disclosures regarding subsidiary companies,
disclosures by the company, CEO/CFO certification of financial results and
reporting on CG as part of the Annual Report
CEO/CFO
certification of financial results and reporting on CG as part of the Annual
Report
Companies
to provide “specific” corporate disclosures of the followings:
Related-party
transactions, disclosure of accounting treatment if deviating from Accounting
Standards, risk management procedures, proceeds from various kinds of share
issues, remuneration of directors, a management discussion and analysis section
in the annual report discussing general business conditions, outlook and
background and committee memberships of new directors, as well as,
presentations to analysts.
In
addition, a board committee, with a non-executive chair, is required to address
shareholder or investor grievances.
Finally,
share transfer, a long- standing problem in India, must be done expeditiously
Suitably
pushed forward the original intent of protecting the interests of investors
through enhanced governance practices and disclosures.
Moves
further into the realm of global best practices (and sometimes, even beyond).
Chakrabarti
(2008) very aptly commented as: “Similar in spirit and scope to the
Sarbanes-Oxley measures in the USA, Clause 49 has clearly been a milestone in
the evolution of CG practices in India”.
Mandatory
for the Indian listed companies to file with the SEBI, the CG compliance
report, shareholding pattern along with the financial statements.
The
SEBI has created a separate link, known as “EDIFAR”, to post the relevant
information submitted by the company. No doubt, the quality and quantity of
disclosures have improved
- Appointment of a
Woman Director
- Tenure of
Independent Directors
- Formal letter of
appointment to Independent Directors
- Performance
Evaluation of Independent Directors
- Separate meeting
of IDs and Training
- Succession plan
for Board/Sr. Management
- Compulsory whistle
blower mechanism
- Constitution of
Nomination and remuneration Committee
- Disclosure in
Annual Report about Remuneration Policy and Evaluation Criteria
- Related Party Transactions
- Compulsory Electronic Voting for all shareholders resolutions(new clause 35)
c. SEBI (Prohibition of Insider Trading ) Regulation 2015
Insider
Trading is one of the most prevailing form of Securities Market Offence
worldwide. The genesis Insider Trading is HUMAN GREED! It is really difficult
for persons with privileged information which could help him to gain
substantial profit or allow avoidance of loss to control the temptation of
using these privileged information But possession of privileged information put
the person in a fiduciary position and misusing this position is a Breach of
Trust and Fraudulent act. When a company gets listed - its promoters, directors
and other key employees as well as other persons who have more information than
general investors become the trustee of Investors’ interest and are in
fiduciary duty to not to use them for their personal benefit.
INSIDER
TRADING is the misuse of privileged position & breach of trust and hence
can disturb whole structure of Securities Market. It can also be a big menace
for small investors as they can loose their hard earned money in the hands of
corporate insiders, hence its effective prevention is very significant.
The East-Asian crisis and the Enron debacle have drawn the
attention of the scientific community on the issues of financial disclosures
and corporate governance. Transparency and good governance is essential to
strengthen the financial system and to withstand the any crisis, both internal
and external. La Porta et al (2000) argue that the laws dealing with the
protection of shareholders and the enforcement of such laws determines the
financial strength of any country.
The
importance of policing insider trading has assumed international significance
as regulators attempt to boost the confidence of investors. Prevention of
Insider trading is necessary to create a Level Playing Field for Investors in
Capital Market. Effective measures to prevent Insider Trading would create
trust & confidence among the Investor Communities and help to develop
securities market. All international capital markets have laws on curbing
Insider Trading and is considered as a heinous crime.
Insider
trading has many governance implications, affecting:
• The
organization of companies;
• The duties of
directors of managing boards and supervisory boards and other corporate
insiders;
• The permitted
flow of information within companies;
• The disclosure duties imposed to companies.
The
main problem in insider trading is conflict of interests and the misuse of
power - Utilisation of the power over
privileged information. Therefore, there is a strong connection between
corporate governance and insider trading
Earlier,
companies were required to disclose or abstain (to misuse information) – rather
focusing on the prohibitive side of insider trading. Now the Directive
indicates companies should abstain and disclose.
SEBI
(Insider Trading) Regulations, 1992 was applicable up to 14 05 2015. SEBI
(Prohibition of Insider Trading) Regulations, 2015 came into force from 15 05
2015. Also SEBI act 1992 and the Companies Act 2013 have disclosure
requirements in this regard.
The SEBI Regulations prohibit an
Insider from Trading in the Securities of a Company listed on any stock
exchange on the basis of unpublished price sensitive information.
“Unpublished Price Sensitive
Information” (UPSI) means any information, which
relates directly or indirectly, to the Company or its securities, that is not
generally available which upon becoming generally available, is likely to
materially affect the price of the securities of the Company.
“Generally available” information means information that is accessible to
the public on a non-discriminatory basis.
“UPSI” includes, without limitation, information relating to the following:
o FINANCIAL RESULTS, FINANCIAL
CONDITION, PROJECTIONS, FORECASTS OF THE COMPANY;
o DIVIDENDS (BOTH INTERIM AND FINAL);
o CHANGE IN CAPITAL STRUCTURE;
o MERGERS, DE-MERGERS, ACQUISITIONS,
DE-LISTINGS, DISPOSALS AND EXPANSION OF BUSINESS AND SUCH OTHER TRANSACTIONS;
o CHANGES IN BOARD OF DIRECTORS OR
KEY MANAGERIAL PERSONNEL; AND
o MATERIAL EVENTS IN ACCORDANCE WITH
THE LISTING REGULATIONS / AGREEMENT.
The SEBI Regulations prohibit the communication of UPSI to any person except as required under law. Further, procuring any person to trade in the securities of any company on the basis of UPSI is also prohibited under SEBI Regulations.
Violations of the SEBI Regulations
subject to Insiders to severe penalties including fines and imprisonment.
Securities
and Exchange Board of India (“SEBI”) through its Gazette Notification dated
January 15, 2015 issued the SEBI (Prohibition of Insider Trading) Regulations,
2015 (“Regulations”) to put in place a framework for prohibition of insider
trading in securities and to strengthen the legal framework thereof. These
Regulations replace the SEBI (Prohibition of Insider Trading) Regulations, 1992
with effect from the 120th day from January 15, 2015
Regulation 9 of the Regulations
requires the Board of Directors of every listed company and market intermediary
to formulate a code of conduct to regulate, monitor and report trading by its
employees and other ‘connected persons’ towards achieving compliance with the
Regulations, adopting minimum standards as set out in Schedule B of the
Regulations, without diluting the provisions of the Regulations in any manner.
Section 195 of the Companies Act,
2013 provided that “No person including any director or key managerial
personnel of a company shall enter into insider trading.
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