One of our pet peeves has been the considerable disparity in the primary market disclosure norms where SEBI requires extensive disclosures when a company undertakes a public offering and in the secondary market disclosures norms where companies have to make continuous disclosures post-listing. The secondary market disclosure norms are considerably weaker than those for the primary markets.
Hearteningly, having been cognisant of this disparity, SEBI has been progressively taking steps to uplift disclosure requirements in the secondary markets. Disclosures in the secondary markets are of two kinds. One is continuous disclosures such as quarterly reporting and annual reporting, and the other is episodic disclosures whereby the company is required to release information to the markets immediately upon the occurrence of any material event that may have an impact on its stock price. Earlier this year, SEBI issued a proposal to increase continuous disclosures by requiring companies to issued an annual information memorandum on a consolidated basis. This takes into account integrated disclosure methods of the kind adopted in other jurisdictions such as the US.
Now, SEBI has undertaken measures to strengthen the episodic disclosure requirement. In a "Discussion Paper on review of clause 36 and related clauses of the Equity Listing Agreement", it vastly expands the scope of episodic disclosures. The discussion paper sets out the underlying philosophy behind this action – to increase market efficiency by enhancing the timeliness and adequacy of the disclosures. In this existing avatar, clause 36 sets out a few circumstances when a listed company must make disclosure to the stock exchanges. They are not only limited to the most significant events, but they also leave a lot of flexibility to the companies to determine whether the events are material enough to merit disclosure. SEBI now proposes to have an elaborate list of events and circumstances when disclosure becomes mandatory. The idea appears to be to limit the discretion in the hands of companies and to (nearly) exhaustively list out situations for disclosures. This would bring about greater certainty and predictability both for companies and investors. Readers’ attention is drawn to the extensive listing of such events that SEBI has attempted in the discussion paper.
While there could be issues emanating from the technical details of the discussion paper (such as an attempted definition of materiality), on the whole this move is welcome and would aid in enhancing market efficiency as well as minimising the disparity between primary and secondary market disclosures.