Coming clean on the deal street
Dec 07 2012
Why Sebi must insist on disclosures by listed companies
These deals, however, have also exposed the poor state of corporate governance in Indian enterprises. Unlike companies listed in London or the US, which are forced to make detailed disclosures on any material transaction like a merger or acquisition event even before it is concluded or a deal signed, companies in India often get away with not disclosing material things such as swings in production and sales that are at a variance with past trends or being approached for M&A transaction or approaching another firm for a similar deal.
Indian firms justify this by saying that premature disclosure of sensitive information could scupper a deal, but these very same firms when listed on stock exchanges abroad, manage to make detailed disclosures which they are loathe to make to their minority shareholders at home. As if this shoddy attitude of firms to minority shareholders in their home market was not enough, the capital markets regulator Securities and Exchange Board of India (Sebi) too stands by silently as companies make jest of their legal obligation to disclose any material information that may have a bearing on the price of the scrip.
Take the case of United Spirits which, on September 3, told BSE: “With reference to the news item appearing in a leading financial daily titled “Diageo may pay Rs 3,000 crore for up to 27 per cent stake in United Spirits”, United Spirits has clarified to BSE that: The news item forwarded contains speculative information and it would not be appropriate for us to comment on market rumours.” But on September 25, under pressure from London listed Diageo plc, USL along with Diageo said, “United Spirits and Diageo plc confirm that Diageo plc is in discussion with United Spirits and United Breweries (Holdings) in respect of possible transactions for Diageo plc to acquire an interest in United Spirits. However, there is no certainty that these discussions will lead to a transaction.”
Sebi’s willingness to turn a Nelson’s eye to such brazen shirking of responsibility to disclose by firms, aids and abets a false market in securities and is tantamount to encouraging insider trading. Companies that withhold such material information broadly belong to two categories. The first are those that say they cannot comment of speculation or say that no transaction requiring shareholder approval has been signed or approved by the board of directors. Such statements are a bunch of half-truths that, by not revealing the true picture, allow a select group of people who have access to the dealmakers and inside information to profit at the expense of small public shareholders who lack such connections.
Worse still, are those companies, that actually deny such developments and say there is no truth in the matter or that reports are factually incorrect and then within a short time of such denial, go ahead and announce they have concluded a deal. Compared with the first group of companies, they are active parties in aiding and abetting the creation of a false market in securities.
Unfortunately, while Sebi has been closely following up incidents of insider sale and purchase of shares ahead of any material announcement that fundamentally alters the company’s fortunes, it has thus far been loathe to even admonish companies that deliberately lie to the public.
The regulator could, perhaps, start by defining the term ‘material’ information. In doing so, it can draw a leaf out of the rules on such disclosure adopted by firms listed in London or the New York Stock Exchange, for that matter. Then it needs to set down stiff penalties that will pinch managements and firms that aim to deliberately mislead the investing public, who offer their hard earned savings as risk capital to these enterprises. Only the credible threat of being brought to task will bring about a behavioural change in the callous attitude towards minority shareholders.
Failure to act now runs the risk of the cancer contaminating the governance and ethical standing of India’s stock markets.