Mandatory information

S. Vaidya Nathan

AS FAR as the flow of information from India Inc to the market is concerned, there are two aspects that SEBI, the NSE and the BSE need to attend to expeditiously:

*They must identify the information set for some of the most commonly occurring corporate actions in the context of disclosure. For all corporate actions such as mergers, takeover, de-mergers, buyback, stock-split, rights offers, acquisitions, global development-driven changes, asset sell-offs and deals with closely-held outfits, meaningful information can be identified easily.

This should also provide for changes across industries. Once such a set is identified, it should be made mandatory for companies to disclose the same in a timely manner. This may improve the market's confidence in India Inc rather than subjective and value-driven aspects such as corporate governance, which SEBI proposes to make a part of the Listing Agreement.

*The second aspect is the mode of dissemination of information. Here, SEBI has indicated that it is working on a model on the lines of EDGAR (Electronic Data Gathering and Retrieval System), used with good effect by the Securities and Exchange Commission, US. This is the right way to go.

SEBI has to sort out a few other things too, including the need to ensure that there is some identity tag to segregate information on different corporate actions. At present, the NSE and the BSE put out the information in a haphazard manner.

Ever since the limited review by auditors was introduced, significant announcements tend to get submerged in a deluge of such reports. Much the same is true for personnel-related changes also.

By the judicious use of information technology and the codification to sort information flow, SEBI can ensure that information flows to investors smoothly, and that important ones capture the attention of investors.

SEBI should also ensure that there is only one nodal point for information flow. At present, companies report to various stock exchanges. If you are lucky enough to own stocks listed on the BSE or the NSE, you may find the information flow better. But if your stock is listed on a regional exchange, the odds on getting timely information are quite low.

Even after these things are put in place, SEBI has to go the extra mile to ensure that the information is put to good use. In the US, the information filed with EDGAR is made available at a nominal fee through an online service. And for up to five companies, a free e-mail service is also available.

A set of specialised firms focussing on such areas as insider-selling, buying, buybacks, mergers and remuneration has ensured that the mass of information filed with the SEC is put to good use. This is apart from the close scrutiny by the SEC's team of officials.

SEBI does not have the adequate human resource to ensure such close scrutiny. An alternative would be to make all filings accessible, if necessary, for a fee. This way, the regulator can ensure that there is intense public scrutiny of corporate information. It may be able to focus on surveillance and enforcement _ the weak spots now compared to the strong regulatory framework covering most key areas.

Of course, regulatory requirements alone will not do. The corporate sector must ensure that it complies with the regulations in the right spirit. Mere compliance with the letter of the law would only perpetuate the sketchy information flow prevalent now. For instance, in the aftermath of the Gujarat earthquake, the Housing Development and Finance Corporation (HDFC) put out information that provided investors with a good picture of its exposures. The following information was furnished:

*Of the housing loan portfolio of Rs 12,825.57 crore in the books of the Corporation as on December 31, 2000 the portfolio of loans provided in Gujarat is about Rs 750 crore, or 5.8 per cent of the total loan portfolio.

*The properties financed in such areas as Vadodara, Surat and Bharuch were not affected due to the recent earthquake.

*The loans in Ahmedabad are worth Rs 268 crore, of which Rs 172 crore are loans to individual households, constituting 1.34 per cent of the Corporation's total loan portfolio.

*The Corporation has negligible loan exposure in Bhuj and other affected areas around Bhuj, as it has no office in Bhuj.

*About 10 per cent of the loans provided to the individual households in and around the Ahmedabad region, amounting to around Rs 17 crore, may be affected by the earthquake.

*The affected portfolio of loans in Ahmedabad would, therefore, be 0.13 per cent of the Corporation's total loan portfolio.

Another related aspect SEBI should address (which might get done automatically if it sets up an EDGAR-like system) is to ensure that information flows to all markets. Now, either the NSE or the BSE, or sometimes the regional stock exchanges get information, and there is no single-point reference. Even if SEBI were to introduce an EDGAR-type system, till it stabilises (which may take a couple of years), it could make a temporary regulatory prescription: all companies, irrespective of listing, should file information with the NSE and the BSE.

It should also require that stock exchanges publish this information with date and time, and at the earliest. As long as these systemic issues are left unaddressed, even if the quality of information flow picks up, its utility may be limited.

Pic.: edgar-online.com, the Web site of EDGAR (Electronic Data Gathering and Retrieval System), used with good effect by the Securities and Exchange Commission, US. SEBI has indicated that it is working on a model on the lines of EDGAR.