Integrated disclosure system needs further clarification

On 21 January 2008, the Securities and Exchange Board of India (SEBI) published a consultation paper on the creation of an integrated disclosure system for Indian public listed companies. The system would enable issuers to supply and investors to access disclosure on a single platform instead of the multiple reporting regimes that exist presently.

It would also remove the current disparity between the quality of disclosure between prospectuses and the ongoing disclosures made in compliance with Indian listing requirements. The consultation paper focuses on a number of key issues, including some in which greater clarity would be welcome.

Materiality

A principal recommendation in the consultation paper is to remove from an integrated disclosure system irrelevant or duplicative information to facilitate disclosure of material information. Greater clarity is needed, however, on how material information is identified.

In the United States, for example, bright-line quantitative tests exist to determine the materiality of frequently encountered items including changes in shareholding levels, amounts claimed in legal proceedings and the significance of proposed business combinations.

These tests are supplemented by qualitative tests, including of the likelihood that a reasonable investor would consider the information to have “altered the total mix” of the available information. Together, these tests provide a framework for issuers and other market participants to assess and identify material information.

Recent reforms to US securities laws have attempted to place greater responsibility on companies to determine and disclose material information. This requires management to consider more critically a company’s performance and prospects.

We suggest that for an integrated disclosure system to work effectively, companies must shift their perspectives away from disclosure for the sake of mere regulatory compliance towards a more thoughtful analysis of relevant and material information. This is more likely to result in robust disclosure beneficial to both issuers and investors.

Dissemination

The consultation paper emphasizes the efficiencies and cost savings that would result from the single platform made possible by an integrated disclosure regime.

However, the consultation paper does not address procedures for collecting and disseminating information. In the US, the Securities and Exchange Commission (SEC) maintains electronic filing systems which enable issuers to file and investors to access disclosure, including registration statements and related prospectuses, annual and quarterly reports and notifications of material business developments.

Electronic filing systems are available to Indian companies but they are maintained by different entities and require different types of information. For example, while prospectuses are filed with SEBI and company registrars, announcements of operating results and other business developments are filed directly with stock exchanges.

Reconciling these differing requirements is time consuming. As an interim step, it may be useful to consider including on SEBI’s website links to stock exchange and other relevant websites enabling investors to more easily access company information.

Liability

The consultation paper recommends not diluting issuer or underwriter liability under an integrated disclosure system. A better understanding is needed of the liability regime likely to apply under an integrated disclosure system. For example, Indian company law already imposes liability for misstatements in a prospectus and it is worth considering whether this can be broadened to cover misstatements in continuous disclosure documents.

It would also be helpful to understand the powers that will be available to the entity supervising an integrated disclosure system in cases of misleading or otherwise deficient disclosure. SEBI has the ability to review and approve prospectuses but it is unclear who would have similar responsibilities with other types of disclosure. It also is unclear if judicial proceedings ought to be supplemented with other types of enforcement to penalize issuers who do not comply. We suggest that evolving a liability and enforcement regime that tracks the underlying purposes of an integrated disclosure system is critical.

The SEBI consultation paper marks the continued efforts of SEBI to strengthen disclosure and reporting norms in India. These efforts, if successful, are likely to improve Indian companies’ access to the international capital markets and assist efficient pricing of listed securities.

Arun Balasubramanian is a partner at Linklaters. His practice is focused on India-related capital markets matters, and his recent transactions include the US$2.2 billion IPO of DLF, the US$1.9 billion IPO of Cairn India, the US$700 million AIM listing of Unitech Corporate Parks and GDR and QIP offerings for a number of issuers His other transactions include the IPOs of TCS, NTPC and IDFC and the ONGC and IPCL disinvestments.