Disclosure challenges

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: As the stock market rises and the general sentiment burgeons, there is a rush to collect monies from the liquidity overhang at the moment. With more than Rs 15,000 crore being raised from initial public offerings and around Rs 21,500 crore from the qualified institutional placement route, the scene is buzzing.

However, at the same time, some developments are likely to challenge the manner in which business is conducted. For one, there is a need for transparency and disclosures and finally sound governance. In fact, the need has turned into a demand.

First of all, there will have to be a switch over to the International Financial Reporting System (IFRS). It would require the management to align the accounting and reporting norms in line with international practices. It is to be implemented by 2011. However, closer home, the Securities and Exchange Board of India’s (Sebi) Committee on Disclosures and Accounting Standards or SCODA has come out with a discussion paper on several factors to make disclosures more transparent and investor friendly.

Its primary recommendations include having listed firms to declare their balance sheet details on a half-yearly basis, the rotation of statutory auditors and the reduction of the time-frame for declaring annual results. The recommendations even provide for the chief financial officer (CFO) to be appointed after several deliberations with the audit committee.

Recently, Sebi chairman CB Bhave mentioned at an event that the regulator will also be looking closely at companies that do not disclose information to independent research agencies. A Crisil report also stated that of the

3,500 actively traded companies only 150 have been covered by research outfits. Hence, the need for transparency and disclosures is bound to rise.

Cost vs benefits

As the requirement for more frequent and extra information rises, so would be the cost of compliance. And, it’s likely to have an impact as well. After the implementation of the Sarbanes Oxley Act in 2002 in the US, which required stringent disclosure requirements, the cost of compliance went up substantially and many companies wanted to migrate their listing overseas to London and other places that had less stringent norms.