Since the matter of pledged shares being sold in the market place has come to the fore recently, it has been observed there are several instances where companies have pledged their shares for raising finance. Prime amongst them are real estate companies. In this regard CS analysts feel all other disclosure requirements that apply to insider purchase and sell activities should be extended to pledging and loaning of shares.
Any ownership change in even unlisted subsidiary companies must be announced on the day of the transaction rather than annually as is the practice now. The market regulator Securities & Exchange Board of India (Sebi) is also looking into this matter and is expected to come out with guidelines soon, said an executive of Sebi. However, companies should ideally instantly disclose any financial market transaction over a certain amount, think CS analysts.
We urge regulators, including the Reserve Bank of India (RBI), not to tweak rules for better reported profits. The market, we reiterate, is sophisticated enough to understand non-recurring losses says the report. The RBI has recently changed the norms for recognising non-performing assets in the light of the economic slowdown.
Banks disclosure regarding total loans by business groups and by industry could be improved. Quarterly detailed break-down of NPLs by industry will not only help investors analyse banks better, but also warn them of looming losses elsewhere.
Those following percentage of completion for revenues should be made to declare cash flow and revenue by projects. Detailed split should be mandated on every major land holding, their ownership and intra-group transactions. Threshold limit for revenue recognition should be standardised. Companies declaring order book should get them audited.
CS requests the Department of Company Affairs (DCA) to stop giving exemptions for publishing of subsidiary accounts, at least electronically. The DCA should also reduce exemptions for other details. Rather, rules for disclosure on sales, margins etc by business units needs tightening.
Regulations related to any preferred warrant and option issuances also needs a review. We feel too many companies do not sufficiently disclose what happens to the fees on these instruments where they expire out of money. In the end, there should be not just be higher civil penalties but severe criminal penalties for auditors, directors and others involved in aiding any misreported or illegal intra-group transactions. The CS team has urged the Institute of Chartered Accountants of India (ICAI) to severely reduce the permitted items that companies can book direct in balance sheets. Most mark-to-market losses and impairment charges should flow through P&L statements. We believe that investors are sophisticated enough to distinguish the non-recurring losses. In the near term, companies should be made to declare all un-booked mark-to-market losses every quarter the report added.
Regulators should make quarterly publication of minimum balance sheet details mandatory. This should be possible given the technology tools available now. Regulators should reduce filing time for annual balance sheets from six to maximum three-four months. At the same time, regulators should make consolidated account reporting mandatory for quarterly results. In the least, income of subsidiaries in the standalone must be mandated to be included using the equity accounting rather than the dividend based methods. This would be in line with practices globally and materially reduce the gap between standalone and consolidated profit numbers. Also, if only consolidated results are produced, the impact of inflated revenues due to sales to related parties will be lower says the report.
Credit Suisse suggests that listed companies should be made to increase disclosure for any material change in the reported tax rate compared with the recent trend. Companies should also declare taxes paid under major categories like capital gains, corporate tax and surcharge.
Regulations loan repayment and pension funding need significant tightening to prevent abuses. Disclosures should also be tightened for off-balance sheet debt and those through structured transactions. Convertible related reporting in balance sheet, and the abuse of contingent liabilities, needs rectification, the report adds.