Sebi norms on diclosure: Why monitoring by exchanges is not enough

By Sajeet Manghat

Market regulator Securities and Exchange Board of India (Sebi) has tightened its hold on Stock Exchanges to ensure better compliance and monitoring under the Listing Agreements by the exchanges.

Companies are required to enter into a listing agreement i.e. a undertaking to adhere to corporate governance and reporting standards. Though these standards have been in existence for sometime, its the absence of continuous monitoring that has led to fall in disclosure standards.

[caption id=“attachment_1164429” align=“alignright” width=“380”]  Sebi. IBNLive.[/caption]

Sebi’s new circular ensures that stock exchanges not only monitor all compliances but also compare them with previous quarters. With this in view, it has asked stock exchanges to set up monitoring cells within the exchange. The regulator has provided broad framework for guidelines, with indicative areas where stock exchanges will be required to bring in new framework or guidelines. It wants framework to be tightened with respect to Clause 35, which handles shareholding disclosures.

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The stock exchanges are required to monitor the shareholding, the changes in the promoter shareholding and their names, pledged shares on a quarterly basis. And aberration or non compliance should be reported using an ‘Exception Report’ which should be submitted to Sebi within 45 days of closing of the quarter. Stock exchanges are also required to ensure better compliance of Clause 41 an Clause 49, which deals with corporate governance standards of board and the companies. The regulator wants stock exchange to seek additional information if they are not satisfied, this should be sought within 2 days of the filing by the companies and the latter is required to ensure the information is provided within 5 days.

A non-compliance empowers stock exchange to fine companies for delay and further initiate SOP or standard operating procedure to take regulatory action including shifting of the scrip to Z category. Sebi also wants the exchanges to closely monitor compliance of Clause 36 - with respect to information provided by the listed companies. Exchanges have been empowered to seek further information which they feel need to be disclosed and is material in nature based on reports appearing in the media. And though no specific timeline has been suggested, stock exchanges will be require to adhere to new guidelines at the earliest.

Not Adequate: Sebi’s move to tighten norms is a step in the right direction, but it too general in nature.

Sebi has provided broad framework to exchanges and indicative areas but no specific guidelines. The absence of which will lead to non-standardised listing agreement rules at different exchanges. One may argue, exchanges will compete to project themselves as having high standards, but for companies it would mean opting for designated exchange with relatively less stringent standards.

Sebi should have used this opportunity to standardise listing agreement across exchanges. The window allowed to stock exchange to bring out their own guidelines will make the compliance standards discretionary. As a result quality of disclosure will differ from exchange to exchange.

There is a need to ensure compliance and reporting standards are uniform across exchanges so that companies don’t get away with legally worded generic statements that leave the exchange and the investors with no additional information. And finally the compliance and monitoring costs for the exchanges will jump many fold, given that they will be required to set up a monitoring cell and submit ‘Exception Reports’ on weekly or quarterly basis as required by the regulator.

Sajeet Manghat is a reporter at CNBC-TV18