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Corporate Disclosure and Investor Protection

Corporate Disclosure and Investor Protection

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Published by: Matharu Knowlittle on Apr 20, 2013
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06/15/2014

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By: Ankita Aggarwal(14053) Anu Bumra (14054) Avneet Rana (14056

)

Meaning The act of releasing all RELEVANT information pertaining to a company that may influence an investment decision Good or bad

operating results  governance structure and policies  the board of directors. . their remuneration  significant foreseeable risk factors  material issues regarding employees and other stakeholders.It includes disclosure about:  company objective  financial details. etc.

Corporate Disclosure Transparency .

consistent and appropriate manner. to disclose information in a timely. .  to broadly disseminate Material Information in accordance with all applicable legal and regulatory requirements.  to protect and prevent the improper use or disclosure of Material Information and Company Information.

 Information about performance during the year. is not detailed in a satisfactory manner  Information about intra-group and subsidiary company transactions  Company’s ongoing and future capital expenditure  Problems confronting the industry or the company  Overstatement of profits . or prospects and potential problems.

 Better support at stock exchanges  Attracts more investors  Fulfill the demands of labour unions who are interested in the security and welfare of the employees  Information provided to government to comply with legal regulations  Fulfill the demand of society at large .

 Since it is an audited document. the state of company’s affairs and salient features of its working results for the year covered. valuable source of information to the shareholders and other users  The purpose is to place before the shareholders. it provides authenticated information . including future prospects.

technology absorption. affecting the financial position of the company which have occurred between the end of the financial year of the company and the date of report. conservation of energy.  . particulars in respect of certain employees. if any. foreign exchange earnings and outgo. The report should cover the following: Material changes and commitments. changes which have been occurred during the financial year in the nature of company’s business in the company’s subsidiaries. Some information required to be included in the Board’s report may not be included and such non-disclosure maybe defended on the plea that the disclosure thereof would be harmful to the business of the company or any of its subsidiaries.

. The report states that the half yearly and annual results of all significant companies are carefully examined and analyzed. The working group has recognized that the quality of financial disclosures is fundamental to corporate transparency and that it offers long term shareholders support. Costs incurred if any in using the services of a group resources company must be clearly and separately disclosed in the financial statement of the user company.WORKING GROUP : In august 1996. A tabular form containing details of each director’s remuneration and commission should form a part of the director’s report in addition to the usual practice of having it in a note to the profit and loss account. a working group was constituted. 2. FINANCIAL DISCLOSURES RECOMMENDED BY THE WORKING GROUP ON THE COMPANIES ACT : 1.

This disclosure would be in the balance sheet of the company as a separate note forming a part of accounts. 4. Where a company has raised funds from the public by issuing shares. and where are the residual funds. namely.3. This should encompass :  the share in total turnover  review of operations during the year in question  market conditions  Future prospects For the present. invested and in what form. A listed public limited company must give certain key information on the division of business segment as a part of director’s report in the annual report. debenture or other securities. if any. how much has been utilised in the projects up to the end of the financial year. it would have to give a separate statements showing the end use of such funds. the cut-off may be 10 percent of the total turnover. . 5. how much was raised versus the stated and actual project cost. This disclosure on debt exposure of the company should be strengthened.

NON FINANCIAL DISCLOSURES RECOMMENDED BY THE WORKING GROUP ON THE COMPANIES ACT : 1. Comprehensive report on the relatives of directors-either as employee or board member-to be an integral part of the director’s report of all public limited companies 2. medical assistance and education for family members and be available only to full time directors. Moreover such loans should be limited to only three categories – housing . Similarly . The existence of such a register and the fact that is open for inspection by any shareholder of the company should be explicitly stated in the notice of the AGM of all public limited companies. 4. The loans should not exceed five times the annual remuneration of the whole time directors and would need shareholders’ approval at a general meeting. Companies have to maintain a register which enclose interest of directors in any contract arrangements of company. . Details of loans to directors should be disclosed as an annex to the director’s report in addition to being a part of the schedules of financial statements. the existence of the director’s shareholding register and the fact that it can be inspected by members in any AGM should be explicitly stated in the notice of the AGM of all public limited companies. 3.

The task force report has recommended that though the disclosures recommended by the Working Group in its report as well as in the modified Schedule VI that would accompany the Draft Bill go far beyond existing levels. High and low monthly averages of share prices in a major Stock Exchange where the company is listed for the reporting year. particularly (i) a model of voluntary disclosure in the current context. much more needs to be done outside the framework of law. Greater detail on business segments up to 10% of turnover. . review of operations. analysis of markets and future prospects. giving share in sales revenue. 2. Under “Additional Shareholder’s Information”. The report on CG released by the CII also has elaborately dealt with the desirable disclosure by companies. listed companies should give data on: 1. and (ii)consolidation of accounts.

If a company chooses to voluntarily consolidate. then the definition of “group” should include the parent company and its subsidiaries (where the reporting company owns over 50% of the voting stake). 2.   . not mandatory. 1. There were two reasons: (i) first. and (ii) the public sector term lending institutions do not allow leveraging on the basis of group assets. it should not be necessary to annex the accounts of its subsidiary companies under section 212 of the Companies Act. The Working Group on the Companies Act has recommended that consolidation should be optional. that the Income Tax Department does not accept the concept of group accounts for tax purposes— and the Report of the Working Group on the Income Tax Act does not suggest any difference. However. if a company consolidates.

Apart from the general review of the adequacy of the existing disclosure requirements the committee was given the task to address itself to the matters relating to the basis for pricing of issues.Malegam to review the existing disclosure requirements in offer documents and recommend additions and modifications thereof.. material facts relating to pending litigations against issuers etc . For appropriate disclosure. performance of group companies.H. . the adequacy and relevance of financial projections. Y. This step was taken in the interests of investors and to promote an orderly development of capital market.   SEBI during March 1995 constituted a committee under the chairmanship of Mr.

An unlisted company can freely price its securities provided it has shown net profit in the immediately preceding three years subject to fulfilling the existing disclosure norms. SEBI has modified the entry barrier requirement for unlisted companies and prescribed payment of dividend in the immediately preceding three years instead of the present stipulation of dividend payment in at least three out of the preceding five years. 6. 4. 5.  1. The promoter’s contribution has now been made uniform at 20 percent irrespective of the issue size. A listed company will be required to meet the entry norm only if the post issue net worth becomes more than five times the preissue net worth. The significant amendments made in the existing provisions are : Unlisted companies required to make a dividend payment in the immediately preceding three years o access the primary market. 2. SEBI has since approved the draft compendium of SEBI’s disclosure and investor protection guidelines. In a recent board meeting held in august 1997. 3. Only such securities can be offered for promoter’s contribution for which a specific written consent has been obtained from the shareholders for lock – in. Companies would be required to make their partly paid up shares fully paid up of forfeit the same before making a public/right issue. Appointment of registrar for rights issue made mandatory .

Investor protection is one of the most important elements of a thriving securities market or other financial investment institution. affairs of the company that they have invested in and the like. Investor protection focuses on making sure that investors are fully informed about their purchases. transactions. investor protection is the effort to make sure that those who invest their money in regulated financial products are not defrauded by brokers or other parties . Simply put.

  . merchant bankers and other intermediaries so that they become competitive and professional. namely.the primary function of which is the protection of the investors’ interest and the healthy development of Indian financial markets. Ensuring the fair practices by the issuers of securities. so that there is a steady flow of savings into the Capital Market. 1999 and 2002. The Securities and Exchange Board of India Act. 1992 (the SEBI Act) was amended in the years 1995. OBJECTIVES OF SEBI  Investor protection. companies so that they can raise resources at least cost. Promotion of efficient services by brokers.

call for information from any bank / any authority / corporation / agencies in respect of any transaction in securities which is under investigation or inquiry by SEBI performing such functions and exercising such powers under the Securities Contracts (Regulation) Act. 1956 (SCRA) conducting research .      regulating substantial acquisition of shares and takeover of companies promoting investors’ education and training of intermediaries of securities markets Carry out inspection/ audits of the SEs / intermediaries etc.

including mutual funds prohibiting fraudulent and unfair trade practices relating to securities markets prohibiting insider trading in securities .      Section 11(2) of the SEBI Act contains measures available with SEBI to implement the legislated desire of investor protection. sub-brokers. registering and regulating the working of venture capital funds and collective investment schemes. The measures available with SEBI include the following: regulating the business in Stock Exchanges (SEs) and any other securities markets registering and regulating the working of intermediaries like stock brokers.

It’s the issuer who pays them and consequently. for the purpose of streamlining work of the credit rating industry as well as to safeguard the interest of the investors.  . Rating agencies are retained by the issuer and not by the investing public.  SEBI plans to bring all the credit rating companies under its direct control to bring about consistency and credibility. they are under great pressure to give a good rating.  Rating is only an informed professional opinion.SEBI regulates the credit rating agencies.

It will offer benefits to the investors in the form of greater accuracy and safety in share transactions as well as improved liquidity of secondary market The problem of share transfers and delays taking place in the settlement process in stock exchanges can be overcome with scheme of ‘depositor’. .   The introduction of electronic book entry transfer in a depository will eliminate the need for physical movement of securities. Investor can either retain their share certificate or convert it into a depository receipt. which is a significant bottleneck.

The Dave Committee report on infrastructure for capital markets was prepared with the help of Association of Merchant Bankers (AMBI) and was released in July 1997. the Banking Regulation Act. the Indian Evidence Act-1872 and the Indian Telegraph Act1885. Debt Recovery Act. FERA 1973.  The report refers to the SEBI Act-1992.  . SCRA 1956. the Indian Penal Code. Benami Prohibition Act. Arbitration and Conciliation Act-1996. Depositories Act.

 The committee wants SEBI to define norms governing the disclosure of information by companies. The Committee has recommended that a comprehensive. These norms should indicate what. integrated and harmonized redrafting effort should be undertaken for each of these laws. when and how information must be disclosed. .

. ‘Investor education and protection fund’ has been set up for educating investors towards a better understanding of company balance sheets and accounting norms. which have remained unclaimed for a period of seven years  The fund will also use grants and donations of government. companies and institutions.  The proposed fund would be financed through unclaimed dividends. debentures and interests accrued on them. matured deposits.

Thank You .

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