In addition to the matters discussed in Parts I and II of this series, the Asian Corporate Governance Association (ACGA) White Paper on Corporate Governance in India, which was published earlier this year, also discussed the quality of corporate disclosures, in particular financial disclosures, by Indian companies.  It concluded that while large companies have an excellent reputation when it comes to reporting financials, the quality of such disclosures across companies is mixed.  More specifically, it noted that the scope, timeliness and availability of financial disclosures has much room for improvement. 

According to the ACGA, financial disclosures by Indian companies are often limited.  For instance, most quarterly reports contain only basic P&L numbers without any accompanying balance sheet or cash flow statement.  Balance sheets, required to be published only yearly, lack critical information that may be disclosed in other jurisdictions.  By way of example, the ACGA compared the balance sheet of an Indian company to that of its U.S. counterpart and noted that, inter alia, the Indian company (i) did not include a “cash and cash equivalents” figure under current assets, (ii) did not produce an estimate for intangible assets, and (iii) contained information on current liabilities that was noticeably less detailed.  In addition, publication of annual reports in India can be slow and investors may wait up to six months for audited results.  Even after they are published, accessing financial reports can be quite difficult.  Until recently, information could be accessed either through the EDIFAR (which SEBI recently discontinued) or the CorpFiling system.  However, both systems were riddled with problems and failed to live up to their expectations.  To complicate matters, websites of companies are often poorly designed and lack sufficient information.  It is apparent that the accessibility of disclosures has not kept pace with the IT revolution that has shaped India in recent years, a fact noted by the ACGA. 

India is moving in the right direction when it comes to addressing such issues.  In late 2009, SEBI announced that it would amend the Listing Agreement in certain respects.  Among other things, the disclosure of balance sheets (including audited figures or non-audited figures with limited review) would be required on a half-yearly basis.  However, much more needs to be done to improve the quality and availability of financial disclosures and afford both domestic and foreign investors the transparency that is currently lacking. 

To this end, recommendations made by the ACGA should be given serious consideration.  The ACGA recommends that (i) the format of quarterly P&L statements be revised to require additional information, (ii) companies be encouraged to provide both cash flow statements and balance sheets with their quarterly reports, (iii) SEBI consult with investors regarding the format and content of balance sheets, (iv) a central repository be created for company information, and (v) companies use their websites more effectively to provide information to shareholders.  With respect to recommendation (iv), the discontinuation of EDIFAR appears to be a step in the right direction.  However, it remains to be seen whether the CorpFiling system will be made more comprehensive and user-friendly. 

In 2002, in a speech entitled, “Restoring Investor Confidence: The Key is Disclosure,” Peter K. Fisher, the Under Secretary of the U.S. Treasury at the time made several statements about the U.S. market that are just as applicable now to India.  He noted that investors have a fundamental right to company information.  In particular, “[i]nvestors should know two kinds of facts that corporate insiders know: first, the handful of key indicators of business value that management actually uses to assess the company’s current performance and near-term prospects, and second, the company’s real asset-liability ratio – the fundamental financial information about all of the company’s contractually-obligated assets and liabilities, whether on- or off-balance sheet.”

It is inevitable that calls for further reform in India will be met with some resistance.  Companies might argue that additional disclosure requirements are overly burdensome.  However, basic information of the sort that investors need is available to and relied upon by management on a regular basis and could easily be provided.  Otherwise, as Fisher noted, so long as “fundamental information asymmetries are allowed to persist, whole armies of independent directors, accountants, auditors, and regulators will fail to align the interests of insiders and investors.”  

This is the third of a series of three articles on corporate governance. Part I and II of the series can be found here and here.

Shubham 'Shubi' Arora is a Texas based Attorney working for Akin Gump Strauss Hauer & Feld LLP. 

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