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Yashika Atul Kotecha, Pursuing LLM from Symbiosis International University.

Unveil the reality- A journey FROM Dereliction of Duty TO Disclosure of Information

When people invest their hard earned money in the share market, they desire that the concerned authority, taking their money, let them know about the use, operation, business conducted and profits earned through their investment. This sharing and disclosure of information with the investor makes him confident with the business performance of the lender and security of his money. Therefore, transparency in the conduct of business by the listed entities is one of the vital principles to achieve trust, attract the genuine investors and increase the creditworthiness of the security market.

The Securities Exchange Board of India (hereinafter referred to as SEBI) is empowered to issue guidelines and/ or regulations, vide Section 11A of the Securities Exchange Board of India Act, 1992; regarding various subjects to secure and maintain the investor’s interest while dealing with the securities in the stock market. SEBI’s disclosure regulations and obligations mandate companies to disclose any material development on a continuous basis. SEBI’s disclosure requirements mandate a company to frame a policy that decides which developments are material—and which aren’t. Material developments also include termination of contracts, which have obviously been affected now.

“People are the ultimate Sovereign”, describes the position and power of people in the democratic country. This principle is no different in the corporate world. The investors are one who are responsible for the growth or for the expose; for the highs and the lows; for making or for the breaking of the share prices in the share bazaar. Hence, they be treated in the same way. Transparency, accountability and access to fair information are not only essential to preserve and sustain the interest of the investors, but there is also an inherent and implied responsibility of the lender of the money. Not only does transparency give us a better understanding of what government is doing, but it encourages those who work for the government to better meet their obligation to us. Freedom of Information and Democratic Accountability are two interrelated tenants of governance. The demand for democratic accountability is largely met by the principal and implementation of the information policy of full disclosure. Lotte Feinberg, aptly stated:

“For democracy to work, citizens must have access to information about what their government is doing and how decisions have been reached”, which holds same water for the investors in the stock markets.

The Satyam Computers Scam (2006- 2008), The Ketan Parekh and Stock Exchange Scam (2001), Harshad Mehta and the Stock Market Scam (1992), Saradha Scam (2003-2011) are among the few eminent cases cited, while talking about the corporate scams making the situation worst and also for urging the necessity of amending and/ or enlarging the scope and laws for the Corporate governance in India. SEBI has constantly been updating the regulations, rules and notifications to curb/ control the ultravirus and unethical activities of the listed entities in India, to maintain the balance of Corporate Governance and smooth business functionings inside the country. The enactment of the SEBI Act, on 4th April, 1992; was with the purpose to provide for the establishment of a Board to protect the interests of investors in securities and promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto”

SEBI, from its inception, has tried its best to formulate the regulations for the transparency and better governance of the listed entities in India. The regulations are mandatory and not in any way in derogation, but are in addition to the Companies Act, 1956.

Corporate governance in the business context refers to the systems of rules, practices, and processes by which companies are governed. In today’s market centric world, where it is necessary to define clear rights, liabilities, powers and functions of any individual, organisation or association to avoid any confusion, conflict and contradictories. Corporate Governance plays an important role in that behalf. It is prominent in demarcating the line of separation between the owners (i.e. the shareholders) and the managers (i.e. the directors), to set out clear boundaries, expectations and outcomes. Corporate Governance creates a system, a structure, and an outline with clear directions and passages, so that there is no scope of misunderstanding, chaos, frauds or scams in the corporate entities.

A good corporate governance system:

  • Ensures that the management of a company considers the best interests of everyone;

  • Helps companies deliver long-term corporate success and economic growth;

  • Maintains the confidence of investors and as a consequence, companies raise capital efficiently and effectively;

  • Has a positive impact on the price of shares as it improves the trust in the market;

  • Improves control over management and information systems (such as security or risk management)

  • Gives guidance to the owners and managers about what are the goals strategy of the company are;

  • Minimizes wastages, corruption, risks, and mismanagement;

  • Helps to create a strong brand reputation;

  • Most importantly – it makes companies more resilient.

The findings of the Judges, in a famous case of Sahara India Real Estate versus Securities & Exchange Board of India. It was keenly observed that the mere filing of the prospectus is not reflective of the intention to make a public offer. The purpose of the issue of the prospectus is to disclose true and correct statements, and it cannot be characterized as an invitation to the public for subscription of shares or debentures. Historical facts also show that fraudulent accounting and non-disclosure of information was the root cause for the collapse of Enron, Barings, World Com, BCCI etc. which put the reforms of corporate governance on the agenda in the United States. India is also not an exception. The most discussed cases in terms of corporate scams like; Harshad Mehta, a Broker, was charged for diverting funds from the Bank to the tune of Rs.4000 crores to stock brokers between 1991-92; Ketan Parekh Securities Scam in the year 2001 in which investors, it was reported, had lost heavily; so also the Banks in the UTI scam 2001, where it was reported that heavy funds were collected from small investors and money was used to fund large business houses and huge amounts were invested in junk bonds;

Satyam Computers Scam of 2008, where it was reported that, over a number of years, Satyam Computer account was manipulated and money was raised through shares. SEBI was established in the year 1988 to promote orderly and healthy growth of the securities market and for investors' protection. SEBI Act, Rules and Regulations also oblige the public companies to provide high degree of protection to the investor’s rights and interests through adequate, accurate and authentic information and disclosure of information on a continuous basis. SEBI Act is a special law, a complete code in itself containing elaborate provisions to protect interests of the investors. Section 32 of the Act says that the provisions of that Act shall be in addition to and not in derogation of the provisions of any other law. Powers and functions of SEBI are dealt with in Chapter IV of the SEBI Act. Section 11 states that, subject to the provisions of the Act, it shall be the duty of SEBI to protect the interests of investors in securities and to promote the development of and to regulate the securities market. SEBI is also duty-bound to prohibit fraudulent and unfair trade practices relating to securities markets, prohibiting insider trading in securities etc.

SUNLIGHT IS THE BEST DISINFECTANT these oft-repeated words by Justice Louis Brandeis refers to the importance of “transparency and openness”. In his famous line about sunlight, Brandeis was just warming up for the pages that followed on which he printed the details of suspect transactions and his proposal to require additional information to be printed in prospectuses.[T]he disclosure must be real . . . To be effective, knowledge of the facts must be actually brought home to the investor, and this can best of done by requiring the facts to be stated in a good, large type. The efficacy and the rationale behind sunlight as a disinfectant is a subject-matter of the field of science, Chandrachud, J. certainly seems to espouse the idea that shedding light on the processes and the goings-on of the court room and making it public in a more effective sense of the phrase will help in furthering the cause of justice. It basically implies that sunlight (i.e. Disclosure requirements) is the best disinfectant (i.e. a means to destroy the corruption and unscrupulousness activities). In other words, it is a Shift from “Dereliction Of Duty to Disclosure of Information”.

With more than 6800 plus companies listed over both the exchanges, and with millions and millions of investors investing their hard earned savings regularly in different securities in the thirst of increment in their monies, it is of utmost importance that, statutory body like SEBI, formulate strict and vigilant controls over the functioning and credit flowing in the listed entities. Disclosure requirements create the trigger in the mind of the managers to perform their best, no matter what, and, on the same hand, it builds trust and gives satisfaction to the investors that they have made the right choice. SEBI in India acts as a last resort to solve the grievances of the innocent investors and also a goblin, which holds the collar of the fraudulent corporate entities.

Developing and amending the Disclosure Requirements by the SEBI, with the changing times, assists in both the ways, i.e., for the investors and for the listed entities. The investors are akin and familiar with the complex workings, and, in the similar parlance, it helps the listed corporate entities to maintain their repute and take their right feet forward. Disclosure Requirements enhances easy investigations in the times of crises along with an opportunity of Internal Self-Assessment for the entities listed as well as for one who invested.

There is no neglecting or ignoring the fact that the citizens of the country contain a high degree of faith and at the same time also have a lot of expectations from the statutory body like SEBI, hence the SEBI Act and the Companies Act are diligently and constantly working in collusion to provide harmony, transparency and good governance to the investors. SEBI mandates the listed entities to disclose all the vital information relating to the incorporation of the listed entities, shareholdings, consumer protection guidelines, upcoming projects, impact of the pandemic on the listed entities, etc.

Mandatory listing of securities in case of offer to public would cast an obligation on the issuers to ensure the transparency of information and other continuing obligations to provide information by means of prospectus and to follow disclosure provisions. Disclosure is the rule, there is no exception. Misleading the public is a serious crime, which may attract civil and criminal liability. Listing of securities depends not upon one’s volition, but on statutory mandate. The absurdity and complexities should be avoided so that disclosure should not stumble. Hence, the concept rightly quoted by Professor Ben-Shahar, “plain English makes it simple.”

Lack of transparency is a dangerous weapon, it enlarges the distance of the investors from the doors of the stock market. Disclosures and corporate governance avoid bizarre behaviour and reduces the scope of conflicts and anonymity. Disclosure is necessary also necessary if it leads to vigilant and educated investors. It is not a denying fact that the Freedom of Information creates consumer satisfaction and motivation. Hence, there is need to move at a fast pace from Dereliction towards Disclosure.