5.3 Disclosure Standards

Disclosure standards in the primary market have seen a gradual but steady improvement.
However, the full benefits of this have not been realised because only a small fraction of
investors receive the full prospectus. The current regulations require companies to provide an
abridged prospectus to all investors, while the full prospectus is available on demand. In
practice the on-demand availability of the full prospectus is geographically limited and is
often restricted to the larger more sophisticated investors. Regulators have sought to deal with
this problem by requiring more information to be reproduced in the abridged offer document,
but this leads to information being crammed in fine print on one huge sheet of paper. It
appears that the abridged prospectus has its origins in the era of price controls when issues
were often oversubscribed a hundred or even a thousand times. At that time, it could be
legitimately argued that it would be prohibitively expensive to provide every applicant with
an unabridged prospectus. In today’s vastly altered scenario, it should be possible for market
intermediaries to ensure that every applicant has received a copy of the complete prospectus
accompanied by a complete set of financial statements. It is necessary to move in this
direction. One possibility would be a regulation that gives any applicant who has not received
the full prospectus the right to withdraw his application at any time before allotment. This
would incentives the issuer to ensure delivery of the full prospectus to every applicant.
Even more than in the offer document, it is in the area of continuing disclosures that the
greatest progress has been made. Five key accounting standards, which have become
effective from April 1, 2001, redress the most glaring inadequacies that existed previously in
Indian accounting practices. These include the critical areas of consolidation of accounts of
subsidiaries, deferred tax accounting and related party disclosures. There are still a number of
areas where Indian accounting standards lag behind international best practices, but these are
less important than the ones that have been redressed. Moreover, there is reason to hope that
these deficiencies will also be removed over a period of time. At the same time, the
accounting scandals surrounding the bankruptcy of Enron Corp in the United States have
heightened the sense of urgency of adopting global best practices in accounting standards.
There has also been some progress in requiring companies to make disclosures to the stock
exchanges in respect of any material developments like mergers, acquisitions, corporate
actions, strategic decisions and other events that have a significant impact on the share price.
However, both the content and the timeliness of these disclosures leave much to be desired.
There have been some initiatives to make effective use of information technology in the
collection and dissemination of corporate disclosures (Securities and Exchange Board of
India, 2000) on the lines of the EDGAR system in the United States. However, these have yet
to move beyond the stage of conceptualisation.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.