In the current regulatory regime, Indian investors get to see the balance sheet of their companies only once a year, while they get to see the profit and loss information once a quarter. In the context of the current crisis, we need to change this urgently because the investor today wants to see the balance sheet as much or even more than the profit and loss data.
For example, if an Indian real estate company or non bank finance company were today to give its investors the choice between receiving a quarterly balance sheet or a quarterly profit and loss account, many investors would choose to get the balance sheet. Investors are currently more concerned about declining liquidity and solvency than they are about declining profitability. Indeed, the maturity and currency composition of the debt and the debt covenants are very critical pieces of information in assessing the survival prospects of these companies.
Another problem is that many companies have adopted the ugly practice of taking foreign exchange losses to the balance sheet in defiance of the accounting standards by taking refuge in some anachronistic arguments of doubtful legality. This means that the balance sheet is essential even to understand the true profitability of companies.
In the 1990s, when Sebi mandated quarterly disclosures of abridged profit and loss data, it was a huge step forward. It moved the Indian market to higher levels of informational efficiency and greatly improved price discovery. It would also be fair to say that quarterly disclosures have done more to reduce insider trading in India than the insider trading regulations themselves.
The time has now come to build on this and take it forward to its logical conclusion. In the 1990s, the only feasible mode of disclosure was a newspaper advertisement, and cost considerations severely constrained the amount of disclosure that could be mandated. The regulators therefore chose a minimal set of line items (all from the profit and loss account) for the quarterly disclosure.
Today online disclosure through the website of the stock exchange has become the primary means of information dissemination. The stock exchange data is then republished by several commercial and media web sites as well as by many online trading platforms. The online medium is not subject to the severe cost constraints that restricted the amount of information that could be published through newspaper advertisements. It is now feasible to mandate comprehensive quarterly disclosure of information.
In the US, Form 10K for annual disclosure and Form 10Q for quarterly disclosure are almost identical in terms of the basic financial data (income statement, balance sheet, cash flows, notes and other disclosures). India should also move to the same system where the quarterly disclosure contains all the information required for annual disclosures under Schedule VI of the Companies Act as well as the listing agreement.
Under normal conditions, this disclosure regime would be phased in gradually after extensive consultations and debate. But these are not ordinary times. The ongoing crisis puts a premium on the availability of information. I believe therefore that Sebi should take extraordinary measures to implement this on an emergency basis.
I propose that the top 500 companies (say the BSE 500) should be required to disclose the complete financial statements (balance sheet, profit and loss account and cash flow statement along with notes and schedules) through the stock exchange website beginning with the October-December 2008 quarter in January 2009. There is nothing to be done in the January-March quarter because it is coterminous with the year end. Therefore the remaining companies should be asked to disclose the extra information from the April-June 2009 quarter.
This disclosure requirement should not pose any problems for the companies. No sensible accountant prepares a profit and loss account without preparing the balance sheet and so my proposal would only require the companies to disclose what they have already prepared internally.
The stock exchanges may need software changes to upload all this extra information to their website. But if only 500 companies are subject to this regime in January 2009, it is quite feasible to upload the information manually in the worst case. The exchanges should undertake the extra effort involved in doing this while making software changes to allow them to handle everything automatically from July 2009.
On a related note, I also think RBI should require banks and financial institutions to disclose vastly more information regarding non performing assets and valuation of financial assets. Accelerated adoption of accounting standard AS 30 for financial instruments should also be considered. Current practices allow banks and finance companies to hide losses by improperly parking assets in the held to maturity category. This should be stopped. At the very least, voluntary early adoption of AS 30 should be encouraged. The market can be counted upon to penalise those companies that choose not to do so.
—The author is a professor of finance at IIM Ahmedabad, working mainly in the field of financial markets and their regulation