Better disclosure norms will benefit shareholders


Director, Banyan Tree Advisors

December 20, 2011

Better disclosure norms will give shareholders equal access bottomline-impacting information, and without having to read between the lines.

IN HIS book One Up On Wall Street, legendary fund manager Peter Lynch, who has averaged over 35 per cent return on investments for over 10 years and consistently outperformed the market, offers interesting insights into his working style. The man who managed the Magellan Fund–the single largest mutual fund, with over $50 billion in assets (that’s about thrice as big as UTI)–says he spoke with the top managements of numerous companies every day and made factory visits several times a year.

Inspired, I called a company I was invested in, but I barely got a minute with the secretary before the phone was banged down on me. As someone who held just 100 shares, I hadn’t a chance of getting through to the management, unlike top fund managers who hold large stakes and have easy access.

The spirit of full disclosure addresses precisely this issue: is it fair that fund managers and those close to the management have better access to information than small shareholders like you and I?

Any attempt to ensure a level playing field must address three issues:

1. relevant information must be easily available to all investors;

2. information that significantly affects a company’s financials (and, in turn, the stock price) should be made public without delay;

3. companies must standardise the accounting information they furnish, so that annual reports of companies can be compared using the same yardstick.

In recent years, the Indian accounting system has done much to ensure fair disclosure. The stipulation that companies must announce quarterly result is a significant step. Other recent moves–the consolidation of accounts and stipulations governing treatment of deferred taxes–should also bridge the disclosure gap. But much more needs to be done.

Access to information. In the US, all companies have mandatorily to file certain information with the SEC (the Securities Exchange Commission, similar to our Sebi) and that information is put out on a government-maintained website. Anyone who wants to check the latest quarterly financials or the annual report or whatever merely has to log on to or

Moves are afoot to get rid of inequities that exist at other levels too. There are times when companies meet analysts or large investors in private and give them market-impacting information. And even if you’re unable to attend an annual general meeting of a company–simply because it’s being held in another town–your rights as a shareholder are eroded.

But it is now mandatory for US companies to give out such information only in public forums and to make details of such conferences available on the Net. Increasingly, companies are hosting such conference calls on their websites: to listen to Bill Gates discuss his company’s prospects and future IT trends, check out For smaller companies that can’t afford to do this on their own, sites like offer a platform.

Indian companies that have gone in for ADRs routinely disseminate such information. Wipro puts out a soundcast and the complete text of the conference call on its website ( In a few years, you can expect to log on to, say, the HDFC website and listen to Deepak Parekh discuss the company’s performance and future prospects.

Relevant information. If you’ve contacts in a company’s top management or even in the finance department, you could be privy to financial results before they’re made public. Often, you’ll see large price movements, backed by large volumes, about 2-3 days prior to the announcement of results.

In many markets, it is mandatory for companies to make public any information that may impact on its fundamentals, as soon as the company is aware of it. Auto companies in India disclose unit volume numbers every month. A retail company in the US ( gives out weekly sales data.

Of course, deciding what is material information and what isn’t is a bit tricky. For starters, it would help to make it mandatory for a company to disclose an insider’s intent to sell or purchase shares of that company. If I notice the top management investing a large portion of their wealth in their company, I would be reassured.

Standardised information. Additionally, companies’ annual reports should carry the following information, which would conform to prevailing US standards:

‘Segmental data’ of sales, operating profits and assets employed in the different segments, particularly in diversified companies.

If a single customer accounts for more than 10 per cent of a company’s sales, it is important that investors are aware of the risks involved.

Many good companies provide financial history (summary of balance sheet and profit and loss accounts) relating to the previous five or 10 years. This provides a long-term perspective to one’s investments. Making this provision mandatory would be in the shareholders’ interests.