RESPONSIVENESS OF THE LAW IN REGARD TO DISCLOSURES IN INDIA BY - SEENATH P. S, GAUTHAM A. B, KAMALESWARY J. P & ADHITHYA SURESH
RESPONSIVENESS OF THE LAW IN REGARD TO DISCLOSURES IN
INDIA
AUTHORED BY - SEENATH P. S, GAUTHAM A. B,
KAMALESWARY
J. P & ADHITHYA SURESH
ABSTRACT
The structure and
contents of the profit and loss statement and balance sheet are outlined in the
Companies Act. In addition to these declarations, the Act requires the
directors' report to contain comprehensive details on a number of topics,
including the duties of the directors. Through giving accounting standards
legal standing, the Act has increased the scope of corporate disclosure.
India's accounting regulations cover a broad spectrum of financial reporting
for companies. In response to the SEBI's directive, the Indian stock exchanges
have mandated that listed corporations furnish cash flow statements, related
party disclosure, and segment reports.
Keywords: SEBI: The Securities and Exchange
Board of India Act of 1992 ; RBI: Reserve Bank of India ; MOA: Memorandum of
Association
INTRODUCTION
Following corporate
scandals and frauds that caused business entities and the country's financial
system to collapse as a result of bad governance, the necessity for superior
corporate governance became evident. India is not an exception to the rule that
upholding governance principles is more crucial than ever in the modern world
in order to protect and defend the interests of stakeholders. Corporate
governance is viewed as an essential tool for long-term business operations
more than at any other time in the history of corporate management. The legal
foundation for corporate governance is essential to this endeavour. India is a
federal republic with a propensity towards unity. This may help to explain why
India does not have distinct business laws for each of its states, in contrast
to other nations. The Ministry of Corporate Affairs, a federal government
organisation, is in charge of overseeing the corporate sector in India. The
Companies Act, 2013, which regulates all business activities from the initial formation
decision to the ultimate dissolution, is enforced by the Ministry. The
Securities Exchange Board of India was founded by the government in 1932 to
foresee and learn from previous instances of securities fraud, as per the
Securities Exchange Board of India Act. Consequently, SEBI has complete
authority over the capital market and serves as its exclusive regulator with
regard to securities. The Companies Act of 2013 and the Securities and Exchange
Board of India Act of 1992 (The SEBI Act, 1992) are the two centrally enacted
statutes that primarily control company disclosure regulations in India, aside
from professional regulation. Additional disclosure requirements apply to
companies listed on Indian stock exchanges in addition to those mandated by the
Companies Act of 2013, which is applicable to all companies incorporated under
it. The legislative basis for corporate disclosure in India is provided by
these two pieces of law taken together. In addition to these two laws, the RBI
Act of 1934 specifies rules for the governance of banking institutions, the
IRDA specifies rules for the governance of insurance firms, and TRAI specifies
rules.
MINISTRY OF CORPORATE AFFAIRS
In the 1950s, the
Department of Corporate Affairs was founded. It was a division or a department
of the Ministry of Law, Ministry of Finance, or Ministry of Commerce until
2004. It received its current name in May 2007 after being recognised as a
Ministry in 2004. The Ministry of Corporate Affairs, a Central Government
entity, is responsible for the corporate sector. The Companies Act, 2013, which
regulates all corporate activities from the moment of creation to the time of
dissolution, is enforced by the Ministry. Accordingly, the Ministry's major
duty is to implement the Companies Act of 2013 and other laws, as well as to
create the necessary guidelines and policies to facilitate business
transactions while upholding corporate governance principles. The Ministry
monitors a wide range of operations through the implementation of the Companies
Act, 2013 and the laws adopted under it, including incorporation,
operationalisation, liquidation, governance, and firm wound up, among others.
In addition, the Ministry has created a number of organisations, including the
Regional Director, Registrar of Companies, and Official Liquidators, for
administrative ease in order to detect and punish noncompliance with the
Companies Act, 2013 and other laws.
THE COMPANIES ACT 2013
A noteworthy piece of
legislation with broad ramifications for all Indian firms is the Companies Act
of 2013. The Act of 2013, however, aims to conform to international standards
and is more outward-looking. It is meant to serve as a model for more contemporary
legislation that permits India's corporate sector to grow under stricter
regulation. The purpose of the 2013 Act was to safeguard the interests of
investors, especially small investors, and to enhance corporate governance,
accountability, and transparency for both companies and auditors. The Companies
Act, 2013 highlights the government's intention to move away from a
control-based or regulatory framework and towards a disclosure-based and
transparent regime, and it reflects important developments in our nation's
corporate governance structure. The Act emphasises the importance of good
corporate governance practices, among other things by giving the Board of
Directors and Independent Directors more roles and responsibilities, (ii)
safeguarding the interests of shareholders, including by granting them special
legal rights, (iii) enhancing disclosures and transparency, (iv) holding
management and auditors of the company more accountable, and (v) promoting
Corporate Social Responsibility (CSR) and other initiatives.
Initial Disclosures
The principal means of
first disclosure are the publishing of a prospectus and the filing of the
articles of association and memorandum with the registrar of companies. The
articles of incorporation, the memorandum, and any agreements with candidates
for managing director or manager should be sent to the registrar at the time of
registration. The Memorandum of Association (MOA) enumerates the purpose for
which a corporation is established. It lays out the parameters of its
activities and the restrictions that apply to it. A MOA is a public document as
per the Companies Act of 2013. The memorandum of association should contain the
name and registered office of the firm, along with its primary goals and
planned share capital. The articles provide forth the guidelines for achieving
these goals. While the memorandum outlines the company's objectives, the
articles specify the guidelines by which those objectives are to be achieved.
Each member is entitled to a copy of the articles and memorandum of the
company. Any employee of the company who fails to provide copies of the
articles and memoranda to its members will face disciplinary action. Any copies
of the company's memorandum and articles issued after that date should be
updated to reflect any changes made. The officer who is in default faces
consequences if the modifications are not implemented. It is against the law to
make a public offering of securities without first releasing a prospectus.
Investors continue to seek information even after the shares are issued.
Requirements for secondary market efficiency include continuous data flow
regarding the company and its securities. Laws governing listed firms mandate
that they give shareholders semi-annual reports in addition to annual reports.
These specifications guarantee ongoing transparency. Every stakeholder has an
equal right to information regarding the company's financial situation and
management. It should be made clear to him whether or not the money is being
spent prudently. The financial accounts and records of the company contain
information on the subject. Since the Companies Act of 2013 mandates the laying
of accounts prior to the annual general meeting, this information may be made
public. An excessive percentage of annual reports and balance sheets are not
filed by Indian corporate sector companies. In the instance of,[1]
the Company Secretary signed the prospectus on behalf of the company's Director
using their power of attorney, and SEBI found that the Company Secretary was
not liable for the prospectus' misstatement as the company's Director. Under
section 447 of the Companies Act, all those who approved the prospectus's
dissemination are liable if any of its statements contain inaccurate or
misleading information. If a director or other individual in charge of
prospectus distribution can demonstrate that he was unaware of the
nondisclosure or that it was the result of an honest error on his side, they
may be able to escape punishment. It is also possible to escape liability if
non-material information was withheld. In addition to the issuer company, other
organisations with clearly defined roles such as lead managers and bankers also
collaborate in the public sale of shares. Everyone participating is required to
do due diligence since public dollars are at stake.
Disclosure of
Financial Statements
To ensure appropriate
financial accountability, accounts must be prepared, released, and made
available for shareholders to evaluate. Every company ought to have an annual
general meeting once a year. At each annual general meeting, the board of
directors is required to present the company's annual accounts, which show the
trading performance for the relevant time. An essential communication tool
between managers and shareholders is the annual report. The Act also details
how and when the annual report is to be prepared. An accurate and balanced
depiction of the company's current state of affairs should be included in the
annual report. But there's no objective standard for defining what makes a fair
and accurate perspective. Discipline will be applied to any corporate director
who does not take reasonable action to lay the annual accounts and balance
sheet before the annual general meeting. It is not possible to hold a director
who has resigned from office liable for neglecting to submit accounts during
their term in office. There are further penalties for withholding information
needed for the profit and loss account and balance sheet. All profit and loss
accounts have to comply with the requirements of the Act. A copy of the balance
sheet, profit and loss account, and auditor's report must be sent to each and
every employee of the company 21 days prior to the meeting. If this clause is
broken, there will be consequences. Three copies of the balance sheet must be
sent to the registrar. Penalties also apply for failing to comply. Penalties
arise for failing to file the annual report with the registrar of companies, to
transmit a copy of the annual report to the members, and to lay the annual
accounts at the AGM.
Disclosure by
Directors
The financial disclosure
given to the company's shareholders by the board of directors is known as a
director's report. The company's operations, range of business, subsidiaries,
and other details will all be made public in an effort to disclose the
financial status of the organisation. It is essentially a summary of the
company's financial performance for the entire fiscal year along with an
outlook for the future. The board of directors is in charge of carrying out
efficient self-evaluation, keeping an eye on the disclosure and communications
procedure, and being reachable by shareholders. The director's report's main
objective is to give enough pertinent information on the performance of the
company. Comprehensive details regarding the company's past performance,
present situation, and potential future growth must be included in the
director's report. It is presented at the annual meeting of the corporation and
is linked to the balance sheet. This enables the shareholders to decide on the
company's future and operations in a way that makes sense economically.
Furthermore, the report functions as a tool for the company to promote itself
to prospective investors and persuade existing investors to maintain or augment
their stake in the enterprise.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
The swift growth of the
worldwide corporate domain has led to several modifications in the methods by
which businesses function. The Indian corporate sector went awry in the middle
and was later revived with the mindset of profit at all costs. The sector was
greatly influenced by its peers and was meant to adjust to the dynamics of
contemporary enterprises. This change in corporate behaviour led to major
corporate failures in the 1990s. The Financial Services Assessment program was
subsequently created by the World Bank and the IMF to evaluate the financial
systems of their members. The Indian government intended to establish a
securities market, a stable financial environment, and a regulator that
supports the most recent corporate governance standards based on this program.
The Securities Exchange Board of India (SEBI), a securities market regulator
patterned after the US Securities Exchange, was established as a result of the
adoption of the Securities Exchange Board of India Act, 1992. The SEBI Act of
1992 has granted SEBI a wide range of authority and powers to oversee and
enforce Indian enterprises' adherence to Governance Standards, as well as to
sanction companies that fail to do so. SEBI has made several efforts in this
regard to guarantee that businesses adhere to corporate governance principles.
Disclosure Regulations under SEBI
By controlling (i)
issuers' eligibility to offer securities to the public (sometimes referred to
as access limits), (ii) information production at the time of issue, and (iii)
processes and procedures related to securities issuance, SEBI has regulated the
primary market. These aspects have mostly been managed by the SEBI (Issuer of
Capital and Disclosure Requirements) Regulations, 2018 (ICDR) and a series of
regulations that regulate the many intermediaries participating in the issuance
process, such as merchant bankers, registrars to the issue, and so on. Over the
years, SEBI has improved the issue process in a number of ways. These have
included things as little as the number of locations where applications for
initial public offerings are accepted to things like the allocation methodology
that significantly affect investor welfare. SEBI depends on the merchant
banker's certification to guarantee adherence to the regulations. According to
the provisions, the issue manager is in charge of verifying the accuracy of the
prospectus, as well as making sure the underwriter has the financial capacity
to perform the service and that the banker and registrar, among other
intermediaries involved in the issue, have the required licenses. The key
markets were dramatically changed by three fundamental institutional reforms. First,
subject to a floor price specified in the prospectus and a 20% band above the
floor, issuers were permitted by the book-building criterion to price shares
based on investor demand and market conditions at the time of the public
offering. The offer price in the so-called fixed price regime has to be disclosed
in the prospectus prior to the publication of the book-building legislation.
SEBI Issue of Capital and Disclosure
Requirement Regulation (ICDR Regulation) 2018
The Controller of Capital
Issues was responsible for determining a company's admittance to the market and
the price at which securities were to be made available to the public until the
early 1990s. Companies can now determine their own issue prices for securities
without interference from regulators thanks to the implementation of a disclosure-based
regime under SEBI's purview, enabling them to benefit from market forces.
Primary issuances are governed by SEBI under the 2018 SEBI (ICDR) Regulations.
In order to facilitate public offerings, SEBI created the Disclosures and
Investor Protection (DIP) recommendations. These guidelines were finally
converted into regulations (ICDR Regulations) in 2018. To stay up with the
ever-changing market conditions, the SEBI DIP Guidelines and subsequently the
ICDR Regulations have undergone multiple amendments throughout the years. It
creates a thorough structure under which businesses can issue securities. A
company must make sure it complies with the SEBI (ICDR) Regulations, 2018
before going after the primary market to obtain capital through a fresh issuance
of securities. The Merchant Banker performs due diligence and verifies
compliance with the ICDR Regulations prior to filing the document with SEBI.
The concepts, shared responsibilities, and ongoing disclosure requirements for
all companies that have previously been listed on any of the nation's stock
exchanges are covered by the SEBI Listing Regulations in addition to the ICDR
Regulations. A listed business must comply with all corporate governance
standards, which are outlined in the Listing Regulations. The primary body of
the SEBI ICDR regulation consists of substantive provisions, and its schedules
provide further procedural requirements and document submission forms. These
two sections make up the SEBI ICDR regulation. The emphasis of the New ICDR
Regulations is on streamlining disclosure requirements with respect to
financial statements in offer documents for initial public offerings by
lowering the volume of disclosures and concentrating on what is deemed material
and relevant to an investor in making an investment decision.
SEBI (Listing
Obligations and Disclosure Requirement) Regulations 2015 (LODR Regulation 2015)
The Listing Obligations
and Disclosure Requirements (LODR) regulations are among SEBI's most
significant mandates. The degree of disclosure and openness needed of publicly
traded companies is governed by the regulation. The rule enhances the mandatory
disclosure standards and the listing agreement that must be formed between the
stock exchange and the firm that is going to be listed. Terms and conditions
pertaining to disclosures, governance, and the company's listing status are
included in the agreement. The SEBI Listing Regulations are divided into two
sections: the main text of the Regulations contains substantive regulations, and
the Schedules to the Regulations contain procedural requirements. Chapter II of
the SEBI Listing Regulations lays forth the broad guidelines guiding the
disclosures and responsibilities of listed companies. In the absence of
specific limitations or ambiguity, the aforementioned entities would be guided
by these principles. A framework for obligations that are generally applicable
to all listed firms has been mentioned in Chapter III of the SEBI Listing
Regulations. These comprise the general compliance requirement of the listed
organisation, the designation of a common compliance officer, electronic
filings, and the necessity of SCORES registration, among other things.
CONCLUSION
Robust and efficient
regulatory bodies are essential components of a robust corporate governance
framework. A Ministry of Corporate Affairs, which is in charge of all matters
pertaining to companies, is part of the centralised administrative structure
established by corporate laws. The Companies Act of 2013 is enforced by the Ministry,
which controls every aspect of business operations, including the decision to
incorporate a company and its dissolution. The Companies Act of 2013 and other
laws, as well as the creation of appropriate rules and regulations to
facilitate company operations while upholding corporate governance standards,
are the main responsibilities of the Ministry in this regard. The MCA formed
the Securities Exchange Board of India to provide additional regulation for the
securities market. There will inevitably be confusion if there are several
regulators. It is crucial to be clear about each body's jurisdiction as a
result. To facilitate the resolution of commercial disputes by providing a
single point of contact, quasi-judicial organisations like the Securities Appellate
Tribunal, the National Company Law Appellate Tribunal, and the National Company
Law Tribunal were founded. These organisations are meant to promptly settle
business-related disputes; yet, the quasi-judicial bodies are overburdened.
Their disposal is slowed down by this.