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24 Int'l Fin. L. Rev. 47 (2005)
Disclosure Duplication a Waste of Time and Money

handle is hein.journals/intfinr24 and id is 151 raw text is: Securities I Disclosure duplication a waste of time and money Sandeep Parekh argues that quality, not quantity, is the answer to India's disclosure issues he philosophy of disclosure in the securities markets is premised on the idea that securities represent a bun- dle offights that are not visible to a potential buyer of securities and that the buyer must know the nature of the bundle of rights before investing. Disclosure also reduces the possibility of wrongdoing. Even if a disclo- sure is not read by anyone, the fact that something needs to be disclosed will provide a good prophylactic against wrongdoing. The idiom that sunlight is the best disinfectant succinctly describes a whole philosophy in the securities market. Every disdosure made by a regulated entity has effort and costs attached to it- and these costs are ultimately paid by the investor. To the extent the mar- ginal cost of compliance exceeds the marginal benefit, time wastage should be eliminated. To the extent disclosure is duplicative, the added cost of disclosure has no value addition and the duplication must be removed. To the extent disclosure is made, but is not truly accessible, there is a need to that ensure the disclosure enters the public domain. When a company attempts to access the public for raising capital, it must go through a complex and lengthy examina- tion process. Much of the process relates to collecting, collating and presenting infor- mation about the company to prospective shareholders of the company. While disclo- sure is a good thing, it costs a good deal of money. A typical primary market issue could cost over 10% of the capital raised (though much of it also relates to costs inci- dental to disclosure costs). This cost is borne by the shareholders of the company. Further, management is often diverted from its usual productive function in gathering information for an issue, so there is a direct economic opportunity cost to the company, and to the economy in general. Efficient capital market hypothesis The theory of integrated disclosure is premised on the efficient capital market hypothesis (ECMH). According to the ECMH, information released into the pub- lic domain is promptly impounded in the price of a security. Once information is in the public domain, no value will be added by repeating the same information when capital is raised. Integrated disclosure The pursuit of integrated disclosure has two objectives. Firstly, to make disclosure as meaningful, as non-duplicative and as non- burdensome as possible. Second, to make disclosure truly available and accessible, par- ticularly when filings with a regulator make a document theoretically public but the process of access is made so cumbersome and the availability so fragmented that it fails to effectively enter the public domain. Reduced duplication of disdosure would reduce time wastage by companies, which are stuck with filling and filing hundreds of forms with large overlapping disclosures. With thousands of listed companies and nearly 700,000 unlisted companies, the waste to the Indian economy can be staggering. The reduced filing O f would automatically , *bl [omai, result in a reduced workload on the IllS S 1 regulator, which can *a then use its energies more efficiently in rs enforcement and policy issues. The regulator would also be able to catch fraud and non-compliance more easily as it would need to tap only one source to check data. Fewer bottlenecks would result in faster capital raising and reduced risk, making corporations more agile. The US philosophy A 1966 article by Milton Cohen in the Harvard Law Review Truth in Securities revisited was a seminal piece on the need for non-duplicative disclosures. Cohen advo- cated that continuous disclosure should be strengthened and issue of capital should invite minimal and only transaction-based information. Any correction, updates or supplementation to the continuing disclo- sure can also be provided to prevent staleness of company information. It later translated into the adoption of a single standard of company information for both primary issues and continuous disclosure for sea- soned issuers. A seasoned issuer could incorporate by reference company informa- tion that was already out in the public domain. Where a company was coming to the primary market for the first time, the standards remained the same as in the past. Also introduced was the concept of shelf registration. Shelf registration allows multi- ple issues of securities with a single prospectus with a requirement to update the prospectus periodically and to distribute transaction details with each issue. In India we have a sample of integrated disclosure in the form of shelf registration. However, the limited scope of the section makes it available only to a select group of financial institutions and for specific types of debt securities. Primary market and secondary market integration A public company that has previously tapped the capital market must comply with continuous disclosure norms under compa- ny law requirements, securities laws as laid down by the Securities and Exchange Board of India (Sebi) regulations and the listing requirements of stock exchanges. For instance, each com- pany must file an annual report and nquarterly reports. ova , .ll To the extent that company-related g-th same information is n already in the pub- lic domain, part of the disclosure made in tapping the capi- tal markets is repetitive and adds no value. It is important to distinguish between company information and transac- tion-based information. The former is already in the public domain, while the lat- ter relating to the particular issue of capital needs to be published in a prospectus. Such transactional details should include details of types of securities offered, underwriting commissions paid, and intended proceeds of capital raised. By contrast, company detail would include the issuer's business, manage- ment compensation, capital structure and recent financial results. A quick look at a statutory prospectus for primary issues in India, whether first time offerings or not, shows that it contains a mish-mash of company information and transaction information. The first step wwwiflr.com IFLR/Mareh 2005 47 1 www~iflr.com IFLR/March 2005 47

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