Can Edifar Make The Toothless Tiger (SEBI) Ferocious?

The fall of Enron and WorldCom in the United States brought into public eye the unholy nexus between the rogue corporates, acquiescent auditors and the capital market and raised fresh concerns about corporate governance. This resulted in the passing of Sarbanes-Oxley Act that prescribes stringent reporting standards for auditors and corporate management and provides for hefty penalties in case of defaults. India has had its own share of corporate frauds. The vanishing non-banking finance companies, sinking mutual funds, teak plantation schemes are just a few well known examples.

Following the western models, India also commissioned Committees to look into the issues of corporate governance. In 1999, the Kumar Mangalam Birla Committee set up by SEBI (Securities and Exchange Board of India) gave its report and in 2003, the Naresh Chandra Committee set up by DCA took it forward. Another Committee on corporate governance was constituted by SEBI, under the chairmanship of Mr. Narayana Murthy to suggest best to improve corporate governance practices. Defying the regulatory push, detailed requirements have been laid down in these reports to ensure good corporate governance.

Even though internationally, the regulators are doing a good job in laying down the form of good corporate governance, at the same time, it is also believed that mere legislation with its brittleness and rigidity may not be sufficient to tame the rogue corporates. The persistent occurrence of scams and scandals in the capitalist structure bears testimony to the pervasiveness of human greed and human ingenuity in bypassing legal limitations.

Thus, there is a need for proper disclosures. To enable investors to take informed decisions, it is imperative that all the relevant information is made available to the stakeholders.

In its quest for more transparency, the SEBI set up a web based EDIFAR through which listed companies would be able to electronically file their periodic disclosure reports. EDIFAR is Electronic Data Information Filing and Retrieval system. It is an automated system for filing retrieval and dissemination of time sensitive corporate information, which till now were being filed physically by the listed companies with the stock exchanges in India. By centralizing the information through on-line filing, EDIFAR’s primary objective is to centralize the information and accelerate its dissemination and by doing so enhance the transparency and efficiency for the benefit of all stakeholders in the securities market.

The EDIFAR has been launched by SEBI in collaboration with the National Informatics Centre (NIC).[1] By an amendment to the Listing Agreement, Clause 51 has been added which provides for EDIFAR Filing.[2] This system is being implemented in a phased manner. As of date, all the listed companies are required to file disclosure statements and other information with the stock exchanges where they are listed. The stock exchanges disseminate this information through trading terminals, their website etc.

In the first phase, a select list of such disclosure statements viz. financial statements comprising of balance sheet, profit and loss account and full version of annual report; half yearly financial statements including cash flow statements and quarterly financial statements, Corporate Governance Reports, Shareholding Pattern Statements, Action taken against any company by any regulatory agency, will be filed electronically by about 200 companies included in the BSE Sensex, S&P CNX Nifty and BSE-200 indices. The companies falling in the first phase of implementation were required to file these information/statement and reports on EDIFAR with effect from July 15, 2002 and would be simultaneously filed with the Stock Exchanges.

This process of electronic filing is facilitated by Registration right at the outset. The Exchange forwards the Registration Form to NIC, New Delhi for allotment of Login ID and Password to enable the company to file statements on the EDIFAR website. Subsequently, the Login ID and Password is sent by NIC directly on the e-mail id given in the EDIFAR Registration Form.

For period ending September 2002, December 2002, March 2003, June 2003 and September 2003, 2345 more companies were included thus enabling 2545 companies to electronically file the documents. These companies will also continue to file this information in the physical form with the stock exchanges. Gradually the physical filing will be discontinued and both the number of companies as well as the disclosure statements will be expanded to cover all actively traded companies for all the disclosure statements. All physical filing would then be discontinued.[3]

FORMS TO BE FILED BY THE COMPANIES:

I.A Quarterly Financial Results Statements (First, Second, Third and Fourth Quarter)

The listed companies are required to furnish the un-audited financial results on a quarterly basis. The format of quarterly statements has been prescribed under Clause 41 of the Listing Agreement. This clause requires the listed companies to file this statement within one month from the end of the quarter to the stock exchanges. The formats are different for banking and non-banking companies. Format IA is for non-banking companies.

The statement provides information about –

The net sales/income, total expenditure, interest, depreciation, profit and loss for the quarter ended and the earnings per share (EPS) for the quarter, and for the corresponding three month in the previous year, year to date figures for the current period, year to date figures for previous year and previous accounting year, the segment-wise revenue (net sale/income), the profit/loss from each segment before tax and the capital employed in each segment for the current quarter, the corresponding quarter in the previous year, the year-to-date figures for the current period, the year-to-date figures for the previous year and for the previous accounting year, aggregate non-promoter holding.

The objective of the quarterly statement is to give the stakeholders the information about a company’s profitability and the performance on a quarterly basis and the comparative position in the previous quarters.

I.B Quarterly financial result statement for banking companies (First, Second, Third and Fourth Quarter)

Format I B of quarterly statement is applicable to banking companies. While the underlying principles governing the disclosure by banking and are the same, the financial parameters included in the statement for the banking companies are different on account of the very nature of banking business. Like the non banking companies, the banking companies are also required to submit their un-audited quarterly, half-yearly financial results with the stock exchanges. Information about the total income, income from various investments, interest income and other income earned by the banking company total expenditure, operating and net profit figures are available in Form IB. Besides various analytical ratios relevant to banking sector, like capital adequacy ratio, price earning multiple e. t. c. for the present quarter, the corresponding quarter of the previous year, the year-to-date figures for the current period, year to date figures for the previous year and for the previous accounting year are also available.

II Shareholding pattern (Promoters holding)

Shareholding pattern of a company is important information for the stake holders. This information is available in the statement of shareholding pattern. The listed companies are also required to submit their shareholding pattern on a quarterly basis, within 15 days of end of that quarter in this form. The form provides information about the Promoters’ holding, i.e., number of shares held and the percentage of holding by the Indian promoters and the foreign promoters, the persons acting in concert and the Non-Promoters’ Holding, which includes the Institutional Investors, Mutual funds, Banks and FIIs. The break up of shareholding in terms of number of shares and the percentage of holding by Others which includes the Private Corporate bodies, Indian Public, NRI/ OCBs and any others are also available from this statement.

III Corporate Governance Reports

The listed companies according to the schedule of applicability prescribed, are required to comply with the corporate governance requirements as prescribed in Clause 49 of the Listing Agreement. Such listed companies are required to provide a separate section on Corporate Governance in their annual reports. The objective of this report is to indicate the level of compliance of the corporate governance provisions in the Listing Agreement.

IV Action taken against the company

As the name suggest, this is a report in which gives information about action taken by any agency against a listed company which is a critical material event which of importance to the investors and the securities market.

APE THE WEST – BUT STILL EDIFAR CANNOT BE EDGAR

EDGAR (Electronic Data Gathering and Retrieval) is the extremely accessible and efficient website of the Securities and Exchange Commission (SEC) available to investors around the world. Its task is the automated collection validation, indexing, acceptance, forwarding of information filed by companies that are required to report to the SEC by law. EDIFAR (Electronic Data Information Filing and Retrieval System), on the other hand, is a me-too attempt by the Securities and Exchange Board of India (SEBI) in collaboration with the National Informatics Centre. The problems with accessing EDIFAR are abundant. A law student colleague, Mr. Apar Gupta, who has been tracking the regulatory developments in the capital markets, equated ‘EDIFAR to be the prodigal son of EDGAR.’

In developed countries like US, all the information that companies are required to share with shareholders/investors is available at the click of a mouse button. The US EDGAR allows the issuer companies to file all the relevant information in a secured manner electronically.  

India has moved away from merit-based regulation of securities market to disclosure based regime. The fundamental principle in disclosure based regulation is to allow the shareholders/investors to make their informed information. For this purpose, it is ensured that all relevant facts, figures and information are made available to the investors.

Even though, a commendable attempt has been made to offer similar facility to Indian investors through EDIFAR system, a wide range of information filed by companies with exchanges is still not available on EDIFAR in a structured user-friendly manner. It is cumbersome to navigate, is out-of-date and a nightmare for users seeking specific information as there is no facility of a search engine.

The Action Taken against the Company section seems to be irrelevant and does not open for these companies at all. Prospectuses are procedurally filed on the SEBI website but are not available later although they are electronically filed. It does not even highlight those companies that have failed to comply with the disclosure norms to provide timely information.

At the outset, although 200 companies were identified by SEBI for electronic filing of documents under the EDIFAR system, the annual reports of around 120 companies were still not available on its website. The market participants attribute this blunder to improper disclosure norms. They contend that it is as yet unclear how the norms are to be applied and compliance enforced. SEBI officials on the other hand, claim that monitoring of the electronic filing was the responsibility of the stock exchanges and action would also have to be taken by them. Filing of the information in electronic format was made compulsory by the market regulator by amending the listing norms of the exchange by inserting clause 51 to the Listing Agreement. So, technically a company failing to file its documents in electronic form is in violation of the listing agreement and hence it is the responsibility of the stock exchange.

But the officials with the stock exchanges on their part contend that it is difficult for them to find out whether a company has filed the documents in the manner required. They argue that the fact that companies have to directly upload these documents onto the SEBI website maintained with technical support from National Informatics Centre (NIC) means that they will not be able to identify errant companies in this regard. Fortunately, much of the information that was supposed to be there on EDIFAR is more efficiently available elsewhere.

Call it non-compliance of the regulatory norms or merely a technical problem as some have asserted it is, the EDIFAR set up with much fanfare in June 2002 on the lines of EDGAR, a creation of the Securities and Exchange Commission of the US, has some heights to climb before it can claim to rank on par with its US counterpart.

SWEET N SOUR APPRAISAL WITH INVESTOR OUTCRIES

To trace the contours of the market, one needs to go down the memory line, post GN Bajpai’s appointment as SEBI Chief, specifically July 2001.Shunned by criticism of its inability to check rampant speculation and price manipulation, SEBI under D.R.Mehta, went into overdrive. In order to ensure that speculation did not go out of hand and imperil the market, it made dematerialized trading mandatory, shortened the trading cycle from a week to a day, and replaced carry-forward trading with derivatives.

Bajpai inherited this fortification, and started to strengthen it. In his term, SEBI effected a flurry of policy changes and outlined several far-reaching measures, giving the impression of being a regulator on the move. However, well intentioned these changes, some haven’t been thought through or fall short in implementation.

One of the satisfying measures has been in the form of posting of all the orders passed by its Chairman against errant companies and market intermediaries on its website. Earlier, only select orders were put up. Even, the orders passed by the Securities Appellate Tribunal (SAT) have been posted on the website. These are verdicts on appeals preferred by intermediaries and companies against orders passed by the SEBI Chairman.

It is very useful information for investors. Before investing in companies or signing up with relatively unknown brokers, they can run a search on the SEBI site to see if the parties concerned have ever been pulled for violations in the past. It is a good filter, as its helps investors avoid investor unfriendly intermediaries and companies.

But, there still seems to be a yawning gap between what happens in the market and how much and how the regulator reacts to. It’s common knowledge that the promoter-broker nexus is deep rooted and insider trading does happen. Remember the abnormal price movements in the infamous K-10 stocks in 2001 and more recently, the undiscriminating run-up in small cap stocks. Yet hardly any insider cases are opened and hardly anybody punished.

In its defence, SEBI retorts by stating that the current law does not give it adequate powers and that the existing penalties are not enough to deter violators. In fact, SEBI seeks search and seizure powers, and the right to impose more stringent penalties on offenders. The idea should be to deprive them of all the monetary benefits they have derived.

SEBI needs to recognise that the investor dissatisfaction is not as much due to the lack of automation as it is due to SEBI’ s inability to use its regulatory and supervisory powers more effectively. Joint Parliamentary Committees are set up, investigations go on for years, and voluminous reports are prepared, which eventually become academic documents. Meanwhile, market scams continue to rear their ugly head every now and then serve grim reminders that SEBI has failed investors.

The regulators are doing a good job in laying down the form of corporate governance, but mere legislation may not suffice to tame the rogue corporates. For corporate governance to take root, the shareholders must know that their activism and alertness is crucial. The investors are conscious of the risks of investing in stocks and are willing to live with them. But what makes him a prey in the wild jungle of share market is when unscrupulous market players manipulate the system and share prices, and go scot free while regulators watch from the sidelines.

Seeing this, an irate small investor, Mr. Shyam Madhavan cries out, “What’s the point of just watching scams, holding enquiries and preparing reports? Isn’t it time the market watchdog started biting?” The point is to create a level playing field, be it brokers, institutions or corporate bigwigs.

In the US, a number of top companies have been openly flogged for frauds by regulators there, Why not in India? SEBI has failed in vigilance and online surveillance. It has failed to pre-empt market crises. Decision making in SEBI is still long drawn and process driven, rather than objective driven.

Given that all these blunders are part of the regulator’s website, it is serious embarrassment that needs to be addressed quickly; especially if SEBI wants to be considered among the world’s leading regulators. Ideally, it must rebuild EDIFAR from scratch and also revamp the main SEBI website in the process.  

[1] The EDIFAR site can be accessed through a hyper link in SEBI’ s website www.sebi.gov.in. The site is maintained by NIC.

[2] SEBI vide its Circular Nos. SMD/POLICY/CIR-13/02 dated June 20, 2002 and SMD/POLICY/CIR-17/02 dated July 3, 2002, introduced EDIFAR.

[3] The procedure for filing and retrieval of information is described in the Operations Manual available on the site.