CORPORATE DISCLOSURE REQUIREMENTS AND TRANSPARENCY STANDARDS

Abstract

This article mainly discusses the importance and their requirement for transparency standards. In this article, it is provided here with the consequences of non-disclosure and the best practices needed to follow with its challenges. India’s company laws, primarily governed by the Companies Act, 2013 and Securities and Exchange Board of India (SEBI), emphasize disclosure requirements and transparency standards. These laws protect investors, promote market integrity, and hold companies accountable to stakeholders. There is importance of disclosure from a company and public perspective, which have different points of view. The company must disclose annual and quarterly financial results, material events, and insider trading reports within 6 months of year-end. Non-disclosure can lead to regulatory penalties, investor loss, reputation damage, legal liabilities, and financial instability. Best practices include regular disclosure, clear language, accessibility, independent verification, and stakeholder engagement. The main legal framework for corporate governance and transparency standards in India is provided by the Companies Act, 2013. In order to maintain transparency and safeguard the interests of investors, companies that are listed are subject to comprehensive disclosure requirements under the SEBI Regulations, 2015. Companies that keep to these standards may become more reputable, bring in investment, and help create an increasingly open and equitable marketplace.

Keywords

Corporate disclosure, types of Disclosure, transparency standards.

Introduction

India’s company laws, primarily governed by the Companies Act, 2013 and Securities and Exchange Board of India (SEBI), emphasize disclosure requirements and transparency standards. These laws protect investors and which promote market integrity, hold companies accountable to stakeholders, and reduce information asymmetry. Disclosure requirements cover financial reporting, corporate governance, ESG factors, and related party transactions. Companies must adhere to IFRS or GAAP standards for financial statements, remuneration, and conflicts of interest. The Companies Act, 2013 provides the primary legal framework for corporate governance and disclosure requirements in India. The SEBI Regulations, 2015 impose detailed disclosure obligations on listed companies, ensuring transparency and protecting investor interests. Companies that keep to these standards may raise their credibility, attract investment, and contribute to a greater transparent and fair market environment.

Disclosure is important from both a company and a public perspective. From each perspective, good disclosure has many advantages, including improved corporate governance and, most crucially, increased transparency and accountability. It maintains an advantage for both businesses and the general public, which is critical in the business sector. The present concerns include information overload, which raises confidentiality concerns with regulatory constraints that have the expense and complexity. To prevent the consequences of non-disclosure, companies must follow their legal obligations regarding corporate disclosure, which include providing timely reports with accurate and complete information; using clear language through making information available through online databases; and this should be conducted through proper audits and reviews. It is critical to follow these best practices.

Importance of Disclosure with Company and Public Perspective

Disclosure is important from a company and public aspect:

Company Perspective

Openness and honesty are demonstrated by transparency and a number of other factors, including accountability, compliance, investor confidence, risk management, and making well-informed decisions that build trust and credibility based on reliable data, help a company gain the trust of its stakeholders, belong to regulations, and enhance its reputation. With raising trust through strategic decision-making through proper risk management techniques and risk management for prevention of crisis by accountability, compliance, investor confidence, and risk management, it makes better investor relations and stakeholder engagement that protect the brand image along with company reputation.

Public Perspective

The public can access company information to the right to know company performance and evaluate it on the basis of assessment with management integrity to identify potential risks associated with risk assessment. Informed decision-making, protecting stakeholder interests, ensuring market efficiency, facilitating regulatory oversight—these factors lead to fostering public trust, encouraging corporate social responsibility, and ensuring financial stability and security. These are all important aspects of company disclosure from public aspects.

From both perspectives, effective disclosure has many benefits, including improved corporate governance and the main outcome of increased transparency and accountability. It maintains the advantage factor for both companies and the public, which is important in the corporate world.

Types of Disclosure

Financial statements (balance sheet, income statement, cash flow): Financial statements (Section 129-132) provide a comprehensive overview of a company’s assets, liabilities, and equity, providing a true and fair view of its financial performance. They also include the Balance Sheet, Income Statement, and Cash Flow Statement, which inform stakeholders about a company’s financial health, ensure compliance with accounting standards, aid decision-making by providing insights into profitability, liquidity, and solvency, and offer additional information and explanations for figures. The auditor’s report (Section 143)[1] offers an independent opinion on the fairness and accuracy of the financial statements.
Material information (mergers, acquisitions, dividend declarations): The Companies Act, 2013 mandates the disclosure of material information (Section 50-54, 173-177), including mergers, acquisitions (Section 230-232), and dividend declarations (Section 123)[2], to stakeholders for informed decision-making. These details include approval from the Board of Directors and shareholders, notice to creditors and stakeholders, and filing with the Registrar of Companies. The purpose of this information is to inform stakeholders about changes in company structure, ownership, and control. Dividend declarations provide shareholders with information about dividend payments, influencing investment decisions. The issue of securities (Section 42)[3] informs stakeholders about changes in company capital structure and potential dilution of shares. The buyback of securities (Section 68)[4] is particularly important for shareholders. Section 68 requires approval from the Board of Directors and shareholders, filing with the Registrar of Companies, and buyback of securities to inform stakeholders about changes in company capital structure.
Insider information (director/trustee transactions): The Companies Act, 2013, mandates the disclosure of insider information, including director/trustee transactions, to prevent insider trading. It includes provisions for directors’ disclosure of interest in contracts. Section 184[5], transactions, or arrangements; Section 185[6], prohibition on directors’ participation in conflicts of interest; disclosure of interest by directors. Section 195[7]: Key managerial personnel and relatives, and Section 196[8]: Disclosure of interest in shares or securities. Directors/trustees must disclose their interests at the time of appointment and within 7 days of changes. Directors/trustees must disclose their interests in shares, securities, or contracts at the time of appointment and must disclose changes within 7 days of occurrence.

Non-Financial Reports: Corporate Disclosure Requirement

The Companies Act, 2013 mandates companies to disclose risk factors, corporate governance, sustainability, and CSR reports, quarterly and annual reports. These disclosures aim to ensure transparency, accountability, and good governance practices among Indian companies. The risk factors report (Section 134)[9] outlines potential risks that may impact a company’s business, while the corporate governance report (Section 135, 149) outlines board composition, executive compensation, and other governance-related information.

The sustainability and CSR report (Section 135)[10] outlines the company’s policies, activities, and expenditures, promoting sustainability, social responsibility, and transparency. The quarterly and annual reports (Section 137-138) provide stakeholders with regular updates on financial performance and position. The purpose of these disclosures is to inform stakeholders about potential risks and ensure preparedness. The Companies Act, 2013 provides a comprehensive framework for companies to comply with these regulations.

Despite just financial indicators, these reports are crucial for stakeholders to better understand the company’s overall performance, governance, and social responsibility.

Consequences of Non-Disclosure

Regulatory Penalties (Section 450)[11]: the financial penalties for The Company may be liable to pay a fine ranging from ₹50,000 to ₹5 lakhs, depending on the nature of the non-disclosure. Financial penalties for non-disclosure can range from ₹50,000 to ₹5 lakhs, depending on the severity of the error, intent, impact on stakeholders, and compliance record. Nonpayment could result in further penalties and legal action.
Loss of Investor Confidence (Section 24)[12]: Section24, Power of Securities and Exchange Board to regulate issue and transfer of securities, etc. Non-disclosure can lead to suspension or cancellation of trading of securities. Non-disclosure of material information can lead to the suspension or cancellation of securities trading. Reasons for suspension include material non-disclosure, repeated non-compliance, and failure to provide accurate information. The consequences include market value loss, reduced liquidity, reputation damage, and increased capital cost.

Companies must follow corporate disclosure legal responsibilities, which include timely, accurate, and comprehensive information, clear language, accessibility through online databases, and audits and reviews, in order to protect themselves from the consequences of non-disclosure. These are the best practices that must be kept with.

How are the Benefits of Transparency? Challenge its Limitations

The corporate disclosure requirement under company law focuses on regulatory compliance, which includes investor information, stakeholder engagement, and risk management. It aims to build trust to ensure accountability, promote informed decision-making, and foster corporate social responsibility. The outcome of this all results in improved investor confidence, better decision-making, regulatory compliance, and reduced risk with better risk management, which will enhance reputation, increase stakeholder trust, and improve governance. Challenges include information overload, regulatory burdens, cost, and complexity, which may raise confidentiality concerns. Best practices that may develop these challenges with key solutions include regular disclosure with correct modes of disclosure, which follow clear language of accessibility, stakeholder engagement, and whistleblower protection. The important practices for this are regular updates and timely reporting.

Corporate Disclosure and Transparency Standards with Their Contradiction of Different Concepts

Corporate disclosure and transparency standards encompass various concepts, including financial, non-financial, material, insider, and risk disclosure, and this further includes types of modes of disclosure. These standards aim for transparency through openness, clarity, accessibility, accountability, and stakeholder engagement. However, there are contradictions, such as over-disclosure, confidentiality, regulatory compliance, cost vs. benefit, competitive advantage vs. transparency, stakeholder interests vs. shareholder interests, and short-term goals vs. long-term sustainability, which a company may look at from the corporate disclosure and transparency standard and the concept that require with it the best practices, including regular disclosure of clear language that has proper accessibility.

Conclusion

Transparency is essential for companies and the public. It contributes to the development of trust, compliance with legislation, and the enhancement of a company’s reputation. Companies must provide financial statements, material information, insider information, risk factors, corporate governance, sustainability reports, and quarterly and annual reports. Non-disclosure may outcome in regulatory penalties, loss of investor confidence, reputational harm, legal liability, and financial instability. Companies must comply with legal requirements, such as providing timely, accurate, and thorough information, using clear language, making information accessible, and conducting independent verification. Transparency has numerous advantages, including higher investor confidence, better decision-making, regulatory compliance, decreased risk, enhanced reputation, increased stakeholder trust, improved governance, and better risk management. There are challenges that exist and include information overload, confidentiality concerns, regulatory burdens, and cost and complexity. For this, the best practices need to be followed, which include regular disclosure, clear language, accessibility, independent verification, stakeholder engagement, regular updates, whistleblower protection, and clear reporting.

References

Disclosure and Transparency, Compliance Online Dictionary, https://www.complianceonline.com/dictionary/Disclosure_and_Transparency.html
The Importance of Transparency and Accountability in Corporate Governance, insights, https://insightss.co/blogs/the-importance-of-transparency-and-accountability-in-corporate-governance/
The Role of Transparency in Corporate Governance, WORLD ECONOMIC MAGAZINE (August 17 2024), https://worldecomag.com/the-role-of-transparency-in-corporate-governance/
Companies Act, No. 18, Acts of Parliament, 2013, (India)

[1] Companies Act, 2013, § 143, No. 18, Acts of Parliament, 2013, (India)

[2] Companies Act, 2013, § 123, No. 18, Acts of Parliament, 2013, (India)

[3] Companies Act, 2013, § 42, No. 18, Acts of Parliament, 2013, (India)

[4] Companies Act, 2013, § 68, No. 18, Acts of Parliament, 2013, (India)

[5] Companies Act, 2013, § 184, No. 18, Acts of Parliament, 2013, (India)

[6] Companies Act, 2013, § 185, No. 18, Acts of Parliament, 2013, (India)

[7] Companies Act, 2013, § 195, No. 18, Acts of Parliament, 2013, (India)

[8] Companies Act, 2013, § 196, No. 18, Acts of Parliament, 2013, (India)

[9] Companies Act, 2013, § 134, No. 18, Acts of Parliament, 2013, (India)

[10] Companies Act, 2013, § 135, No. 18, Acts of Parliament, 2013, (India)

[11] Companies Act, 2013, § 450, No. 18, Acts of Parliament, 2013, (India)

[12] Companies Act, 2013, § 24, No. 18, Acts of Parliament, 2013, (India)

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