THE LEGAL OBLIGATIONS OF COMPANIES REGARDING CORPORATE DISCLOSURES AND TRANSPARENCY

This article is written by Lavanya. B of BA LLB of 5^th Year of Ramaiah College of Law, an intern under Legal Vidhiya

ABSTRACT

Corporate disclosures and transparency are fundamental pillars of corporate governance and regulatory compliance, playing a vital role in ensuring accountability, investor protection, and market integrity. This research article explores the legal obligations and regulatory frameworks governing corporate disclosures and transparency in both India and the United States.

In India, corporate disclosures are primarily governed by the Companies Act, 2013, and regulations issued by the Securities and Exchange Board of India (SEBI). These laws mandate comprehensive disclosures related to financial performance, governance practices, shareholder information, and material transactions. Non-compliance can lead to penalties and regulatory actions, underscoring the importance of transparency in corporate operations.

Similarly, the United States has a robust legal framework for corporate disclosures, including the Securities Act of 1933, Securities Exchange Act of 1934, Sarbanes-Oxley Act of 2002, Dodd-Frank Act, and listing rules of stock exchanges such as NYSE and NASDAQ. These laws require public companies to disclose financial information, insider transactions, executive compensation details, and material events through periodic filings with the Securities and Exchange Commission (SEC). The objective is to protect investors, maintain fair markets, and uphold ethical standards in corporate conduct.

This comparative analysis highlights the key provisions and enforcement mechanisms of corporate disclosure laws in India and the United States, emphasizing their role in promoting transparency, investor confidence, and market stability. Understanding these regulatory frameworks is essential for legal practitioners, policymakers, and corporate professionals navigating the complexities of corporate governance and compliance in international markets.

KEYWORDS

Companies, Corporate disclosures, Transparency, Companies Act 2013, SEBI, USA, Securities Act, Securities Exchange Act.

INTRODUCTION

Corporate disclosures and transparency are critical aspects of corporate governance and regulatory compliance. These obligations ensure that companies provide accurate, timely, and comprehensive information to stakeholders, investors, and the public, fostering trust and accountability in the business environment.

In India, corporate disclosures and transparency are primarily governed by the Companies Act, 2013, and regulations prescribed by the Securities and Exchange Board of India (SEBI). Under these laws, companies are required to disclose a wide range of information including financial performance, shareholding patterns, related party transactions, corporate governance practices, and risk management policies. The objective is to ensure that shareholders and other stakeholders have access to reliable information for making informed decisions and assessing the company’s performance and governance practices.

SEBI mandates the disclosure of material information by listed companies to prevent insider trading and to ensure fair market practices. Additionally, the Companies Act, 2013, outlines the responsibilities of directors and auditors in ensuring transparency and accuracy in financial reporting. Non-compliance can lead to penalties and regulatory actions.

Similarly, in the United States, corporate disclosures and transparency are governed by the Securities Act of 1933 and the Securities Exchange Act of 1934, enforced by the Securities and Exchange Commission (SEC). Publicly traded companies are required to disclose financial statements, material information, executive compensation details, and other significant events through periodic filings like Form 10-K and Form 8-K. These disclosures are designed to protect investors and maintain fair and efficient markets.

The Sarbanes-Oxley Act of 2002 further strengthened corporate governance and disclosure requirements in response to accounting scandals. It introduced measures to enhance internal controls, audit procedures, and whistleblower protections, emphasizing the importance of transparency and accountability.

Thus, the robust legal frameworks in India and the United States pertaining to corporate disclosures and transparency serve to protect investor interests, enhance market integrity, and uphold ethical standards in corporate conduct. These regulations are crucial for fostering investor confidence and maintaining the stability and integrity of financial markets.

WHAT IS CORPORATE GOVERNANCE?

Corporate governance refers to the system of rules, practices, and processes by which companies are directed and controlled. It encompasses the relationships among various stakeholders involved in the company, including shareholders, management, board of directors, employees, customers, and the broader community.[1]

The Cadbury Report defines corporate governance as “the system by which companies are directed and controlled”[2] and emphasizes the importance of accountability, fairness, transparency, and responsibility.

The World Bank[3] views corporate governance as “concerns the system by which companies are directed and controlled. It is about having companies, owners and regulators become more accountable, efficient and transparent, which in turn builds trust and confidence” emphasizing the role of boards, shareholders, and stakeholders in ensuring sustainable business practices.

Corporate governance seeks to improve business integrity, bolster investor trust, and foster sustainable growth through the encouragement of ethical conduct, accountability, and prudent decision-making within companies.

WHAT IS THE MEANING OF DISCLOSURE AND TRANSPARENCY?

Disclosure refers to the act of revealing or making information known to others, particularly in a business or legal context. In business and finance, disclosure involves providing relevant and accurate information about a company’s financial performance, operations, risks, and other material aspects to stakeholders such as investors, regulators, and the public. The purpose of disclosure is to ensure transparency and enable informed decision-making. Examples of disclosures include financial statements, annual reports, regulatory filings, and disclosures of material events or risks that could impact investors’ decisions.[4]

Transparency refers to the quality or state of being open, honest, and easily understood. In a business or organizational context, transparency means providing clear and accessible information about activities, decisions, and processes to stakeholders. Transparent practices promote accountability, trust, and credibility. Transparency can involve disclosing information about governance structures, financial performance, corporate policies, decision-making processes, and relationships with stakeholders. It helps build trust among investors, customers, employees, and the wider community by demonstrating integrity and responsible behavior within an organization or institution.

IMPORTANCE OF DISCLOSURES FOR TRANSPARENCY

Transparency in business operations is crucial for fostering trust, accountability, and ethical behaviour. Disclosures play a pivotal role in achieving transparency by providing stakeholders with critical information about a company’s performance, governance, and risks.

1. Informed Decision-Making: Disclosures enable stakeholders, such as investors, regulators, and consumers, to make informed decisions based on accurate and comprehensive information about a company’s financial health, strategies, and operations.
2. Trust and Credibility: Transparent disclosures build trust and credibility among stakeholders by demonstrating openness, honesty, and integrity in business practices.
3. Regulatory Compliance: Many jurisdictions require companies to disclose specific information and adhere to transparency standards to comply with regulatory requirements and ensure fair market practices.
4. Stakeholder Engagement: Transparent disclosures facilitate effective communication and engagement with stakeholders, fostering stronger relationships and mutual understanding.
5. Risk Management: Disclosures help identify and mitigate risks by providing visibility into potential challenges, vulnerabilities, and governance practices.
6. Market Confidence: Transparent disclosures enhance market confidence by reducing uncertainty and enhancing predictability, thereby attracting investment and fostering economic growth.[5]

REGULATORY FRAMEWORKS FOR TRANSPARENT DISCLOSURES

Indian Laws

Companies Act, 2013

The Companies Act 2013[6] serves as the principal legislation governing the incorporation, operation, and dissolution of companies in India, emphasizing transparency and accountability through mandatory disclosures. One key provision, Section 129, mandates the preparation of comprehensive financial statements such as balance sheets, profit and loss statements, and cash flow statements, adhering to Schedule III of the Act and relevant accounting standards. These financial statements must be compiled annually and submitted to the Registrar of Companies (ROC) as per Section 137, ensuring public access to vital financial information.

Moreover, under Section 134, company boards are obligated to prepare a detailed report encompassing operations, financial performance, risks, corporate governance practices, and other pertinent details. This board’s report is presented to shareholders during the Annual General Meeting (AGM) and subsequently filed with the ROC within 30 days of the AGM, as stipulated by Section 137. Additionally, Section 92 necessitates the submission of an Annual Return to the ROC, which includes information on shareholders, debenture holders, directors, and promoters, ensuring transparency in ownership and governance structures.

Notably, any change or appointment of auditors must be promptly communicated to the ROC within 15 days under Section 139, maintaining transparency in auditing processes. Directors are also required by Section 184 to disclose any direct or indirect interests they hold in proposed contracts or arrangements involving the company, safeguarding against conflicts of interest. Furthermore, Section 186 imposes disclosure requirements for loans, guarantees, investments, or securities exceeding prescribed thresholds, ensuring transparency in financial dealings. Similarly, transactions with related parties above specified limits must be disclosed under Section 188, mitigating risks associated with potential conflicts or unfair practices.

These stringent disclosure provisions embedded within the Companies Act 2013 underscore India’s commitment to promoting corporate governance, investor confidence, and market transparency, essential for fostering a robust and accountable business environment.

SEBI Regulations

SEBI (Securities and Exchange Board of India) regulates listed companies to ensure transparency and investor protection through various disclosure requirements:

SEBI mandates the disclosure of price-sensitive information by listed companies to prevent insider trading and ensure a level playing field for all investors. This information includes financial results, dividends, changes in capital structure, and other material developments that could affect the company’s share price.

Additionally, SEBI’s corporate governance regulations require listed companies to disclose details about their corporate governance practices, board composition, audit committee functioning, related party transactions, and remuneration policies. These disclosures aim to enhance transparency, accountability, and investor confidence in listed companies.

Insider Trading Regulations

India’s Insider Trading Regulations[7] aim to prevent unfair trading practices and maintain market integrity and transparency. According to the Securities and Exchange Board of India (SEBI), insider trading refers to “trading in securities based on unpublished price-sensitive information by individuals who are privy to such information owing to their position within the company”. SEBI’s regulations prohibit insiders, including directors, officers, and key employees, from trading on undisclosed material information.

Insiders are required to comply with stringent disclosure norms, promptly reporting any changes in their shareholding or trading activities to the company and stock exchanges. SEBI mandates the implementation of internal codes of conduct and surveillance mechanisms within companies to monitor and prevent insider trading activities effectively. These regulations play a crucial role in enhancing investor confidence, ensuring a level playing field, and upholding the integrity of India’s financial markets.

Corporate Social Responsibility (CSR)

Under the Companies Act, 2013, certain qualifying companies are required to spend a specified portion of their profits on Corporate Social Responsibility (CSR) activities. These companies must disclose their CSR initiatives and expenditures in their annual reports, detailing the projects undertaken, funds allocated, and outcomes achieved.

The disclosure of CSR activities promotes accountability and transparency, allowing stakeholders to assess a company’s commitment to social and environmental responsibility. It also encourages companies to integrate ethical practices and sustainability into their business strategies, contributing positively to society and the environment.

Disclosure Requirements for Mergers & Acquisitions

In India, disclosure requirements for mergers and acquisitions (M&A) transactions are governed by the Companies Act, 2013, and SEBI regulations. Companies involved in M&A activities must disclose comprehensive information about the transaction to shareholders and regulators. SEBI’s regulations emphasize transparency, ensuring that stakeholders have access to relevant details regarding the rationale, financial implications, risks, and impact of the transaction.

These disclosure requirements serve to protect shareholder interests, facilitate informed decision-making, and prevent potential market abuse. By providing transparency throughout the M&A process, these regulations promote fair market practices and help mitigate risks associated with such transactions. Non-compliance with disclosure norms can result in regulatory penalties and legal consequences, highlighting the importance of adhering to these regulations for companies engaged in M&A activities in India.

USA Laws

Securities Act of 1933

The Securities Act of 1933[8] was enacted to regulate securities offerings and provide investors with material information necessary for making informed investment decisions. Under this act, companies issuing securities to the public must register these offerings with the Securities and Exchange Commission (SEC) and provide detailed disclosures about the securities being offered, including financial statements, risk factors, and other relevant information. This registration process ensures transparency and helps protect investors from fraudulent securities offerings.

Specific provisions of the Securities Act of 1933 include:

• Section 5: Requires registration of securities offerings with the SEC unless exempted.
• Section 11: Imposes liability on issuers for false or misleading statements in registration statements.
• Section 12: Establishes civil liability for offers or sales of unregistered securities.

These provisions collectively promote transparency in the capital markets by mandating disclosure of material information to investors during securities offerings.

Securities Exchange Act of 1934

The Securities Exchange Act of 1934[9] governs the ongoing disclosure and regulation of securities trading and markets. This act requires publicly traded companies to regularly disclose financial information and other material developments to investors and the public. Key provisions of the Securities Exchange Act include:

• Section 13: Requires reporting companies to file periodic reports (such as annual and quarterly reports) with the SEC, disclosing financial statements and other relevant information.
• Section 16: Regulates insider trading by requiring insiders (directors, officers, and large shareholders) to report their transactions and holdings of company securities.
• Section 14: Regulates proxy solicitations, ensuring that shareholders receive adequate information to make informed voting decisions.

These provisions promote transparency, investor protection, and fair trading practices in the U.S. securities markets.

Sarbanes-Oxley Act (SOX) of 2002

The Sarbanes-Oxley Act (SOX) of 2002[10] was enacted in response to corporate accounting scandals (such as Enron and WorldCom) to enhance corporate governance, financial reporting, and disclosure practices. SOX imposes stringent requirements on publicly traded companies, including:

• Section 302: Requires CEO and CFO certification of financial reports.
• Section 404: Mandates internal controls assessment and reporting.
• Section 401: Enhances disclosure requirements for off-balance-sheet transactions.

SOX aims to restore investor confidence by improving transparency, accountability, and the integrity of financial reporting in U.S. public companies.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Act[11], passed in response to the 2008 financial crisis, enhances disclosure and transparency in financial markets to prevent future economic crises. Key provisions of Dodd-Frank related to disclosure include:

• Volcker Rule (Section 619): Limits banks’ ability to engage in proprietary trading and invest in hedge funds or private equity funds.
• Enhanced Regulation of Credit Rating Agencies (Title IX): Requires disclosure of methodologies and conflicts of interest by credit rating agencies.
• Executive Compensation Disclosures (Section 953): Requires public companies to disclose CEO pay ratio.

Dodd-Frank promotes transparency and accountability in financial markets by addressing systemic risks, enhancing consumer protection, and improving disclosure practices.

NYSE and NASDAQ Listing Rules

The New York Stock Exchange[12] (NYSE) and NASDAQ[13] impose additional disclosure requirements on listed companies to ensure fair and efficient markets. These listing rules include:

• Corporate Governance Standards[14]: Require listed companies to adhere to specific corporate governance practices, including board composition and committee charters.
• Listing Agreement Disclosures: Mandate disclosure of material information related to financial performance, regulatory compliance, and corporate actions.
• Continued Listing Standards: Establish criteria for maintaining a listing on the exchanges, including timely disclosure of material events and financial results.

JUDGEMENTS REGARDING CORPORATE GOVERNANCE

1. In the case of Marchand v. Barnhill[15], the Delaware Supreme Court ruled that directors must actively oversee a company’s compliance with legal obligations and risks related to its business operations. This decision highlighted the directors’ duty to establish and monitor effective systems and controls aimed at detecting and addressing central compliance issues and risks. It emphasized the critical role of strong corporate governance practices, particularly in industries vulnerable to regulatory risks, and stressed the board’s responsibility to foster a corporate culture that prioritizes compliance and risk management for consumer safety and shareholder value.
2. The Securities and Exchange Board of India vs. Price Waterhouse Coopers (2018)[16] dealt with the accountability of auditors in corporate governance and their liability in cases of financial misconduct. The Supreme Court upheld SEBI’s ban on Price Waterhouse Coopers (PwC) entities from auditing listed companies for a specific period. This judgment reinforced SEBI’s commitment to enhancing corporate governance standards by holding auditors responsible for ensuring accuracy and transparency in financial reporting.
3. The Satyam Computer Services scandal of 2009[17] exposed management’s manipulation of financial statements, causing a significant loss of investor trust. This case highlighted the urgent need for robust corporate governance practices and stricter enforcement measures to prevent fraudulent activities, especially in the digital age. It underscored the importance of transparency, integrity, and accountability in corporate governance to maintain investor confidence and market stability.

CONCLUSION

In conclusion, corporate disclosures and transparency are indispensable elements of modern corporate governance and regulatory frameworks in both India and the United States. The legal obligations outlined in the Companies Act, 2013, and SEBI regulations in India, along with the Securities Act of 1933, Securities Exchange Act of 1934, and subsequent legislative acts in the U.S., emphasize the commitment to fostering accountability, investor protection, and market integrity through comprehensive disclosure requirements.

These robust legal frameworks emphasize the importance of accurate, timely, and accessible information for stakeholders, investors, and the public, facilitating informed decision-making and enhancing market confidence. By promoting transparency, accountability, and ethical conduct, these regulations contribute to sustainable growth, investor trust, and the stability of financial markets. Compliance with these disclosure obligations is essential for maintaining corporate governance standards and upholding ethical practices in corporate conduct on a global scale.

REFERENCES

1. What is corporate governance? Your 2024 guide!, IMD (Apr. 08, 2024), https://www.imd.org/reflections/what-is-corporate-governance-the-ultimate-guide.
2. Abhinav Mishra, Effectiveness of Disclosure In Indian Corporate Law, TAXGURU (Apr. 08, 2024), https://taxguru.in/corporate-law/effectiveness-disclosure-indian-corporate-law.html.
3. Aditi Shakya, DISCLOSURE REQUIREMENTS UNDER INDIAN COMPANY AND SECURITIES LAWS: AN ANALYSIS, JUS SCRIPTUM (Apr. 08, 2024), https://www.jusscriptumlaw.com/post/disclosure-requirements-under-indian-company-and-securities-laws-an-analysis.
4. Adam Hayes, The NYSE and Nasdaq: How They Work, INVESTOPEDIA (Apr. 08, 2024), https://www.investopedia.com/articles/basics/03/103103.asp#:~:text=Code%20of%20conduct%3A%20The%20NYSE,directors%2C%20officers%2C%20and%20employees.
5. What Are the Listing Requirements for the NASDAQ?, INVESTOPEDIA (Apr. 08, 2024), https://www.investopedia.com/ask/answers/nasdaq-listing-requirements/.   
6. Rules – The NASDAQ Stock Market, NASDAQ, (Apr. 08, 2024), https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/nasdaq-5600-series.
7. The Cadbury Report, ICAEW, (Apr. 08, 2024), https://www.icaew.com/-/media/corporate/files/library/subjects/corporate-governance/financial-aspects-of-corporate-governance.ashx?la=en.    
8. G20/OECD Principles of Corporate Governance 2023, OECD (Apr. 08, 2024), https://doi.org/10.1787/ed750b30-en.  
9. Corporate Governance, THE WORLD BANK (Apr. 08, 2024), https://www.worldbank.org/en/topic/financialsector/brief/corporate-governance#:~:text=The%20corporate%20governance%20group%20is,strengthening%20their%20corporate%20governance%20frameworks.
10. Swati Raghuwanshi, The Importance of Corporate Governance in Today’s Business Environment, STARTUPFINO (Apr. 08, 2024), https://www.startupfino.com/blogs/the-importance-of-corporate-governance-in-todays-business-environment/.

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[1] What is corporate governance? Your 2024 guide!, IMD (Apr. 08, 2024), https://www.imd.org/reflections/what-is-corporate-governance-the-ultimate-guide.

[2] The Cadbury Report, ICAEW, (Apr. 08, 2024), https://www.icaew.com/-/media/corporate/files/library/subjects/corporate-governance/financial-aspects-of-corporate-governance.ashx?la=en.

[3] Corporate Governance, THE WORLD BANK (Apr. 08, 2024), https://www.worldbank.org/en/topic/financialsector/brief/corporate-governance#:~:text=The%20corporate%20governance%20group%20is,strengthening%20their%20corporate%20governance%20frameworks.

[4] Rick Wayman, What Is a Disclosure? Definition in Business and How They Work, INVESTOPEDIA, (Apr. 08, 2024), https://www.investopedia.com/articles/analyst/073002.asp.

[5] Swati Raghuwanshi, The Importance of Corporate Governance in Today’s Business Environment, STARTUPFINO (Apr. 08, 2024), https://www.startupfino.com/blogs/the-importance-of-corporate-governance-in-todays-business-environment/.

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

[7] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015.

[8] Securities Act of 1933, 15 U.S.C. §§ 77a-77aa (2018).

[9] Securities Exchange Act of 1934, June 6, 1934, ch. 404, title I, § 1, 48 Stat.

[10] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).

[11] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[12] Adam Hayes, The NYSE and Nasdaq: How They Work, INVESTOPEDIA (Apr. 08, 2024), https://www.investopedia.com/articles/basics/03/103103.asp#:~:text=Code%20of%20conduct%3A%20The%20NYSE,directors%2C%20officers%2C%20and%20employees.

[13] What Are the Listing Requirements for the NASDAQ?, INVESTOPEDIA (Apr. 08, 2024), https://www.investopedia.com/ask/answers/nasdaq-listing-requirements/.

[14] Rules – The NASDAQ Stock Market, NASDAQ, (Apr. 08, 2024), https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/nasdaq-5600-series.

[15] 212 A.3d 805 (Del. 2019).

[16] Ajay Gautam, Landmark Judgments on SEBI by Supreme Court of India, LINKEDIN (Apr. 10,2024), https://www.linkedin.com/pulse/landmark-judgments-sebi-supreme-court-dxrrf/.

[17] Tanushree Jaiswal, Satyam scam, 5PAISA (Apr. 10, 2024), https://www.5paisa.com/blog/satyam-scam.

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