Companies may have to disclose commodity exposure

Sebi and FMC may take the move for enhanced disclosures of hedged and unhedged positions of commodities

Listed companies might soon have to disclose raw material holdings and whether they have hedged against exposure to commodities. Commodities’ exposures are hedged on futures exchanges.

This move is an initiative of the commodities market regulator, the Forward Markets Commission (FMC), and part of the enhanced disclosures required by the Securities and Exchange Board of India (Sebi)’s new listing regulations.

“We are examining a proposal from the commodities regulator to ensure that listed companies as a part of annual disclosures also declare their holdings of raw materials that are hedged against their financials,” said a source. Many companies, including in the information technology sector, disclose their foreign currency exposure and their hedging levels. The FMC had held discussions with the capital markets regulator to for similar disclosures by companies; since Sebi is the authority overseeing listed companies, a beginning could be made there.

NEW NORMS LIKELY

• Forward Markets Commission and Sebi considering making it compulsory for companies to disclose their raw material holdings
• Companies could be asked to disclose raw material exposure as a part of annual filing
• Regulators believe this would increase accountability and transparency
• Will increase depth in market and encourage more companies to invest in commodities

Earlier in September, the FMC had asked the capital markets regulator to make provisions in the the Securities and Exchange Board of India Act, 1992, regarding listed companies’ disclosure on raw-material holdings hedged on their balance sheets.

An FMC official said: “We have discussed this with Sebi on various occasions and even as recently as a few months ago.”

If the proposal gets cleared, companies would have to disclose their hedged and unhedged raw material on the stock exchange platform. It is also in the interest of companies to hedge their raw material price risks. So far, most companies, including small and medium ones, find commodities exchanges don’t provide enough depth in many commodities. However, of late, the FMC has allowed increases in open position limits to facilitate hedging.

A source with information of the matter said: “Such a move will increase transparency and make individual shareholders aware of the commodity exposure that a company has.”

Market experts said this would enhance accountability and push companies to hedge their commodities on Indian exchanges, increasing the depth of the market.

An FMC official said: “Companies will also become more aware of how much of their raw material they have hedged

and how much more they can hedge to protect themselves from fluctuations in the price of the commodity.”

For currency risks, even accounting standards require companies to disclose everything and account for the risk. A commodity exchange official said it was time such standards were developed for commodities.