Sebi asks listed firms to reveal commodity risks, hedging in annual report

Market regulator Securities and Exchange Board of India has asked all listed companies to disclose their commodity risk and hedging in their annual reports. The move is expected to improve risk management by companies and make their positions transparent as far as outstanding risks are concerned. It will also help all commodity derivatives to improve depth and width apart from generating liquidity.

Sebi on Thursday issued a circular mandating listed entities to make disclosures regarding commodity price risk and hedging activities in the corporate governance report section of the annual report of a listed entity. Companies have to disclose risk relating to material commodities. However, what will be classified as a material commodity is to be decided by a company’s board.

Such provisions exist for disclosing currency risk and this has led to companies improving hedging in currencies as market see red when they see that unhedged currency risks are higher when currency or Indian rupee is falling. Several non-performing assets were generated mainly because the commodity in which the company was active became very volatile and several small and mid-cap companies were not hedging them. Only large manufacturing companies were hedging risks, that too, in commodities like bullion, metals and crude oil and its derivatives. They were hedging risks most of the time in overseas exchanges.

MCX MD & CEO Mrugank Paranjape said, "This is a great initiative that will give much-needed thrust to ensure that corporates understand and manage their commodity exposures. It will greatly enhance the participation by the physical market in the commodity derivatives markets."

After the entry of NSE and BSE last month, there are four big exchanges and one small exchange in commodity derivative space. They all are gradually expected to see hedging improving by listed companies and as a result volumes on their platforms. MCX and NCDEX may see immediate benefits as they offer a large basket of commodities for hedging.

Sebi today said that companies have to not only disclose risks in rupee and in quantities but also have to say how they managed the risks. The proposal to ask listed firms to disclose their commodity exposures and hedging activities were made by the former regulator Forward Markets Commission four years ago.

However, the Corporate Governance Committee formed under the chairmanship of Uday Kotak recommended a year ago that “the listed entities should disclose their risk management activities during the year, including their commodity hedging positions in a  more transparent, detailed and uniform manner.” This report was accepted by the Sebi in March and in accordance with that, issued a circular today.

Sebi has also asked companies to disclose the risk of commodities pertaining to overseas market and that should be shown in rupee terms. In India, risk relating to commodities is much bigger and largely unknown to shareholders. It is precisely that reason that Kotak committee recommended disclosure of commodity risk.