Opaque company filings provide fertile ground for aggressive SEBI

By Himank Sharma and Sumeet Chatterjee

MUMBAI (Reuters) - In the name of investor protection, India's capital markets watchdog is telling companies on the Mumbai bourse to disclose more information when the situation calls for it - or else.

The Securities and Exchange Board of India (SEBI) drove home that message on Monday when it banished DLF Ltd from the capital markets for three years, its toughest ruling ever.

SEBI, criticised in the past for not actively chasing frauds and penalising wayward firms, said India's biggest listed property firm had failed to provide key information on subsidiaries and pending legal cases at the time of its record-busting initial public offering in 2007.

SEBI's new-found teeth have spread disquiet among Wall Street and local investment banks vying for fund-raising mandates from Indian companies, in a market where large deals are few and fees are notoriously low.

"The net could get cast wide in some cases, no doubt about that," said the head of equity capital markets at a large European bank in Mumbai, declining to be named due to the issue's sensitivity. "You need to be scared of the regulator if you have done something wrong - that's the message."

While currently there is no plan to make banks liable for non-disclosure of material information by companies, SEBI could penalise banks if the regulator uncovers collusion between them and the company, some bankers said.

Under its Chairman U.K. Sinha, appointed in this role in 2011, SEBI has taken a slew of initiatives from cracking down on suspicious trades to improving corporate governance guidelines.

Clamping down on inadequate disclosures has not been SEBI's strong suit due to a lack of resources and expertise. But a slew of complaints from overseas investors about shoddy corporate practices have galvanised the regulator, SEBI officials said.

"Under chairman Sinha, SEBI has gone from being an insular organisation to more of an open platform for investors to come and discuss how to improve Indian markets," said one official at the regulator's corporate finance department.

"Both foreign and domestic investors have repeatedly asked for better quality of disclosures from companies, especially the promoter-driven ones," said the official, who declined to be identified as he was not authorised to talk to the media.

A spokesman for SEBI declined to comment.

CORRUPT DEALINGS

In August, SEBI banned the founders of technology company Bharatiya Global Infomedia Ltd from the markets for five years for failure to disclose key information about preferential loans and use of proceeds from its 2011 IPO.

Similarly, towards the end of last year, the regulator barred Taksheel Solutions Ltd and its founders for inadequate disclosures in its IPO documents.

This week, SEBI slapped a fine of 2.5 million rupees ($40,736) on GlaxoSmithKline Plc (GSK) and a group company that owns most of GlaxoSmithKline Pharmaceuticals for delays in disclosing changes in the shareholding structure of the India-listed unit.

The regulator acknowledged that the delay was inadvertent and that GSK did not receive any "quantifiable gain or unfair advantage" due to the delay, but still imposed the penalty.

GlaxoSmithKline Pharmaceuticals did not immediately respond to a request for comment.

"All this has brought attention to a lot of issues that previously went unnoticed, one of which is disclosure, the other is corrupt dealings by powerful promoters," said Shriram Subramanian, managing director of Bangalore-based shareholder advisory firm InGovern.

In August, a policy-making group in SEBI proposed launching an electronic disclosure system that will unify industry specific disclosures into a single electronic process to prevent market-sensitive information from going unnoticed.

Some investors are not convinced.

"Disclosures are still not standard by far, so most of the time we reach out to the companies for more details," said Sankaran Naren, chief investment officer of Mumbai-based ICICI Prudential Asset Management.

"We get our internal analyst to look at the annual reports and ask for specific clarifications, sometimes we get good quality of responses, sometimes we are not satisfied."

SEBI also needs to shorten the time it takes in investigating alleged wrongdoings and handing out penalties. It must also invest more in resources and technology to keep up with the rising number of market participants and increasingly fast-paced and complex trading systems, people in the industry say.

(1 US dollar = 61.3700 Indian rupee)

(Additional reporting by Zeba Siddiqui in MUMBAI; Editing by Ryan Woo)