The ongoing discussion on disclosure of material information by issuers of securities in India just got a new facet. The United States Securities and Exchange Commission (SEC) has issued a public report embracing social media and networking sites. such as Facebook and Twitter, as acceptable means of disseminating information, making it clear usage of such networks would need to be compliant with regulations barring selective disclosure.
The Securities and Exchange Board of India (SEBI), too, is grappling with how to regulate selective disclosure of information in the Indian market - most of this concern is centered on the primary market for new issuance of securities. Increasingly, SEBI is getting concerned about selective disclosure to large and institutional investors in securities offerings - for example, in the form of research reports and marketing presentations - while rest of the investors have to rely on disclosures in the official offer documents for securities offerings.
As a concept, disclosure of information in India is covered by multiple regulations. Regulations governing issuance of securities also lightly govern issuance of research reports published around the time of securities offerings. Observation letters issued by SEBI upon review of draft offer documents generally state that marketing material should not contain information extraneous to the contents of the offer documents. However, this is an area light on clarity, considering the depth and detail in which international developments in this space came under the scanner when Eliot Spitzer took Wall Street by storm with his prosecution of securities research and marketing practices in the US.
Even less clear is the area of disclosure of price-sensitive material information about companies that are already listed. The listing agreement (between the listed companies and the stock exchanges) regulates this area. Material developments and decisions taken by boards of listed companies are required to be intimated to stock exchanges for dissemination to the market. SEBI has historically made numerous interventions by issuing directions under Sections 11 and 11B of the SEBI Act to listed companies that made disclosures or failed to make disclosures about developments in their businesses not to access markets until further orders.
Most of these interventions have been based on the charge of fraudulent and unfair practices in the securities market, aimed at artificially moving and manipulating market price of the securities of the issuer. However, what remains elusive is clarity on what should be disclosed, when it should be disclosed, and what means maybe adopted for disclosures. Currently, statements to stock exchanges are the only means envisaged.
Of course, information published in the annual report along with the financial statements would also be regarded as having been disclosed, but whether an interview from a CEO to a widely read newspaper, also published on the issuer's website, would constitute an official publication, would not beget a confident and assured response either way. If stock exchanges are the primary platform, imagine the information flow exchanges would have to contend with, if every issuer were to play safe and send everything they wanted in the public domain to the exchanges. Indeed, there is abuse of this platform, too. Listed companies are known to send their version of litigation to stock exchanges, giving the market a one-sided picture of developments, with counter-parties having no say in presenting their side to the public, defeating the very objective of this dissemination platform.
There is yet another dimension. Regulations governing insider trading prohibit disclosure of "unpublished" price-sensitive information by insiders in listed companies to third parties. The term "published" is defined as publication by the listed company, but these regulations, too, do not get into the medium of publication.
This leaves open the legality of conducting due diligence into a listed company before taking it over, and even if one were desirous of making a public disclosure, there would need to be an assurance that a publication on the company's website, or a publication of an interview in a widely read newspaper, would indeed render the information to be "published".
The regulator's firm and clear official view on these issues is not known to the market. Routinely, every time a newspaper reports a development, regardless of its accuracy, stock exchanges routinely ask the listed company to confirm the news.
If the news cannot be confirmed for sheer lack of certainty, the company would reply that nothing that warrants disclosure has occurred. The braver ones deny outright. And, indeed, weeks later, when the news becomes truly accurate and certain, the official disclosure comes out.
The development from the Securities and Exchange Commission is that it has now said it would embrace disclosures made on social media as effective publication, so long as the company is able to demonstrate that the publication of the information was "reasonably designed to provide broad, non-exclusionary distribution of information to the public".
The Securities and Exchange Commission has simply asked for advance intimation to the market that a certain platform would be used for dissemination, say the official Facebook page.
It is high time India had regulatory clarity on the medium for publication and disclosure of information.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
somasekhar@jsalaw.com
