Transparency and disclosure in Indian capital markets

Abstract

Two significant features seen in capital markets are the existence of the principal - agentproblem and acute asymmetries of information. The shareholders (principals) entrust therunning of their company to the management (agent), which is to be monitored by theBoard. The company is also accountable to various other stakeholders. In the wake ofvarious scams and market abuses, it has been realized that better corporate governancewould help to avoid the recurrence of such incidents. A critical aspect of superiorcorporate governance is Disclosure. This would cover the disclosures made bymanagement to the Board for better monitoring and the disclosures to be made by thecompany to regulators, investors and the general public. Such disclosures could bemandated or voluntary. This paper studies the disclosure scenario in the Indian context. Itargues that the markets should be allowed to gauge the disclosure practices of thecompanies and that stringent mandates to effect disclosure may result in placing moreemphasis on the form at the expense of the content. The regulators could play the role ofinforming the public about what the firms have and have not disclosed. The regulatorstoo have to improve their act and play a pro-active role rather than reacting after the horsehas bolted. Technological advances such as XBRL need to be actively encouraged foradoption. With regard to forcing the pace of such disclosure practices on Indiancompanies, the lead should come from the financial institutions that have significantstakes in most large enterprises but have so far played a very passive role. Betterdisclosure and such other effective corporate governance practices have become moreimperative in view of the following developments. More and more investors are seekingto invest in the capital markets because of reducing interest rates. Foreign Institutionalinvestors too are increasing their exposure due to the attractive returns offered. And,Indian companies may also prefer to raise cheaper capital from foreign markets. Tofacilitate such developments, it would be impossible to ignore the need for more effectivedisclosure practices.