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Friday, September 3, 2010



We are aware that in order to take any particular decision, one needs to have some basic information to arrive at a conclusion. The decision-making in corporate world is no exception. The shareholders require periodical information about the Co. in which they have invested so that they can take decisions about a particular matter.

Now it is also well known that the Co. law, the market regulator SEBI and government agency DCA mandates that a corporate body should and must disclose the information, which in the view of above trio, is necessary for the shareholder to receive.

But here lies the debate of transparency vis a vis disclosure. The companies usually try to hide such information, which it feels may send wrong signals about their position in the market. Also the Co’s usually do not disclose any matter, which may affect its shareholding such as decisions regarding the new projects or, merging or joining hands with another corporate and so on. The company law mandates that at each and every step of Co. the need to disclose right starting from constituting the Co., commencement of business, issue of shares and further other decisions to be taken.

Now suppose the Co. does not disclose the needful then what is the solution? The Co. law provides for punishment or fine for the non-disclosures that are mandatory in nature. But what about the disclosures which are non-mandatory? If the Co. does not furnish such information, where does the confused shareholder go? Can the shareholder in such a situation ask the Co. to furnish the information? Is it right to say that the shareholder has a right to get information from the Co.? Can we say that a shareholder has a right to information keeping into consideration the basic corporate governance principles? This is the underlying question that the project will try to answer.

The project first discusses the rational behind the need of disclosing any kind of information. Then we try to look at actually what the corporate law, SEBI DIP guidelines mandates the Co. to disclose. By this we try to find out the various mandatory and voluntary disclosures and where a shareholder can be denied to give information. Then we come to the conclusion as to whether there really exists a right to information of shareholder.

The another major aspect of the topic the project tries to analyze is that even if the Co. is giving the even if the Co. is giving some information, whether that information is in such a manner that a ‘normal shareholder’ is able to identify with it and if not what can be possible solution for the same.

Thus the project in short tries to find out all related aspects of ‘Right to information of shareholders’ w.r.t. corporate governance principles.



Disclosure is ensuring access to information by all interested parties, regardless of the purpose of obtaining the information, through a transparent procedure that guarantees information is easily found and obtained. Timely and accurate disclosure is essential for shareholders, potential investors, regulatory authorities, and other stakeholders. Since we are at present only talking about the shareholders we would restrict us only to the benefit caused to them. The access to material information helps shareholders protect their rights and improves the market participants’ ability to make sound economic decisions.

Disclosure makes it possible to assess and oversee management, as well as to keep management accountable to the company and shareholders. Disclosure benefits companies since it allows them to demonstrate accountability towards shareholders, act transparently towards the markets, and maintain public confidence and trust. Good disclosure policies should also reduce the cost of capital.

Finally, apart from the shareholders, information is also useful for creditors, suppliers, customers, and employees to assess their position, respond to changes, and shape their relations with companies.


1. Principles of Disclosure
A more everyday and practical expression of what constitutes a good disclosure can be as follows:

1. Provided on a regular and timely basis;
2. Easily and broadly available;
3. Correct and complete; and
4. Consistent, relevant, and documented.

The above is though of a very ideal situation and is usually not possible for the corporate to abide by the same but the mandate should be while disclosing one gets as near to the above guidelines.

2. Disclosure Versus Transparency
Disclosure is sometimes confused with transparency. Unfortunately, these two terms are frequently and erroneously used interchangeably. While disclosure and transparency would, at first glance, appear to be the same, they are not. Companies may disclose an enormous amount of information that is of no particular value to the users of such information. Important pieces can be withheld. Disclosure can be irrelevant or, worse, appear to be manipulated in such a way as to conceal the true picture of the state of the enterprise.




The OECD Principles of Corporate Governance (OECD Principles) suggest that there should be timely and accurate disclosure on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. The key concept that underlies the OECD’s recommendation is the concept
of materiality. Material information is information, the omission or misstatement of which could affect economic decisions taken by the users of information. Materiality may also be defined as a characteristic of information or an event that makes it sufficiently important to have an impact on a company’s share price.

The OECD Principles call for disclosure of all material information in the following areas:

 Financial and operating results of the company;
 Company objectives;
 Shareholdings and ownership structure;
 Directors and key executives, as well as their remuneration;
 Material foreseeable risk factors;
 Material issues regarding employees and other stakeholders; and
 Governance structure and policies.

One can say that the list is comprehensive, if general. The Technical Committee of the International Organization of Securities Commissions (IOSCO) has developed more detailed, high-level principles for ongoing disclosure and material development reporting for listed entities. These principles are :

• Materiality of information for an investor’s investment decision;
• Disclosure on a timely basis — immediate or periodic;
• Simultaneous and identical disclosure in all jurisdictions where the entity is listed;
• Dissemination of information by using efficient, effective, and timely means;
• Disclosure criteria fairness, without misleading or deceptive content and containing no material omission;


 Company Objectives

It is important for markets, shareholders, and other stakeholders to be aware of the company’s objectives. The communication of company objectives can be either in response to legal requirements or it can be voluntary. Legislation requires that company objectives (such as the issuance of securities, acquisition plans, replacement and sales of assets, or research and development) be disclosed in the prospectus. The annual report must outline the company position in the industry, priority areas of activity, and development trends.

 Information on Directors and Executives

a) Personal Data
Investors and shareholders should have access to relevant information about Supervisory Board members and key executives to evaluate their experience and qualifications. Educational background, current occupation, and professional experience of directors and senior executives should be disclosed and readily accessible to interested parties. It is also important that shareholders and investors have information about any (existing or potential) conflicts of interest that may affect the independence and decision-making capacity of the Supervisory Board and Executive Board.

Shareholders should also be able to assess whether or not Supervisory Board and Executive Board members dedicate sufficient time to their duties and properly carry out their responsibilities. Accordingly, companies should disclose all other Board positions held by Supervisory or Executive Board members in other companies (domestic and foreign), and the meeting attendance records.

b) Remuneration
Incentive remuneration schemes are common in many countries and come in many varieties. Few companies have such arrangements that are identical to one another. Executive remuneration plans are usually put in place in an effort to motivate executives, and better align their interests with the interests of shareholders. They normally include performance-based bonuses. Incentive remuneration schemes may not be the most effective way of alleviating inherent conflicts of interests and, in any event, should always be subject to careful legal and financial examination and the approval of the Supervisory Board

 Material Foreseeable Risk Factors
Risk (along with return) is one of the most important considerations for any investor. Risks may include particular industry risks as well as political, commodities, derivatives, environmental, market, and interest and currency fluctuation risks. In short, risk is an omnipresent feature of business activity. Risk is, by its very nature, forward-looking and extremely difficult to quantify. Nevertheless, companies are required to describe material risks in their annual reports. Specific industry, country and regional risks, as well as financial and legal risks all need to be disclosed in prospectuses and quarterly reports.

 Corporate Governance Structures and Policies
When assessing a company’s governance structure, market participants may want to obtain information on the company’s governing bodies, including the division of authority between shareholders, directors, and executives, as well as on the company’s corporate governance policy, its commitment to corporate governance principles, and compliance mechanisms. The charter is the document that sets the rules and procedures of the company’s governance system. It is a fundamental document of the company that is to be made publicly available. Company-level corporate governance codes also serve to highlight general corporate governance concepts and structures.

 Disclosure During the Placement of Securities in prospectus

Companies must prepare and register prospectuses under certain circumstances. A prospectus provides material information on the company so that investors can make informed decisions on the merits of potential investments. Prospectuses set forth the nature and object of shares, debentures, or other securities, and the investment and risk characteristics of the issue. Investors must be furnished with a prospectus before purchasing securities.

 Information for Shareholders Through the Annual Report

Companies are obliged to provide shareholders with access to corporate documents, regardless of the number of shares owned. Arguably, the most important document to be provided to shareholders is the company’s annual report. It is a formal record of a company’s financial condition that must be distributed to shareholders under the Company Law. The annual report is a shorter and more easily digestible version of more detailed financial information. Annual reports increasingly include forward-looking and qualitative information that is important to readers.


It is good practice for companies to voluntarily disclose material information beyond formal legal requirements. This holds particularly true for companies operating in emerging markets that are often marred by weak legal and regulatory environments, and, moreover, poor enforcement mechanisms. To the extent possible, companies are encouraged to use existing forms of disclosure (e.g., prospectuses, and quarterly, annual, and material events reports) and adhere to the same quality standards that are demanded for these forms of reporting.

Voluntary disclosure may cover issues such as a company’s policies concerning corporate governance, business ethics, environmental issues, and other public policy commitments. This information can help to properly evaluate the prospective performance of the company, its relationship with various stakeholders and communities in which it operates, and the steps that the company has taken to implement its objectives. As with other types of disclosure, the quality of information provided to the public is greatly enhanced by adhering to a widely accepted standard. They are also encouraged to use existing channels of communication, such as the internet and the print media. We discuss two of them in some details:

1) Corporate Websites
Corporate websites are easily accessible to the public at low cost, and can be an exceptionally powerful means of communication. At present, the internet is beginning to be accepted as an official disclosure channel. Web-based disclosure is being studied closely by securities commissions worldwide to make its maximum use in corporate disclosure.

2) Mass Media
The print media are an additional channel for disclosure. Although publication may entail additional costs, it is a recognized legal channel for disclosure and (unlike the internet, which is passive) ensures the active dissemination of information among the public. Most companies disclose information about new products, major contracts, acquisitions, financial results, production plans, and securities issues in the print media.


The disclosure provisions of the securities laws involve three issues: who should disclose, what and in what manner it should be disclosed. For all the securities, in which the shareholder has his interest, set forth basic disclosure duties, and additional requirements have been created under the SEBI’s rule making authority. The Disclosures and Investors Protection Guidelines in India (DIP) that regulates issuance and sale to the public emphasized disclosure in a printed prospectus, clearly is the authority where such power to disclose is vested among the shareholders.

The disclosure requirements pertain basically to the issuing, companies and intermediaries. SEBI, on its own, also discloses with it and relevant in participants decision-making. In most of the securities markets, including India, securities regulatory system is based on a hybrid of merit regulation and disclosure regulation. Now there are provisions made in the regulations also to ensure that adequate information is disclosed on corporate governance. Such disclosure may be classified as disclosures on corporate governance. We deal with the different type of disclosures required –


The principle of full and fair disclosures prier to issue is set out by SEBI Regulations for Merchant bankers and in the SEBI DIP guidelines. These regulations have statutory force and that an offering could be delayed if the draft-offering document forwarded to the regulator is found to be deficient in disclosure or not in full compliance with the SEBI DIP guidelines. Also, if the Merchant Banker has not exercised due diligence regarding the proposed offering, the offering could be delayed unless the deficiencies are set right. The regulator can also delay or stop an offering if there is a specific court order to the regulator to that effect.
The offer document or the prospectus generally requires containing information on-

a) The description of the securities offered and details of the transaction in which the securities are being offered.
b) Audited financial statements updated to 6 months prior to the date of opening of the issue.
c) The issuers business and property and the legal environment in which the company operates.
d) The company’s financial position and results of operations as descriptions by the board or management.
e) Company information
f) Objects for which the issue was formed
g) The internal regulations i.e. AOA of the Co.
h) Minimum subscription to be received etc.

In the case of debenture issue, information on credit rating, name of trustees, rights and obligations of trustees and right of debt security holders and the details of assets to be charged are also to be disclosed additionally. Accountability of the information disclosed is ensured by entrusting the issuer and the Merchant banker to the issue of legal responsibility for the entire content of the prospectus except the expert opinion. Any proved misstatement or lack of due diligence on part of issuer and its lead manager attracts civil and administrative action and may also lead to cancellation and refund of the offering or a trading halt (delisting of securities).

Also information of trade secrets, client names, material incomplete negotiations, financials of closely held overseas joint venture partners may be exempt from disclosure depending upon the circumstances of the case with the approval of the regulator only after being satisfied that the disclosure are unnecessary or misleading for the purpose of the protections of investors interest and would impose an unreasonable burden on the issuer.

As far as disclosure on the details of directors and senior management is concerned, the details of related/ affiliated party transactions and their purpose are required to be disclosed. However unlike in the case of USA, Malaysia in India it is not mandatory to disclose transactions with the issuer.


Prior to the listing the issuer must prepare and file a listing document containing information on the records of the dividend, bonus etc. for the last 10 years. The listing document requires disclosing specific information on the rights attached to the shares, charges or fees for sub-division, consolidation of shares and other procedural matters, which do not find a place in detail in the prospectus. The stock exchanges are vested with the authority to enforce listing document disclosure by delaying or refusing a listing. Since the listing document is a material document pertaining to the offering it is available for public inspection.


In India, like in other jurisdictions, the disclosure requirements on continuous basis for the companies are prescribed under the companies Act and the Listing Agreement. Companies are required for filing information required under the Companies Act on continuous basis for the to Registrar of Companies (ROC). The listed companies are required to file information on the following on a continuous basis to stock excahngs under the listing agreement :


a) Complete & full balance sheet and profit & loss a/c.
b) Directors report to shareholders
c) Announcements regarding name change indicating any new line of business.
d) Cash flow statements
e) Consolidated financial statements
f) Related party disclosures

a) Half yearly results approved by the board of directors and subjected to a ‘limited review’ by the auditors of the Co. within 2 months after the close of the half year.
b) Explanation of the sum of total of first and second quarterly un-audited results.
c) The aggregate non-promoter shareholding along with the half yearly financial results.


a) Un-audited results within one month from the end of quarter
b) Change in name of the Co. and any new line of business suggested and disruption of business, turnover and income etc. from such new activities separately in the quarterly /annual results.
c) Segment wise revenue results, results and capital employed along with the quarterly un-audited financial results.
d) Shareholding pattern on a quarterly basis within 15 days of the end of the quarter.
e) Statement of variation between projected utilization of funds and /or projected profitability statement made by it in the prospectus or letter of offer and the actual utilization of funds on a quarterly basis etc.

a) About the board meeting at least 7 days in advance (also issue an immediate press release)
b) Board decisions within 15 minutes of the closure of board meeting
c) Change in the board of directors and auditors

In India, certain listed companies are also required to provide information on certain financial statements like un-audited quarterly financial statements, shareholding pattern report, annual reports etc. online in the EDIFAR website. This provides real time dissemination of price sensitive corporate information to all investments across the world.


In India, clause 49 of the listing agreement for companies mandates requirement intended at promoting corporate governance of listed companies. Under this clause information required to be disclosed in corporate governance report includes:

 All pecuniary relationships or transactions of non executive directors
 All elements of remuneration package of all the directors i.e. salary, benefits, bonuses, stock options etc.
 Details of fixed component and performance linked incentives, along with the performance criteria; service contracts, notice period etc.
 Stock options details, if any and whether issued at a discount as well as the period over which accrued and over which exercisable.


The right of shareholders to information can be defined as the right of shareholders, in the order and volumes established by law, to search, receive, transfer, make and Distribute the data on persons, subjects, facts, events, phenomena and processes in the field of legal corporate relations. The legislation contains a number of rules regarding the disclosure of information and imposes an obligation upon various bodies and persons to make it available to various business operators.

The Cadbury committee considered several proposals as to increase the directors accountability. He favored possible alterations to the legal process for tabling shareholder resolutions and emphasized the importance of AGM at which the shareholders have direct access to their board of directors. Companies are encouraged to experiment with ways of improving links with shareholders, such as supplying forms to shareholders for questions in AGM’s and circulatimg a summary of points raised in AGM.

The stated objective of the Cadbury Committee was "to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them". The Committee investigated accountability of the Board of Directors to shareholders and to the society. It submitted its report and associated "Code of Best Practices" in Dec 1992 wherein it spelt out the methods of governance needed to achieve a balance between the essential powers of the Board of Directors and their proper accountability. The resulting report, and associated "Code of Best Practices," published in December 1992, was generally well received. Whilst the recommendations themselves were not mandatory, the companies listed on the London Stock Exchange were required to clearly state in their accounts whether or not the code had been followed. The companies who did not comply were required to explain the reasons for that.

Now the said Cadbury report has done a world of good to shareholders rights. Now the shareholders feel more close to the company since there exists a direct nexus between the shareholder and the company. But does that means that all problems of giving and receiving information are solved with. The answer is certainly in negative. The reason being that the companies though still manage to give appropriate information, but they like to miss out on those points, which they think, may act in detriment to them.

Now if statutes or mandatory provisions or regulations do not back the absent disclosures, then the companies have the free will to escape through and not provide it to the shareholder. Now what does the shareholder do in such a case. Does he have a right in such cases also? The answer lies is what we describe as a right. Anything can be ones right only if he has some backing behind like it is present in the constitution.

So if the Company law is giving or providing the shareholders with powers to ask for information then the Companies cannot refuse the same otherwise they would be liable for non disclosure.



It is a known fact that the nature of director’s accountability to shareholders has its origin in the history from the time companies came into being and remains essentially unchanged till date. Now the first thing that may come into our minds is that co is a an artificial person and therefore it cannot act itself but it has to act through certain human intermediaries whom we call as directors. Now section 291 empowers the board of directors to manage the Co. Thus meetings are required to be held for the director and the members and thus what is decided in the meeting is stated in reports called as company reports.

The shareholders as already mentioned according to the information furnished by the Co gets the reports to know about the steps and decisions taken by the Co. Now the question we need to address upon is are the shareholders given sufficient relevant and understandable information to enable them to play a more positive role in corporate governance?

This key question concerns the information, which the shareholders receive. Without information, how are the shareholders to question the directors at the AGM? Without addressing information asymmetry, how can one begin to redress the inequality that exists between a private and institutional shareholder?

The remoteness of shareholders may be due to their inability to assimilate the information provided. If encouraging greater shareholder involvement is a serious issue within the corporate governance debate then it is easily understandable that the question of whether shareholders are given sufficient, understandable information to enable them to make rational economic decisions deserves special attention and moreover because of the fact that the extent of private share ownership is going to increase.

Out of the three reports which the Co law mandates, it is the annual report which is of prime importance as it can be considered as the most periodical and the most comprehensive package of information regularly available to the shareholders, but the said report ahs also undergone substantial transformations, with both the government and the accounting profession adding more and more detail to the standard report. The typical annual report can hardly be said to be ‘user friendly’ particularly because here the term ‘users’ has been given a wide interpretation and it comprises of the shareholders, but also the employees, lenders, suppliers, and other trade creditors, customers, government agencies and the public. But it is common prudence that financial statements that will meet the needs of the providers of risk capital to the shareholders, will also meet the needs of other users.

Note: We shall restrict ourselves only to the annual report it being the major one.

The annual report is the most detailed package of information sent to shareholders on a regular basis. The accounting profession is naturally keen to promote the value of annual report and in particular the annual financial statements. The objective of financial statements is to provide information about the financial position, performance and financial adaptability of an enterprise that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions.

Now the financial statements when revealed to the shareholders must be compatible and relevant. The primary qualitative characteristics relating to content are relevance reliability: financial statement that is not relevant and reliable is not useful. The primary qualitative characteristics relating to presentation (of information) are comparability and understandability. Even if information were to be relevant and reliable its usefulness would be limited if it were not also and understandable.

We can clearly see the mandate if we see the UK counterpart of the same issue. There the Accounting Standard Boards (ASB) gives prime importance to the understandability as a key quality and states that annual reports should be written in a clear style and as succinctly as possible, to be readily understandable to the shareholder”.

But a counter argument for the same can be that the extent to which the information is understandable largely depends on the abilities and knowledge of the recipient. But to counter the same one can say that the persons who have invested in shares usually have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence.

But the said presumption that the shareholders usually have a business-mind to understand the things can be well rebutted if some surveys that have been done are to be looked upon. There was a survey done on the evidence from a study of shareholders views of the annual report, the first to be done in UK for more than twenty years. We can see that in 1970’s a serious questioning of the role and the quality of financial reporting, which has once again come under the microscope following several unexpected corporate collapses and cases of fraudulent financial reporting. In UK after the coming of the Cadbury’s Reports recommendations, extra components have been added to the annual reports of quoted companies; there are now statements of director’s responsibilities been incorporated. One feels that the same should also be done in India.

The survey showed the following conclusions-
 Shareholders believe that the annual report is now more useful although the profit and loss account is not as widely read as it used to be;
 The auditors report is considered to be more important than it used to be and shareholders want to be and shareholders want auditors to expand the scope of their work.
 Management discussion and analysis is not perceived to be very useful;
 Shareholders want more information but they want it presented in a way, which they can understand.

Another research in UK shows that the majority of the respondent’s shareholders claimed to have no training in finance or accounting but also accepted that they make their own financial decisions. Generally private shareholder appears to be more interested in the narrative sections of the annual report. It was found that mostly the shareholders are only interested in the Chairman’s statement and nearly one quarter failed to read it. This suggests that shareholders are more interested in obtaining an informal overview of the Co. and its performance than its detailed reports of financial data. Thus what the above survey mandates is one should serve such item’s which the receiver can understand and appreciate the same. In India, such practices are going on, and the reports are becoming totally mechanical day by day.

But one can say that sometimes even the shareholder is also sometimes less concerned about what is going on in the Co. following this approach it might be argued that shareholders (the owners of the Co.) should show an interest in the directors account of their stewardship of the company. Results from a US study indicates that a significant no. of individual investors are more concerned with corporate spending on the environment and product safety than they are with increased dividends, shareholders may review annual reports for information in pursuit of concerns other than pure personal gain. This extended stewardship concept has been largely ignored in debates on financial reporting and corporate governance in general.


Given the general lack of interest in the specific parts annual report, it is worth exploring the possibility that other media may be more effective in communicating governance issues to shareholder. Possibilities include summary financial statements, interim statements and preliminary statements.
Thus if we see the above one can clearly see that there is clear evidence of a demand from shareholders for less information. Very few companies have responded to the demand though the picture may change due to simplification of the procedure, which companies have to follow in times to come.

The central theme of corporate governance debate is recognition of the need to establish shareholders power over their agents, the directors. The aim should be to provide shareholders with information, which they can comprehend and understand.

After analyzing all the aspects of disclosure by a Co. one can realize the very important co-relation between disclosure and shareholders relation with the Co. can very well be chalked out. It is seen that requiring disclosure of information can be a powerful regulatory tool in company law. It enhances the accountability for and the transparency of the company’s governance and its affairs. The mere fact that governance structures or particular actions or facts have to be disclosed, and therefore will have to be explained, creates an incentive to renounce structures outside what is considered to be best practice, and to avoid actions that are in breach of fiduciary duties or regulatory requirements, or could be criticized as being outside best practice.

If wee see the disclosure requirements, both mandatory and voluntary and the way the shareholder responds to it making the directors accountable by the same, one can say that there exists a lawful ‘right to information’ for each and every information that vests with the company. Now the problem lies where the corporate law does not mandate particular information to be disclosed to the shareholders and has basically given a voluntary disclosure. Here the shareholder as of now cannot ask for an information for such a disclosure and the extent of disclosing lies basically on the discretion of the companies i.e. it is the companies wish as to how and what it wants to disclose apart from all the mandatory disclosure. These sets of disclosure are for the sole reason of welfare of its shareholders and how much the company wants the shareholder to disclose. Now usually the big companies have a reputation to maintain and keep a sound position in the market arena. Therefore they usually do not back out in giving the required disclosure asked by the shareholders because that it’s the last thing they want i.e. to offend their faithful shareholders.

Moving to second aspect of complex information disclosed by the Co. one can conclude that there is substantial evidence to show the shareholder indifference to many parts of information given by the company. Sometimes the information given in annual reports including the financial statements and records etc. are so multifaceted and difficult it is usually beyond the general comprehension of the public. Although there is a clear need for greater efforts to educate shareholders so that they are better able to understand financial matters generally, but how this will be achieved remains to be seen.

One feels that it is the market regulator and legislators who have to come forward to first make mandatory most of the information to be disclosed and leave very less scope for the whims and fancies of corporate as to what to disclose or not, and secondly to see that whatever information is furnished is in a proper format which can come to terms with a normal shareholder intellect and is able to relate it so that he can act accordingly on that information whenever he gets a chance.

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