Disclosures on Management Changes

The saga involving the removal of SKS Microfinance’s chief executive raises a number of issues relating to corporate governance as well as securities regulation. One such issue pertains to the nature of public disclosures made regarding the removal of the chief executive, which acquires prominence considering SKS is a public listed company. Circumstances that have panned out over the last few days indicate that the company at first merely notified the stock exchange of the event. Detailed reasons were forthcoming only subsequently after requests were made by SEBI and questions were raised in the media. Apart from the specificities of the goings on in SKS, this episode provides an opportunity to review the disclosure norms applicable in this regard.

Clause 41(IV) of the listing agreement provides for continuous disclosures by listed companies as follows:

k) The company shall disclose any event or transaction which occurred during or before the quarter that is material to an understanding of the results for the quarter including but not limited to completion of expansion and diversification programmes, strikes and lock-outs, change in management and change in capital structure. The company shall also disclose similar material events or transactions that take place subsequent to the end of the quarter.

At the outset, it may seem that SKS has been in technical compliance with the requirements of the clause as they notified the stock exchanges of the change. However, the more crucial information regarding the background and reasons for the change were missing. If the stock markets are to be truly efficient the reasons are as important for securities investors as the management change itself. The current requirements focus on the events to be reported without emphasis on the underlying reasons.

This raises a larger issue of disparity between primary market disclosures and secondary market disclosures. While there have been significant regulatory developments in strengthening primary market disclosures over the years (recently culminating in the promulgation of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009), the disclosure requirements in the secondary markets (primarily contained in the listing agreement) have not quite kept up pace. Although there have been constant calls for streamlining primary and secondary market disclosures, no concrete steps appear to have been taken in that direction, although it is a matter that requires attention.

For a previous discussion pointing to the disparity between primary and secondary market disclosures, see this post discussing SEBI’s proposal over 2 years ago to introduce integrated disclosures, and also a paper by Sandeep Parekh.