Come on!

The Covid pandemic and the lockdown imposed to contain the virus spread have impacted businesses across the globe.  The degree of impact is largely uneven. Essential goods suppliers, services providers, medical and pharma companies are lucky to escape the hit. Several others are reportedly limping back and no credible news about many other outfits. Who are hit beyond recognition and who are sailing through is based on one's update on the current affairs and guess work. Publicly available information is perhaps insufficient to come to a clear view. The pandemic has caused distortion in the market due to gaps in information available about the business operations of various entities. 

True and fair disclosure of information is a sine qua non especially when a company gets itself listed on stock exchanges as it has statutory and regulatory obligation to furnish material information in a timely manner to the bourses for immediate dissemination to various stakeholders.

In the absence of certainty and predictability, it becomes extremely difficult for businesses to attract capital. Even optimists like Warren Buffet are finding it difficult to come to terms with the impact of the pandemic. This is clear during his virtual annual shareholders meeting he had earlier held. Though he remains bullish on America, his repeated answer “I don’t know” during question answer session and his cautious optimism on the performance of capital markets makes it realistic about the formidable challenges ahead.

Listed entities around the world have been making disclosures regarding the impact of the pandemic, including that on financial condition and on current as well as future operations. Regulators have also encouraged timely reporting as well as complete and accurate disclosure of the impact, as far as possible. 

The heart of good Corporate Governance is transparency, disclosure, accountability and integrity. Market confidence goes up significantly when a company voluntarily complies with the principles of Corporate Governance. Besides the management getting appreciated, company’s market capitalization could fetch fair valuation. In Indian corporate space, Infosys used to set high standards of fair disclosures in 90’s when the disclosure norms were still evolving and the regulatory compulsion on many corporate activities was minimal.

Post lockdown, companies have started to share information pertaining to disruption of operations at their various premises. However, the information furnished so far remained mostly cosmetic, sketchy and for compliance sake. Hardly any inclination is seen to make preliminary disclosure of evaluation of impact on operations, liquidity, profitability and ability to make debt servicing etc. 

SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 mandates every listed company to frame and disclose a ‘Policy on Determination of Materiality of Events’. One of the key considerations is the likely result in significant market reaction. Board of Directors is responsible for undertaking assessment on material events and their likely impact on the company and intimating that to market. There is, however, no enthusiasm on the part of most of the managements of companies to implement disclosure norms in letter and spirit. 

Though there is no such a regulatory obligation to update the market, Anand based Gujarat Co-operative Milk Marketing Federation, the owner of US 5 Billion dollar valued Amul brand, has been on the front foot in sharing their insights from day one on their practical difficulties in collecting milk, supply chain disruptions during the initial lockdown period and percentage of disruptions etc.. Such proactive sharing of information is not seen from the corporate world. Share prices of some prominent companies have been witnessing huge swings without any information available in public domain about their businesses recovering to pre-covid levels. Some have fallen nearly 100 percent and then recovered in V shape as if the pandemic has taken L shape.

Given the reluctance of the companies,  SEBI issued an Advisory in second half of May stipulating that all investors have access to timely, adequate and updated information,…..companies are encouraged to evaluate the impact of the COVID-19 pandemic on their businesses, performance and financials, both qualitatively and quantitatively to the extent possible and disseminate. SEBI further laid down an illustrative list on which companies need to report like estimation of the future impact of COVID-19 on its operations, impact on financial position, profitability, liquidity, ability to service debt, supply chain issues, demands for its products/services etc. It further says at Para 8 of the Advisory dated May 20, 2020 that companies should not resort to selective disclosures, keeping in mind the principles governing disclosures and listing obligations. Besides, they shall revisit, refresh or update its previous disclosures based on the peculiar circumstances of each company.

Government owned unlisted company Air India’s latest announcement that its Board of Directors approved a leave without pay scheme for its permanent employees for a period of six months to two years, extendable to five years is clear communication to understand the impact of the pandemic on the carrier’s state of affairs. This disclosure on the HR policy is indeed a disclosure of material impact issue. Such disclosures are the need of the hour. Newspapers report that private sector banking firms have put in cold storage their recruitment plans and reworking pay packages for existing employees in order to conserve cash. However, no banking company apprised the exchanges about these decisions. The unwillingness could be due to fear of bad news spoiling their image and market sentiment turning against them.

Post lockdown, large number of young professionals working from home have been on a demat account opening spree with various zero brokerage firms indicating their eagerness to enter the capital markets. Making price sensitive information public by publicly listed companies in time would surely help these budding investors take informed investment decisions and avoid risky bets based on speculative tips. 

Let’s hope the nudge from SEBI makes the Boards of listed companies throw light on their true state of affairs in the upcoming quarterly financial disclosures. After corona, glorious past performance is no longer a barometer for future prospects.