The US Securities and Exchange Commission’s (SEC) proposal to allow listed companies to opt for semi-annual earnings disclosures instead of quarterly reporting has reignited the debate over investor protection and market transparency.
While corporates could benefit from reduced compliance costs and relief from the pressure of delivering results every quarter, critics worry that the move may tilt the balance of power further toward managements at the expense of shareholders.
Information Asymmetry
Market participants warn that the proposal could increase information asymmetry, heighten insider-trading risks and reduce transparency. “This could create arbitrage between different sets of investors because private equity firms investing in these companies will continue to seek quarterly financial information,” said Nilesh Shah, managing director of Kotak Mahindra Asset Management Company.
Shah also expressed concerns about a potential rise in insider trading, particularly in jurisdictions such as India, where the market regulator, Securities and Exchange Board of India, does not enjoy enforcement powers comparable to those of the SEC.
Financial and business disclosures provide investors with critical insights into a company’s operating performance, growth prospects, balance-sheet strength and governance standards. As such, they remain among the most important sources of information for market participants.
According to Shriram Subramanian, founder of InGovern Research Services, semi-annual disclosures could also increase share-price volatility, as investors may form divergent views on a company’s profitability and business operations in the absence of regular updates.
However, Subramanian noted that many market participants in the US believe most listed companies would continue reporting earnings quarterly even if the SEC proposal is implemented.
“Larger companies are less likely to shift to a longer disclosure cycle because they would not want to be perceived as opaque, particularly by institutional investors,” said Paras Parekh, partner at CMS INDUSLAW.
Earlier this month, the SEC proposed allowing listed companies “to elect to file semi-annual reports on new Form 10-S instead of quarterly reports on Form 10-Q”. According to the regulator, the flexibility would allow companies to choose the reporting frequency that best serves both the company and its investors.
Indian Perspective
Interestingly, some Indian corporates believe a similar framework could eventually work in India.
“This is the need of the hour. If a market like the US can do it, it strengthens the case for developing markets such as India to consider a similar approach,” said Anand Agarwal, chief financial officer of V-Mart Retail. “A half-yearly reporting structure also frees up management bandwidth and reduces compliance costs.”
Supporters of the proposal argue that, apart from lower compliance costs, it would reduce filing obligations, ease short-term earnings pressure and result in fewer trading-window closures linked to unpublished price-sensitive information.
Yet, most experts believe India is unlikely to adopt a similar framework in the foreseeable future. They argue that Indian investors depend heavily on periodic regulatory disclosures and that less frequent reporting could encourage speculation and increase uncertainty.
Shailesh Haribhakti, founder and chairman of Shailesh Haribhakti & Associates, said the US market is at a much more advanced stage of evolution.
“We will have to wait and see how many US companies transition to a semi-annual reporting structure. Quarterly filing of results under Sebi’s LODR regulations began 26 years ago, on March 31, 2000, whereas the US has had a quarterly reporting framework since 1970. The option to move to semi-annual reporting is being considered only now. They are at a different stage of market maturity compared with India,” he said.
