In today’s business environment, transparency is no longer just a legal formality — it is a cornerstone of good governance and a key driver of stakeholder trust. The Companies Act, 2013 and SEBI regulations set out a clear framework for disclosures that ensure companies operate with transparency, uphold ethical standards, and protect the interests of shareholders, investors, and the public.
But beyond legal compliance, the way a company approaches disclosure has a far-reaching impact on its reputation, investor confidence, and market position. Companies that prioritize transparent business practices not only mitigate the risk of legal scrutiny, but also set themselves up for long-term growth.
In this article, we will explore the key disclosure requirements under the Companies Act, 2013, SEBI’s LODR (Listing Obligations and Disclosure Requirements), and the wider impact of transparency on business performance.
Why Disclosures Matter: The Legal Framework
1. Financial Disclosures (Section 134 and Section 143)
The Companies Act, 2013 mandates companies to provide accurate, timely, and complete financial information through annual financial statements. These must reflect a true and fair view of the company’s performance and position.
– Section 134: Directors are responsible for ensuring the accuracy of financial statements. Under this section, they must ensure that the financial reports include a directors’ report detailing key company activities, financial performance, and future projections.
– Section 143: This section requires auditors to report on the company’s financial statements, ensuring that there are no material misstatements, fraud, or irregularities.
Example: Companies like Hindustan Unilever and Tata Consultancy Services (TCS) have developed a reputation for transparent financial reporting. Their quarterly disclosures follow best practices, providing stakeholders with clear insights into their performance and market outlook.
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2. Related Party Transactions (Section 188 & SEBI LODR Regulations)
Related party transactions (RPTs) can be a minefield for companies, as they may lead to conflicts of interest or the appearance of unethical conduct. Under Section 188 of the Companies Act, any material RPTs require approval from the board of directors and, in some cases, the shareholders. These transactions must also be disclosed in the annual report.
Under SEBI LODR (Listing Obligations and Disclosure Requirements), listed companies are required to disclose related party transactions on a quarterly basis in a detailed format, and ensure that they are carried out at arm’s length.
Example: In the Infosys case, the company had to disclose several related party transactions that were scrutinized by both the board and shareholders, with a transparent approach ultimately ensuring their compliance with legal norms. The company faced significant shareholder backlash when certain related party deals were not disclosed properly in the past, making transparency crucial for reputation management.
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3. Corporate Governance Disclosures (SEBI LODR)
SEBI’s LODR regulations impose several disclosure obligations on listed companies related to corporate governance. These include disclosing the composition of the board, the role of the audit committee, and any remuneration policies for directors and senior executives. These disclosures help stakeholders evaluate the effectiveness of the company’s governance structure and practices.
– Regulation 27: Requires listed companies to disclose the compliance status with corporate governance norms.
– Regulation 34: Mandates the inclusion of a corporate governance report in the annual report that outlines the company’s corporate governance practices and how they align with SEBI’s requirements.
Example: Companies like HDFC Bank are often cited as role models for corporate governance due to their detailed and transparent reporting on board composition, audit processes, and remuneration policies. Their annual governance reports set a high bar for transparency and accountability in the banking sector.
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4. Audit Committee Reports & Internal Control Systems (Section 177)
Under Section 177 of the Companies Act, companies are required to establish an audit committee that oversees the integrity of financial reporting, internal controls, and the audit process. The audit committee’s reports must be shared with shareholders and disclose any significant issues or concerns about financial reporting, fraud, or irregularities.
– The audit committee is also responsible for ensuring that the company adheres to internal control systems, thereby ensuring accuracy and reliability in disclosures.
Example: The Satyam Computers scandal serves as a cautionary tale. The company’s failure to have a robust and transparent audit committee process led to one of the most significant financial frauds in Indian corporate history. Had the audit committee been more diligent and transparent in its reporting, the scandal could have been prevented.
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5. Risk Management and Governance Disclosures (Section 134 & SEBI Guidelines)
Companies are also required to disclose their risk management framework and how it is integrated into their governance structure. Section 134(3)(n) of the Companies Act mandates that the board of directors assess and disclose the risk management systems in place, while SEBI’s LODR Regulations require listed companies to disclose how they manage key business risks.
Disclosures should also include a clear explanation of how the company is managing business risks and what steps have been taken to mitigate them.
Example: The Reliance Industries annual report is a strong example of transparent disclosure practices, especially in its risk management framework. It provides detailed insights into its business risks (like regulatory changes or market disruptions) and how the company is addressing them through strategic measures.
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The Power of Transparency: How It Builds Trust and Value
1. Investor Confidence
Clear, accurate disclosures increase investor confidence and create a positive perception of the company in the market. Transparent financials, related party disclosures, and governance practices signal to investors that the company is committed to ethical practices and long-term sustainability.
2. Protection Against Legal Scrutiny
Regular and comprehensive disclosures ensure that a company is in compliance with legal regulations. This protects the company from investor lawsuits, regulatory penalties, or reputational damage. In contrast, a lack of transparency can trigger investigations, lead to fines, or even cause the company to lose its listing status on stock exchanges.
Example: Yes Bank, during the liquidity crisis of 2020, faced heavy scrutiny because of poor disclosure practices related to bad loans and financial irregularities. The lack of transparency resulted in a loss of investor trust and a significant drop in its stock price.
3. Enhancing Corporate Reputation
The more a company is open about its practices, the more likely it is to be viewed as a responsible corporate entity. Transparent disclosures on CSR initiatives, financial performance, and governance practices can boost a company’s public image and make it an attractive partner for investors, consumers, and other stakeholders.
Example: Tata Group has consistently been praised for its transparency in its financial dealings, corporate governance standards, and ethical business practices. The company’s transparent operations and disclosures have helped it build a trusted reputation, both domestically and internationally.
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Key Takeaways:
– Disclosures under the Companies Act, 2013 and SEBI LODR regulations are critical for maintaining transparency in business operations.
– Proper related party transaction disclosures and the functioning of the audit committee help safeguard stakeholder interests.
– High levels of transparency improve investor confidence, reduce the risk of legal challenges, and enhance corporate reputation.
– Failure to disclose or poor transparency practices can result in severe consequences such as financial penalties, loss of investor trust, and regulatory scrutiny.
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What Can a Company Secretary Do?
A company secretary plays a critical role in ensuring that the company meets its legal obligations for disclosure and transparency. Here’s what a CS can do:
– Ensure all financial disclosures, related party transactions, and governance reports are prepared accurately and on time.
– Advise the board on disclosure requirements and help implement internal controls for better reporting.
– Maintain the company’s records of disclosures to ensure legal compliance and avoid potential penalties.
– Foster a culture of transparency within the company, engaging with investors and stakeholders proactively to maintain trust.
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Key Takeaways:
– Compliance with disclosure regulations is essential for legal protection and building stakeholder trust.
– Transparency is not just about compliance but a tool for long-term value creation.
– Company secretaries are key in ensuring companies follow disclosure requirements and foster transparency in governance.