CHAPTER - III

CORPORATE DISCLOSURE

ENVIRONMENT

IN INDIA

Sr. No. Contents Page No

1 Introduction 71

2 Corporate disclosure and the Indian Companies Act 73

3 Corporate disclosure and ICAI 80

4 Corporate disclosure and SEBI 95

5 Informational needs of Users and Management 107 Preferences

6 Contents of corporate financial reporting 108

7 Conclusion 111

INTRODUCTION

It is to be expected that environmental conditions in a country will affect

the accounting and disclosure practices that develop there. This idea has been

discussed and investigated by several writers. Zeff (1971) 1 , Abu- Jbarah (1972)2,

Choi and Mueller (1978)3, and Arpan and Radebaugh (1981)4, demonstrated that a

host of environmental variables affect any nation's accounting and disclosure system.

Similarities in accounting are based on similarities in environmental and economic

characteristics.

India has had trading links with Western Europe from the early sixteenth

century. The British East India Company increased its influence until, by the middle

of the nineteenth century. In 1858 the East India Company was taken over by the

British government and until independence was attained in 1947, most of India was

administered directly by the United Kingdom. Accounting and financial reporting

practices were therefore largely based on the UK model although developments since

independence meant that significant difference have arisen. 5

Corporate disclosure in India is governed (private sector) by five major

factors, i.e.,

a) Indian Companies Act,

1 Zed S.A, "Forging Accounting Principles in Five Countries", Stipes Publishing Company, North Holland, 1971. 2 Abu-Jbarah, 1-LM, "A Sub- entity basis for Financial Reporting by Multi-National Firms: A Cluster Analysis Approach" unpublished Ph.D dissertation, University of Wisconsin, 1972. 3 Choi, F.D.S and Mueller, G.G, "An Introduction to Multi-national Accounting", Prentice-Hall, 1978, pp. 23-28. 4 Arpan, J.S and Radebaugh, L.H, "International Accounting and Multi-National Enterprises", Warren, Gorham and Lamont, 1981, p.43. 5 Claire Marston, op. cit, p.2.

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Indian Companies) Act

Users informational needs

b) Pronouncements of the Institute of Chartered Accountants of

India (ICAI),

c) Securities and exchange board of India regulations,

d) Users informational needs, and

e) Managements' preferences.

As shown in Figure 3.1, the factors taken together constitute the

corporate disclosure environment in India.

Figure 3.1

Corporate Disclosure Environment In India

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CORPORATE DISCLOSURE AND THE INDIAN COMPANIES

ACT

In India, the companies Act, governs the disclosure of information in the

annual reports by the companies.

i) UNDER THE COMPANIES ACT OF 1882

The history of financial reporting in India dates back to 2 centuries ago.

Although the first statutory Act giving a legal recognition to the preparation of

balance sheet under the prescribed form, however, on the optional basis, was passed

in 1857, which was then converted into compulsory basis by the Act of 1866, but the

comprehensive Act, recasting and overhauling all the pervious ones was passed only

in 1882, known as the Indian companies Act, 1882.

Under the Act of 1882, provisions pertaining to the balance sheet and its

audit were contained in compulsory section, 74, whereas, for others, viz., profit and

loss account, laying and circulation of annual accounts, contents of auditor's report,

director's report and so on were contained in the optional regulations 78 to 94 of

Table A.

ii) UNDER THE COMPANIES ACT OF 1913

The Indian companies Act, 1913 [Act No.VII of 1913] came into force

with effect from 1 s April 1914. A new form of balance sheet was introduced and

many new items were required to be disclosed therein, e.g., loans were required to be

shown separately as secured and unsecured, similarly, on the asset side, mode of

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valuation of investments, capital expenditure like, commission or brokerage not

written off, were required to be stated.

iii) UNDER 1111, COMPANIES AMENDMENT ACT OF 1936

The Companies Amendment Act No XXII of 1936, again drastically

amended the provisions about financial reporting. Many of the provisions connected

with the profit and loss account and the director's report, which were up-till now

contained in the optional regulations of Table A were brought to the Act itself.

As far as the disclosure of details in the balance sheet was concerned,

many items dissimilar in nature were mixed together, e.g., shares issued as bonus

shares on account of capitalization of reserve were mixed up with shares issued for

consideration other than cash, stating nearly all reserves under one head without

having any regard for capital or revenue, reserve and provisions, mixing of all

miscellaneous outstanding liabilities under one sub-head, 'other finance', etc.

As regards profit and loss account, regulation no. 107 of Table A, made

it obligatory for all expenditure to be brought into the profit and loss account,

whereas, no such requirement existed for income with the result that capital profits

and income of an exceptional nature.

In the absence of detailed provisions, many companies gave only the

amount of gross profits without disclosing the amount of sales, purchases, stocks,

selling expenses, commission and discounts. Even the profit appropriations were not

disclosed.

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iv) UNDER '1111E COMPANIES ACT OF 1956

In conformity with British legacy, independent India adopted its first

companies Act in 1956. The Shastri committee in 1956 had introduced certain

modifications in compilation and reporting aspects. Under the recommendations of

this committee, part- I of schedule VI section 211 has been improved upon; from the

capital head, share premium account has been shifted to reserves and surplus; current

liabilities were segregated into two classes i.e., (a) current liabilities, and (b)

provisions; current assets were subdivided into (a) current assets and (b) loans and

advances.

Contingent liabilities not provided for, have been deleted and relegated

to footnote status. Under current assets, sundry debtors have been regrouped as (a)

due for more than 6 months and (b) others. As regard to part- II of schedule VI,

Shastri committee suggested that an adequate form of profit and loss account should

be defined and made compulsory by law.

In India, the report of company law committee (Bhaba committee),

which was formed before enacting the companies Act of 1956, stated as follows:

"... The form of balance sheet and the contents of profit and loss

account should be such as would make available to the shareholders as much

information relating to the affair's of the company as it is possible to disclose".

Section 211 (1) & (2), schedule VI of the companies Act, 1956 for the first time spelt

out the need for disclosure of 'true and fair view' of the state of affairs' of the

company.

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Some of the sections of the companies Act 1956, have significant

bearing on disclosure of information in the annual report, they are:

Section 210: Board of directors of every company to lay before the

shareholders at the annual general meeting, a balance sheet and a profit and loss

account for a financial year.

Section 211 (1): Balance sheet to give 'true and fair view' of the state of affairs

of the company as at the end of accounting period. Balance sheet should be prepared

as per schedule VI, part I of the companies Act 1956.

Section 211 (2): Profit and loss account to give 'true and fair view' of the profit

or loss for the financial year. Information should be disclosed in the profit and loss

account as prescribed in part II of schedule VI, of the companies Act 1956.

Section 211 (6): Information to be disclosed by way of notes and such notes to

form part of the accounts, i.e., balance sheet and profit and loss account.

Section 212: Balance sheet, profit and loss account, auditor's report and

director's report of the subsidiary company to be attached to the balance sheet of the

holding company.

Section 216: Auditor's report should be attached to the balance sheet.

Section 217: Director's report to the shareholders to cover the following;

a) State of company's affairs;

b) Amount to be carried to reserve;

c) Dividend recommended;

d) Material changes / events after balance sheet date in so far as they

affect the financial position of the company; and

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e) Material changes in the nature of business of the company and its

subsidiaries.

Section 227 (1A): Auditors to enquire and report adverse findings on certain

matters.

Section 227 (2); Auditor to report to the members of the company, on accounts

examined by him and on every balance sheet and profit and loss account and

annexure thereto.

Section 227 (3): Contents of auditor's report.

Section 641 (1): Central government vested with powers to alter disclosure

requirements in schedule VI.

V. UNDER I'HE COMPANIES (AMENDMENT) ACT OF 1973

The companies (amendment) Act of 1973 required the disclosure of the

following information in the financial statements:

1. Specified details in respect of investments and profit earned or loss incurred in

partnership firm in which the company is a partner.

2. Quantities and amounts in respect of the turnover of each class of goods.

3. Break-up in quantity and value in respect of each class of raw materials

consumed or purchased.

4. Class-wise break-up of quantity and value in profit and loss account in respect

of opening and closing stock of goods manufactured or purchased.

5. Break-up of expenditure on salary, wages and bonus in respect of employees

drawing a remuneration of Rs.3000 p.m or more. (This limit of Rs.3000 p.m

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has been increased to Rs.6000 p.m by amendment made to the companies Act

in 1988) and

6. Quantitative details regarding licensed capacity, installed capacity and actual

production in respect of each class of goods manufactured.

A high powered expert committee known as Sachar committee, has

recommended that the balance sheet and profit and loss account should be prepared in

vertical form. The committee has suggested the inclusion of the following items in the

director's report:

a) Amount of deposits received from the public during the year; total

repayments during the year and outstanding with a break-up of dues

within one or two years.

b) Brief particulars of prosecutions which resulted in a fine of Rs. 1000

or more in any one case, or in imprisonment of any of the directors or

officers of the company.

c) Particulars of unclaimed and unpaid dividends.

d) Details of any investments in corporate bodies, firms or joint ventures,

which have not yielded any return during the year.

e) Particulars of material liability.

f) Statement of unprovided liabilities.

g) Details about the company's social activities.

h) Statement indicating the loss suffered by the company in any division.

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i) Accounting ratios, such as ratio of current assets to current liabilities,

inventory to sales, trade receivables to sales, net income to net sales,

etc.

j) Key limiting factors' preventing full utilization of installed capacity of

plant and machinery.

k) Number of shares held by each director carrying not less than 20 per

cent of the total voting rights.

1) Particulars of any contract in which directors or their spouses or

dependent children have interest, and

m) Statement regarding compliance of statutory norms and guidelines in

respect of managerial appointment and remuneration and inter-

company investment and loans.

VI. UNDER THE COMPANIES (AMENDMENT) ACT, 1988

The amendments of 1988 have brought drastic changes in the provisions

on disclosure contained in the companies Act, 1956. Report of the board of directors

to include the following matters:

❑ Conservation of energy.

❑ Technology absorption.

❑ Foreign exchange earnings and outflow.

Another significant amendment, which affects corporate disclosure, has

been made in section 219 of the companies Act, 1956. This amendment gives a

choice to the listed companies either to send detailed accounts to their shareholders

or a statement containing only the salient features. However, it is obligatory to send a

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copy of the detailed accounts free of cost to a shareholder, in case he demands the

same within 21 days time prior to meeting.

VII. UNDER '171E COMPANIES (SECOND AMENDMENT) BILL, 1999

AND AMENDMENT ACT OF 2000.

The companies amendment Act 2000, requires the disclosure of the

following information in the annual report:

1. Under section 217, subsection newly inserted (2AA) the director's report shall

also include a 'Director's responsibility statement'.

2. Under section 211, while preparing accounts one thousand rupees shall be

substituted by ten thousand.

3. In section 227 (3), an additional clause (e) is added. It states that the

observations or comments of the auditor should be typed in bold or should be

italicised.

CORPORATE DISCLOSURE AND ICAI

ICAI, being the premier professional accounting body in India, plays a

pivotal role in regulating the disclosure practices of the companies both in the public

sector and the private sector. With a view to regulate the corporate disclosure

practices, it issues accounting standards, guidance notes and expert opinions, holds

the competition for the best presented published accounts annually and organizes a

number of seminars, workshops and conferences on various dimensions of corporate

disclosure.

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Since different accounting and reporting practices are followed by the

corporate sector in India, ICAI constituted the Accounting Standard Board (ASB) in

April 1977. The basic objective of ASB is to harmonies the diverse accounting

policies and practices being followed by companies in India, keeping in view the

international developments in the field of accounting. To achieve this objective ASB

has undertaken to formulate and propagate the 'Accounting Standards' and to

persuade the concerned parties to adopt them in the preparation and presentation of

the financial statements. ASB has issued 15 accounting standards till date [as on

March 31, 20001.

Besides these accounting standards, the institute has also issued some

exposure drafts, guidance notes and expert opinions by the corporate sector in India,

for the preparation of the financial statements, shall make the statement comparable

and more relevant to their users.

The institute also arranges a number of seminars, workshops and

conferences covering different aspects of financial reporting, every year. These

programmes are specifically conducted for the members of the institute and the

officials working in different organizations, who are related to the preparation of the

corporate annual reports.

ICAI holds a competition annually for selecting the best-presented

accounts. This competition is held for three categories of organizations:

1. Companies in public and private sectors and non-financial statutory

corporations.

2. Financial institutions and banks in the public and private sectors; and

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3. Port trusts, municipal corporations, public utilities not registered under the

companies Act, co-operative societies, public trusts, educational and

research institutions.

SOME IMPORTANT FACTORS GENERALLY CONSIDERED FOR ME

AWARD OF SHIELDS AND PLAQUES FOR IRE BEST-PRESENTED

ACCOUNTS.6

1. Compliance with the legal requirements in the preparation and presentation of

financial statements as specified by the companies Act, 1956 and other

relevant statutes.

2. Basic quality of accounts as judged from the qualifications in the auditor's

report, notes to the accounts and compliance with the generally accepted

accounting principles such as, those recommended in the accounting

standards, statements, guidance notes, etc., issued by the council of the ICAI

and its various committee.

3. The nature and quality of information presented in the accounts to make the

disclosure meaningful. For example;

•* Cash flow statement.

❖ Sufficient details of revenues / expenses for financial analysis, e.g.,

distinction between manufacturing cost, selling cost, administrative

cost.

❖ Use of vertical form as against the conventional 'T' form; judicious

use of schedules; use of subtotals; manner of showing comparative

figures; ease of getting at figures.

6 The Chartered Accountant, ICAI, New Delhi, July 1999, p.205.

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•:• To what extent additional financial information is provided to the

readers through charts and graphs.

❖ Extent of clarity, lucidity and comprehensiveness of the information

contained in the financial statements in the context of a layman.

Financial highlights and ratios including earning per share.

❖ Inclusion of one or more of the information like, value added

statement, break-up of operations, organization chart, location of

factories/branches, human resources accounting, inflation adjusted

accounts, social accounts.

4. How informative are the (i) director's report and / or (ii) chairman's

statement? The following aspects are considered relevant in this regard;

(a) Availability of information regarding different segments and units of

the entity i.e., whether details about each product / service and units,

whether located in the same area or spread in different geographical

locations, are given.

(b) Information regarding financial operations, capital raised during the

year, financial requirements, borrowings, etc. in respect of multi-

product / multi- unit organizations, whether details as per above have

been given for financial operations.

(c) Employee relations.

(d) Industry problems and problems peculiar to the enterprise.

(e) Information regarding social concern (e.g., contribution to

conservation and development of environment and ecology).

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(f) Information on contribution to community development projects,

particularly in areas around location of entity (e.g., medical

institutions, educational institutions, provision of sanitary and drinking

water, etc).

(g) Post- balance sheet events not requiring adjustment in accounts but

material enough to warrant disclosure and future plans, programmes,

market conditions, profitability, forecast, environment friendliness,

etc.

(h) Manner of review of performance plans and prospects by the

company.

5, Layout of contents, general appearance, presentation and quality of printing.

6. Timeliness in presenting accounts based on the date of the notice of the annual

general meeting in respect of which the annual report is circulated to the

shareholders.

ICAI awards a silver shield for the best-presented accounts to the

organization from each of the first two categories and a plaque to the best-presented

account to an organization from the third category. Three plaques are awarded for the

next highly commended accounts from category (i). By holding such competitions,

the institute motivates companies and other organizations to disclose the relevant and

useful information in the published accounts so as to make them comprehensive,

informative and useful to investors and other users.

The concept of 'one market economy' due to liberalization is going to

have far reaching implications on disclosure practices in. India. Accounting practices

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and disclosure the world over are going to be standardized. Therefore, ICAI has to go

a long way but in a short span of time to stand at par with the professional accounting

bodies in other countries like, AICPA, ICAEW, CICA, etc.

ACCOUNTING STANDARDS

Accounting standards may be defined as a media of information system

through which complete and fruitful information about a business enterprise may be

supplied to all interested parties.

Accounting practices differ from country to country. Though,

international accounting standards have not so far been fully developed, the efforts

are being made to evolve such standard in accounting, which may be uniform and

consistent to the possible extent and may be accepted with minor adjustments in all

the countries, so as to make the accounting results measurable and comparable.

ACCOUNTING STANDARDS IN INDIA

In India, the statements on accounting standards are issued by the ICAI,

to establish standards that have to be complied with to ensure that financial

statements are prepared in accordance with the generally accepted accounting

principles in the country. These standards are largely drawn from the International

Accounting Standards (as India is a member of the IASC), suitably modified to cater

to the requirement of local business.

In order to examine the compliance of accounting standards by the

selected Indian public limited companies, the following research methodology has

been followed:

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METHODOLOGY

i. The study was limited to the period from 1995-96 to 1999-00, i.e., for five

years.

ii. The study was also limited to 125 selected public limited companies.

iii. The reporting pattern of the companies was judged through annual reports of

the selected companies [compiled from the data collected through 'index of

disclosure' as shown in Appendix II].

Table 3.1 presents the 'compliance of accounting standards by selected

companies', both in absolute figures as well as in per cent for the years 1995-96 to

1999-00. A cursory look at this table reveals the following:

(1) Almost all the selected companies [100%] complied with the provisions of

Accounting standard no.1 (Accounting policies), no.3 (cash flow statement), no. 6

(Accounting for depreciation) and no.10 (accounting for fixed assets).

(2) None of the selected companies have (0%) complied with the provisions of

Accounting standard no.7 (accounting for construction contract).

(3) Some of the other accounting standards on which there has been very low level of

compliance by the selected companies are — Accounting standard no.9 (revenue

reCognisation), Accounting standard no.12 (accounting for government grants)

and Accounting standard no.14 (accounting for amalgamation).

(4) One of the possible reasons for the low level of compliance on certain accounting

standards by the selected companies may be, transactions of this nature might not

have occurred during the period of study.

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Table 3.1

Compliance of accountin standards by selected companies

Sr.No Accounting standards No of companies disclosing (per cent) 95-96 96-97 I 97-98 I- 98-99 99-2000

1 AS-1 Accounting policies 125 (100) 125 (100) 125 (100) 125 (100) 125 (100)

2 AS-2 Valuation of inventories 110 (88) 112 (89.60) 115 (92) 117(93.60) 117(93.60)

3 AS-3 Cash flow statement 124 (99.2) 125 (100) 125 (100) 125 (100) 125 (100) AS-4 Contingencies and events occuring after

4 balance sheet date 99 (79.2) 99(79.2) 99(79.2) 99(79.2) 100(80) AS-5 Prior period and extra ordinary items and

5 changes in accounting policies 73(58.4) 78(62.4) 82(65.6) 91(72.8) 92(73.6)

6 AS-6 Depreciation accouning 125(100) 125(100) 125(100) 125(100) 125(100)

7 AS-7 Accounting for construction contract 0 0 0 0 0

8 AS-8 Accounting for research and development 122(97.6) 123(98.4) 124(99.2) 124(99.2) 124(99.2)

9 AS-9 Revene recognization 19(15.2) 20(16) 30(24) 35(28) 40(32)

10 AS-10 Accounting for fixed asstes 125(100) 125(100) 125(100) 125(100) 125(100) AS-11 Accounting for effects of changes in foreign

11 exchange rates 117(93.6) 122(97.6) 123(98.4) 123(98.4) 123(98.4)

12 AS-12 Accounting for Government grants 9(7.2) 12(9.6) 16(12.8) 24(19.2) 24(19.2)

13 AS-13 Accountign for Investments 123(98.4) 124(99.2) 124(99.2) 124(99.2) 124(99.2)

14 AS-14 Accounting for Amalgamation 2(1.6) 2(1.6) 2(1.6) 2(1.6) 2(1.6) 15 AS-15 Accounting for retirement benefites 67(53.6) 69(55.2) 83(66.4) 97(77.6) 106(84.8)

Source: Compiled from the annual reports of the selected companies from 1995-96 to 1999-06.

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(5) There has been a gradual improvement in the compliance of the accounting

standards over the period of study.

(6) All the selected companies have provided information in a statement form,

regarding the accounting policies.

(7) Most of the selected companies have provided depreciation on straight-line basis

at the rates specified in schedule XIV of the companies Act, 1956.

(8) Most of the companies have prepared separate schedules of fixed assets,

depreciation, investments, inventories, etc.

(9) All companies have provided information regarding contingent liabilities, in the

footnotes or notes in balance sheet.

(10) Most of the accounting standards were partially complied with by the selected

companies, as was evident from their annual reports.

Table 3.2 presents the 'Disclosure pattern of selected companies,

regarding Accounting Standards', both in absolute figures as well as in percentage for

the years 1995-96 to 1999-00. A cursory look at this table reveals the following:

a. There has been a gradual improvement in the compliance of the accounting

standards by the selected companies over the period of study.

b. The highest compliance percentage of the companies is 86.67. To name a few

of the companies, which have attained the highest level of compliance are —

Bannari Amman Sugars Ltd, ELGI Equipments Ltd, Hindustan Lever Ltd,

Indo Gulf corporation Ltd, Linc pens & plastics Ltd, LML Ltd, Navneet

Publications (India) Ltd, Reliance Industries Ltd and so on.

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Table 3.2

Disclosure pattern of Selected Companies regarding Accounting Standard

Sr. No Company No of Accounting standard complied with (Total out of 15)

95-96 96-97 97-98 98-99 99-2000 Total Percent Total Percent Total Percent _ Total Percent Total Percent

1 ABB - ASEA BROWN BOVERI LIMITED 12 80 12 80 12 80 12 80 12 80 2 ABS INDUSTRIES LTD. 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 3 ACC (THE ASSOCIATED CEMENT COMPANY LTD) 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 4 ACGL (AUTOMOBILE CORPORATION OF GOA LTD) 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 5 A)ANTA PHARMA LTD. 9 60 9 60 9 60 9 60 10 66.67 6 ALFA LAVAL (INDIA) LTD. 9 60 9 60 9 60 9 60 9 60 7 APAR INDUSTRIES LTD. 9 60 10 66.67 11 73.33 10 66.67 10 66.67 8 APOLLO TYRES LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 9 ARVIND MILLS LTD 9 60 9 60 9 60 9 60 10 66.67 10 ASIAN HOTELS LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 11 ASIAN PAINTS (INDIA) LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 12 RUM AUTO LTD 12 80 12 80 12 80 11 73.33 12 80 13 BA.IAJ HINDUSTHAN LTD 10 66.67 10 66.67 11 73.33 11 73.33 11 73.33 14 BANNARI AMMAN SUGARS LTD 11 73.33 11 73.33 11 73.33 13 86.67 13 86.67 15 BATA INDIA LTD 9 60 9 60 9 60 9 60 9 60 16 BIMETAL BEARINGS LTD 10 66.67 10 66.67 10 66.67 10 66.67 11 73.33 17 BIRLA YAMAHA 9 60 9 60 9 60 10 66.67 10 66.67 18 BIRLA 3M LTD 9 60 10 66.67 10 66.67 10 66.67 11 73.33 19 BIRLA ERICSSON OPTICAL LTD 9 60 9 60 9 60 10 66.67 10 66.67

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20 BLUE STAR LTD 11 73.33 11 73.33 11 73.33 1 1 73.33 1 1 73.33 21 BPL LTD 10 66.67 10 66.67 10 66.67 1 1 73.33 1 1 73.33 22 CABLE CORPORATION OF INDIA LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 23 CADBURY INDIA LTD 11 73.33 11 73.33 11 73.33 11 73,33 11 73.33 24 CAMPHOR &ALLIED PRODUCTS LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 25 CAPRIHANS INDIA LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 26 CEAT LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 27 CENTURY ENKA LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 28 CENTURY TEXTILES AND INDUSTRIES LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 29 CHAMBAL FERTILISERS AND CHEMICAL LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 30 CHEMPLAST SANMAR LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 31 CHICAGO PNEUMATIC INDIA LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 32 CIBA SPECIALTY CHEMICAL (INDIA) LTD 8 5333 10 66.67 10 66.67 10 66.67 11 73.33 33 CIPLA LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 34 COATES OF INDIA LTD 9 60 9 60 9 60 11 73.33 11 73.33 35 COLGATE - PALMOLIVE (INDIA) LTD 9 60 9 60 9 60 9 60 9 60 36 CREST COMMUNICATION LTD 8 53.33 9 60 9 60 9 60 9 60 37 CYBERTECH SYSTEMS AND SOFTWARE LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 38 DABUR INDIA LTD 10 6647 10 66.67 11 73.33 11 73.33 11 7333 39 DAEWOO MOTORS 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 40 dalmia cement (BHARAT) LTD 10 66.67 11 73.33 12 80 11 73.33 12 80 41 DEEPAK FERTILIZER & PETROCHEMICAL CORPORATIOr 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 42 DIGITAL EQUIPMENT (INDIA) LTD 12 80 12 80 12 80 12 80 12 80 43 E.I.D.-PARRY (INDIA) LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 44 E.MERCK (INDIA) LTD 11 7333 11 73.33 11 73.33 11 73.33 11 73.33 45 ELGI EQUIPMENTS LTD 11 73.33 13 86.67 13 86.67 13 86.67 13 86.67 46 FERRO ALLOYS CORPORATION LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 47 finolex INDUSTRIES LTD 10 66.67

10 66.67 10 66.67 10 66.67 10 66.67

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48 GERMAN REMEDIES LTD 11 73.33 11 73.33 11 73.33 11 73.33 n 73.33 49 GLAXO INDIA LTD 11 73.33 111 73.33 11 73.33 11 73.33 11 73.33 50 GOA CARBON LTD 11 73.33 11 73.33 11 73.33 11 7133 11 73.33 51 GODREJ FOODS LTD 9 60 9 60 10 66.67 11 7333 11 73.33 52 GODRE3 SOAPS LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 53 GOODRICKE GROUP LTD 12 80 12 80 12 80 12 80 12 80 54 GRASIM INDUSTRIES LTD 12 80 12 80 12 80 12 80 12 80 55 GREAVES LTD 8 53.33 9 60 10 66.67 10 66.67 11 73.33 56 GUJARAT AMBUJA CEMENTS LTD 12 80 12 80 12 80 12 80 12 80 57 GUJARAT NARMADA VALLY FERTILIZER CO LTD 10 66.67 10 , 66.67 12 80 11 73.33 12 80 58 GUJARAT SIDHEE CEMENT LTD 11 73.33 11 7333 11 73.33 11 73.33 11 73.33 59 GUJARAT STATE FERTILIZER & CHEMICALS LTD 12 80 12 80 12 80 12 80 12 80 60 HINDUSTAN LEVER LTD 12 80 12 80 12 80 13 86.67 13 86.67 61 HITECH DRILLING SERVICES INDIA LTD 10 66.67 10 66.67 10 66.67 10 66.67 10 66.67 62 I. T.C. LTD 11 73.33 11 7333 11 73.33 12 80 11 73.33 63 ILLINOIS TOOLS WORKS INDIA LTD 9 60 9 60 10 6667 10 66.67 10 66.67 64 INDO GULF CORPORATION LTD 12 80 12 80 12 80 13 86.67 13 86.67 65 ISPAT ALLOYS LTD 9 60 9 60 9 60 9 60 9 60 66 KINETIC ENGINEERING LTD 10 66.67 10 66.67 10 66.67 10 66.67 11 73.33 67 LARSEN & TOUBRO LTD 10 66.67 11 73.33 10 66.67 12 80 12 80 68 LINC PEN & PLASTICS LTD 11 73.33 11 7333 12 80 13 86,67 13 86.67 69 LML LTD 11 73.33 11 7333 11 73.33 13 86,67 13 86.67 70 MAFATLAL DYES & CHEMICALS LTD 9 60 9 60 9 60 9 60 9 60 71 MAHINDRA & MAHINDRA LTD 11 73.33 12 80 11 73.33 12 80 12 80 72 MAKERS LABORATORIES LTD 9 60 9 60 9 60 9 60 9 60 73 MOTOR INDUSTRIES CO LTD 9 60 9 60 9 60 9 60 9 60 74 MRF LTD 12 80 12 80 12 80 12 80 12 80 75 NATIONAL ORGANIC CHEMICAL INDUSTRIES LTD 9 60 9 60 9 60 10 66.67 10 66.67

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76 NAVNEET PUBLICATION (INDIA) LTD 11 73.33 12 80 12 80 13 86.67 13 86.67 77 NICHOLAS PIRAMAL INDIA LTD 11 73.33 11 7333 11 73.33 13 86.67 13 86.67 78 NIRLON LTD 8 53.33 8 53.33 8 53.33 9 60 9 60 79 NOVARTIS INDIA LTD 8 53.33 8 53.33 8 53.33 8 53.33 8 53.33 80 PARKE - DAVIS 11 73.33 11 7333 11 73.33 12 80 13 86.67 81 PETRON ENGINEERING CONSTRUCTION LTD 8 53.33 8 5333 10 66.67 10 66,67 11 73.33 82 PHIL CORPORATION LTD 9 60 9 60 10 66.67 10 66.67 10 66,67 83 PHILIPS INDIA LTD 9 60 9 60 10 66.67 10 66.67 11 73.33 84 PORRITTS & SPENCER (ASIA ) LTD 9 60 9 60 9 60 9 60 9 60 85 PROCTOR & GAMBLE HYGIENE AND HEALTH CARE LTD 8 53.33 8 53.33 8 53.33 9 60 9 60 86 RAJSHREE SUGARS & CHEMICALS LTD 10 66.67 10 66.67 11 73.33 11 73.33 11 73.33 87 RALLIS INDIA LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 88 RELIANCE INDUSTRIES LTD 12 80 12 80 13 86.67 13 86.67 13 86.67 89 SANDVIK ASIA LTD 9 60 9 60 9 60 10 66.67 10 66,67 90 SATYAM COMPUTER SERVICES LTD 12 80 12 80 13 86.67 13 86.67 13 86.67 91 SESA GOA LTD 8 53.33 8 53.33 9 60 12 80 12 80 92 SKF BEARING INDIA LTD 9 60 9 60 9 60 9 60 10 66.67 93 SOUTHERN PETROCHEMICALS INDUSTRIES 11 73.33 11 73.33 12 80 12 80 12 80 94 SRF INDIA LTD 9 60 9 60 9 60 10 66.67 10 66.67 95 STERLTTE INDUSTRIES INDIA LTD 9 60 9 60 10 66.67 10 66.67 10 66.67 96 SUN PHARMACEUTICAL INDUSTRIES LTD 10 66,67 10 66.67 11 73.33 11 73.33 11 73.33 97 SUNDRAM FASTENERS LTD 9 60 9 60 9 60 11 73.33 11 73.33 98 SURAl DIAMONDS INDIA LTD 9 60 9 60 10 66.67 10 66.67 10 66.67 99 TATA CHEMICALS 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 100 TATA STEEL 13 86.67 13 86.67 13 86.67 13 86.67 13 86.67 101 TATA TEA LTD 11 73.33 11 73.33 12 80 12 80 12 80 102 TELCO LTD 12 80 12 80 13 86.67 13 86.67 13 86.67 103 THE GREAT EASTERN SHIPPING CO, LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33

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104 THE INDIAN HOTELS COMPANY LTD 11 73.33 11 73.33 11 73.33 11 73.33 11 73.33 105 THE INDIAN SMELTING & REFINING CO. LTD 8 53.33 8 5133 8 53.33 9 60 8 53.33 106 THIRUMALAI CHEMICALS LTD 10 66.67 10 66.67 9 60 10 66.67 10 66.67 107 TIMEX WATCHES LTD 5 33.33 6 40 9 60 9 60 9 60 108 TITAN INDUSTRIES LTD 9 60 10 66.67 10 66.67 10 66.67 10 66.67 109 TITANOR COMPONENTS LTD 12 80 12 80 12 80 12 80 12 80 110 TVS - SUZUKI LTD 10 66.67 10 66.67 9 60 10 66.67 10 66.67 111 UNITED PHOSPHORUS LTD 9 60 9 60 12 80 12 80 12 80 112 UNIVERSAL CABLES LTD 10 66.67 10 66.67 10 66.67 11 73.33 11 73.33 113 VAM ORGANIC CHEMICALS LTD 10 66.67 10 66.67 11 73.33 12 80 12 80 114 VASHISTI DETERGENTS LTD 7 46.67 8 53.33 9 60 9 60 9 60 115 VINDHYA TELELINKS LTD 9 60 9 60 9 60 9 60 10 66.67 116 VINYL CHEMICAL INDIA LTD 6 40 7 46.67 7 46.67 9 60 9 60 117 VITARA CHEMICALS LTD 6 40 7 46.67 8 53.33 9 60 9 60 118 VOLTAS INDIA LTD 10 66.67 11 73.33 12 80 11 73.33 12 80 119 WARTSILA NSD INDIA LTD 10 66.67 10 66.67 10 66.67 11 73.33 11 73.33 120 WHIRLPOOL OF INDIA LTD 9 60 10 66.67 10 66.67 10 66.67 11 73.33 121 WIMCO LTD 8 53.33 8 53.33 10 66.67 10 66.67 10 66.67 122 WIRES FABRICS LTD 8 53.33 8 53.33 9 60 9 60 10 66.67 123 WYETH LEDERLE LTD 6 40 7 46.67 9 60 10 66.67 10 66.67 124 ZENITH LTD 8 53.33 9 60 9 60 11 73.33 11 73.33 125 ZUARI INDUSTRIES LTD 11 73.33 11 73.33 13 86.67 13 86.67 13 86.67

Source: Compiled from the annual reports of the selected companies from 1995-96 to 1999-00.

93

c. The lowest compliance percentage of the company is 33.33, by Timex

Watches Ltd, for the year 1995-96.

d. In case of 56 companies the compliance percentage remains the same in 1999-

00, as it was in 1995-96.

SHORTCOMINGS

Major shortcomings of the system of formulating, issuing, enforcing and

policing the accounting standards were as under:

1) Clear direction is lacking as to which accounting standard should or should

not be applied by a company belonging to a specific industry, while

maintaining accounts.

2) Law does not back the accounting standards issued by the ICAI. As there is no

law in the country to compel private enterprises to comply with the standards

issued by the ICAI, making them 'mandatory' the significant level is lowered.

3) The ICAI is not an autonomous body. As a result certain interested groups

may easily influence the standards setters. These groups may influence the

standard setters' decisions for their benefit.

4) Company law, which directs and regulates business accounting and reporting

are formulated and enforced by government. The companies therefore,

consider accounting standards as an additional burden to comply with.

5) Lack of awareness about the cost and benefit of compliance of the accounting

standards may be the cause why most of the companies don't comply with the

standard.

94

The ASB should be made autonomous, so that, there is least interference

from government or other interests. The ICAI should take steps to lay down standard

accounting practices in other areas that have not yet been covered by it.

CORPORATE DISCLOSURE AND SEBI

The Securities and Exchange Commission (SEC) regulates corporate

disclosure in USA and supports the accounting standards issued by the Financial

Accounting Standard Board of AICPA.

The government of India has established 'The Securities and Exchange

Board Of India' (SEBI) on the pattern of SEC of USA, on April 12, 1988 to promote

orderly and healthy development of the securities markets and to provide adequate

investor protection. As a part of capital market reforms the first step which the

government took was to grant statutory recognition to the Securities and Exchange

Board of India as a regulatory body for the capital market in February 1992.

One of the specific objectives of SEBI is to provide a high degree of

protection to the rights of investors and their interests through adequate, accurate and

authentic information and its disclosure on a continuous basis. SEBI has released an

approach paper in August 1988 to evolve a comprehensive securities law and to

develop an integrated framework to deal with all aspects of securities market

including better investor safeguard.

The SEBI proposes to rationalize the financial information contained in

the balance sheet and profit and loss account and supplement it by disclosure of non-

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financial information and statements by management, adequate to form a reasonable

judgment about the company's affairs and prospects 7.

SEBI's Organisation

SEBI's activities have been divided into five operational departments

headed by an Executive Director and legal department headed by General Counsel

and investigation department by Chief of Investigation.

1. Primary Market Department.

2. Issue Management & Intermediaries Department.

3. Secondary Market Department — Policy, Operations and Exchange

administration, Insider trading, etc.

4. Secondary Market Department — Inspection of Stock Exchanges, non-member

intermediaries.

5. Institutional Investment Department.

Objectives of SEW

According to the preamble of the SEBI Act, the following are the

objectives of setting SEBI:

❖ To protect the interests of investors in securities.

❖ To promote the development of securities market.

❖ To regulate the securities market.

7 CFA, Newsletter, August 1988, p.5.

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Rules, Regulations and Guidelines issued by SEBI

SEBI has issued a series of guidelines, clarifications, rules and

regulations to develop, stabilize, consolidate and strengthen the Indian Capital

Market. To name a few: -

1. SEBI (Portfolio Managers) Rules and Regulations, 1992.

2. Introduction of Stock-invest (9-1-1992) and subsequent modifications.

3. Guidelines on free pricing of issues (13-4-1992).

4. Guidelines for disclosure and investor protection (11-6-1992) and subsequent

clarifications.

5. SEBI (Stock Brokers and sub- brokers) Rules and Regulations (20-8-1992).

6. SEBI (Insider Trading) Regulations, 1992 (19-11-1992).

7. SEBI (Merchant Bankers) Rules and Regulations, 1992 (22-12-1992).

8. SEBI (Mutual Fund) Regulations, 1993 (20-1-1993).

9. SEBI (Registrars to an issue and Share Transfer Agents) Rules and

Regulations, 1993 (31-5-1993).

10. SEBI (Underwriters) Rules and Regulations, 1993 (8-10-1993).

11. SEBI (Debenture Trustees) Rules and Regulations, 1993 (29-12-1993).

12. SEBI (Bankers to an Issue) Rules and Regulations, 1994 (14-7-1994).

13. SEBI (Custodian of Securities) Regulations, 1996 (16-5-1996).

14. SEBI (Depositories and Participants) Regulations, 1996 (16-5-1996).

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SEBI and investor grievance and guidance

SEBI has an investor grievance and guidance division, which handles

investor complaints. The complaints received by SEBI from investors are categorized

as under-

Type Nature of Complaint

I Non-receipt of refund orders/ allotment letters.

II Non-receipt of dividend.

III Non-receipt of share certificates/ bonus shares.

IV Non-receipt of debenture certificates/ interest on debenture/ redemption

amount of debentures/ interest on delayed payment of interest on debentures.

V

Non-receipt of annual reports, right issue forms/ interest on delayed receipt

of refund orders/ dividend, etc.

SEW and surveillance systems

SEBI has sought the assistance of US Stock Market regulatory body,

Securities and Exchange Commission (SEC) for setting up sophisticated market

surveillance mechanisms within the SEBI. Surveillance system in NASDAQ and

New York Stock Exchange. work on set parameters, which trigger off alarms

whenever there is unusual trading activity. Once this is achieved, surveillance system

in India will be at par with that at NASDAQ or NYSE. Detection of untoward

fluctuations in volume and prices would be easier within the regulatory body. This

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system has been successfully implemented by both NYSE and NASDAQ, London,

etc. 8

The SEBI, constituted a 12 member committee headed by MR. Y.H.

Malegam, chartered accountant to review the existing disclosure requirements in

offer documents and recommend additions thereto and modifications thereof, so that

the disclosure assist in achieving the objectives for which SEBI was set up. The

committee's 65-page report was released on 29 th June 1995.

The highlights of recommendations are:

❖ All of SEBI' s requirements on disclosure should be consolidated in a single

document issued in loose-leaf form, which can be periodically updated in a

systematic fashion.

❖ The prospectus should disclose the actual expenditure incurred on the project

upto the date of filing the draft prospectus with SEBI.

❖ In respect of financial information disclosed in the prospectus, adjustments

needed must, wherever possible, be made in the statement of assets and

liabilities and in the statement of profit and loss account itself and not

indicated by way of notes.

❖ In the statement of profit and loss account the turnover disclosed should be

bifurcated into:

i) Turnover of products manufactured by the company and

ii) Turnover of products traded in by the company.

8 Sanjiv Agarwal, "Manual of Indian Capital Market", Bharat Law House, New Delhi, 1997, pp. 88-102.

99

❖ The prospectus should disclose details of 'Other Income' in all cases where

such income exceeds 20% of the net profit before tax.

❖ The prospectus should disclose all significant policies followed in the

preparation of the financial statements.

❖ The prospectus should disclose specified accounting ratios for each of the

accounting periods for which financial information is given.

❖ All financial information given in the prospectus including accounting ratios

should be audited.

❖ Normally the prospectus should not disclose projections of future profits.

❖ Projected earnings should not be used as a justification for the price.

❖ The prospectus should disclose as justification for the issue price:

1. EPS pre-issue for the last three years (as adjusted for changes in

capital);

2. P/E pre-issue and comparison thereof with industry P/E where

available;

3. Average return on net worth in the last three years;

4. Minimum return on increased net worth required to maintain pre-

issue EPS;

5. NAV based on last balance sheet;

6. NAV after issue and comparison thereof with the issue price.

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❖ The prospectus should disclose management's discussion and analysis of the

financial position and result of the operations presented in the financial

statements. 9

The SERI had appointed a committee under the chairmanship of Shri.

Kumar Mangalam Birla with terms of reference to suggest measures to improve the

standard of corporate governance disclosure practices in the annual reports. 10 A

brief abstract of the report is given below:

SUGGESTED LIST OF ITEMS TO BE INCLUDED IN THE REPORT ON

CORPORATE GOVERNANCE IN THE ANNUAL REPORT OF COMPANIES.

1) A brief statement on company's philosophy on code of governance.

2) Board of directors,

•:* Composition and category of directors for example, promoter,

executive, non-executive, independent non-executive, nominee

director, which institution represented as lender or as equity investor.

❖ Attendance of each director at the BOD meetings and the last AGM.

❖ Number of BOD meetings held, dates on which held.

3) Audit committee,

❖ Brief description of terms of reference.

❖ Composition, names of members and chairperson.

❖ Meetings and attendance during the year.

4) Remuneration committee,

9 Sanjiv Agarwal, ibid, pp. 621-628. /° "Report on Corporate Governance", Chartered Secretary, vol. No. )00C, no.3, March 2000, p.380.

101

❖ Brief description of terms of references.

❖ Composition, names of members and chairperson.

❖ Attendance during the year.

•:• Remuneration policy.

❖ Details of remuneration to all the directors, as per format in main

report.

5) Shareholders committee,

❖ Name of non-executive director heading the committee.

❖ Name and designation of complaint officer.

❖ Number of shareholders complaints received so far.

❖ Number of complaints not solved to the satisfaction of shareholders.

❖ Number of pending share transfers.

6) General Body Meetings,

❖ Location and time, where last three AGM held.

❖ Whether special resolutions were put through postal ballot last year,

details of voting pattern.

❖ Person who conducted the postal ballot exercise.

❖ Special resolutions proposed to be conducted through postal ballot.

❖ Procedure for postal ballot.

7) Disclosures,

❖ Disclosure on materially significant related party transactions, i.e.,

transaction of the company of material nature, with its promoters, the

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directors, or the management, or their subsidiaries or relatives, etc, that

may have potential conflict with the interests of company at large.

Details of non- compliance by the company, penalties strictures

imposed on the company by stock exchange or SEBI or any statutory

authority, on any matter related to capital markets, during the last three

years.

8) Means of communication,

❖ Half- yearly report sent to each household of shareholders.

❖ Quarterly results.

❖ The newspapers, which normally publish the report.

❖ Any website, where displayed.

+ Whether it also displays official news releases, and

❖ The presentations made to institutional investors or to the analysts,

❖ Whether "Management discussion and analysis" (MD & A) is a part of

annual report or not.

9) General shareholder information,

❖ AGM, date, time and venue.

• Financial calendar.

❖ Date of book closure.

❖ Dividend payment date.

❖ Listing on stock exchanges.

❖ Stock code.

❖ Market price data; high, low during each month in last financial year.

103

❖ Performance in comparison to broad based indices such as BSE

sensex, CRISIL index. etc.

❖ Details about registrar and transfer agents.

+ Share transfer system.

❖ Distribution of shareholding.

❖ Dematerialization of shares and liquidity.

❖ Outstanding GDRs / ADRs / warrants or any convertible instruments,

conversion date and likely impact on equity.

❖ Details on plant locations.

❖ Address for correspondence.

CII TASK FORCE DESIRABLE DISCLOSURE OF CORPORATE

GOVERNANCE

A task force was setup by the Confederation of Indian Industry (CII)

with Shri. Rahul Bajaj, as chairman. The task force had prepared a draft code on

`desirable disclosure of corporate governance', that was released in April 1998 11 . A

summarized version of the code is given below:

(1) STRUCTURE OF THE BOARD AND NUMBER OF MEETINGS

A single board if it performs well, can maximize long-term value of

equity for the shareholders, just as well as two or multi-tiered board. The full board

should meet a minimum of six times a year, preferably at an interval of two months,

11 Report of the CII task force on, "Desirable disclosure of corporate governance: A code", Chartered Secretary, vol. XXVII, no.5, May 1997, PP. 580- 586.

104

and each meeting should have agenda items that require at least half a day's

discussion.

(2) COMPOSITION OF NON- EXECUTIVE DIRECTORS

A listed company with a turnover of Rs. 100 crore and above should

have professionally competent and acclaimed non-executive directors, who should

constitute at least 30 per cent of the board, if the chairman of the company is a non-

executive director, and at least 50 per cent of the board, if the chairman and managing

director (CMD) is the same person.

(3) CEILING ON DIRECTORSHIP

No single person should hold directorship in more than 10 companies.

The ceiling excludes directorship in subsidiaries (where the group has over 25 per

cent but not more than 50 per cent equity stake).

(4) ROLE OF NON-EXECUTIVE DIRECTOR

For non-executive directors to play an important role in maximizing

long-term value of shareholders', they need to become active participants in boards,

not passive advisors, and know how to read a balance sheet, profit and loss account,

cash flow statement and financial ratios and have some knowledge of various

company laws. This, of course, excludes those who are invited to join boards as

expert in other fields, such as science and technology. Sufficient sitting fees should be

paid to non-executive directors to induce serious effort by them.

(5) COMMISSION / STOCK OPTION TO NON-EXECUTIVE DIRECTORS

To secure better efforts from non-executive directors, companies should

pay commission, over and above the sitting fees, for the use of the professional

105

inputs. An appropriate mix of commission and stock option should be considered, to

align the non-executive directors towards keeping an eye on short-term profits as well

as longer-term value of shareholders.

(6) ATTENDANCE OF BOARD MEETINGS

While re-appointing members of the board, companies should give the

attendance record of the concerned directors. As a general practice, one should not re-

appoint any non-executive director who has not attended a minimum of 50 per cent of

the total board meetings.

(7) KEY INFORMATION

In the interest of good governance certain key information must be

placed before the board, and must form part of the agenda papers.

(8) AUDIT COIVEVITTTEE

The listed companies with either a turnover of over Rs.100 crore or a

paid up capital of Rs.20 crore, whichever is less, should setup audit committee within

two years. Audit committee consists of at least three members, all drawn from non-

executive directors, who should have adequate knowledge of finance, accounts and

basic elements of company law.

(9) ADDITIONAL SHAREHOLDER INFORMATION

Under additional shareholder information, listed public companies

should give data on high and low monthly average share prices in all the stock

exchanges, where the company is listed, for the reporting years, a statement on value

added and greater details on business segments or divisions.

106

(10) CONSOLIDATION OF GROUP ACCOUNTS

Consolidation of group accounts should be optional and subject to the

financial institutions allowing companies to leverage on the basis of group assets and

the income-tax department using the group concept in assessing corporate income-

tax.

The present study reveals that only Bajaj Auto Ltd disclosed corporate

governance, as per CII guidelines and SEBI guidelines, in the annual report for the

year 1999-00.

INFORMATIONAL NEEDS OF USERS AND MANAGEMENT

PREFERENCES

A company is at present accountable for its performance and affairs not

only to the shareholders but also to the other 'stakeholders'. In alternative terms,

companies are now obliged to serve the additional informational needs of the users of

the annual report, even though not mandatory under the law. Suppliers of the

information (management) must make best efforts to 'disseminate' information such

that the actual supply of information matches with the 'expectations' of the

consumers of the information (users). [Vasa1,2000] 12 .

There are bodies like the law, ICAI and SEBI that govern the disclosure

of information but the consideration of the user's informational needs is of paramount

significance in this regard. Corporate reporting, to be useful, must satisfy the

informational needs of the users.

12 Vasal, V.K, "Extended Corporate Reporting and Indian Public sector- Some Evidence", Journal of Accounting & Finance, volume 14, no.2, September 2000.

107

The users prescribe the information needed by them for the purpose of

their decision- making. Even the regulatory bodies like, government, ICAI, and SEBI,

etc, consider the informational requirement of the users, while making law,

pronouncements or rules regarding disclosure.

Which information is to be disclosed in an annual report, ultimately

depends on the management preferences and beliefs regarding disclosure. A

conservative management may be reluctant to disclose greater information, whereas,

an open-minded organization may opt for liberal disclosure policies. In India, most of

the organizations, especially in the private sector, are conservatives and hence do not

favour-expanded disclosure in annual reports.

CONTENTS OF CORPORATE FINANCIAL REPORTING

All the information, which meets the needs of the users, should be

disclosed. The quantity of information to be disclosed also depends upon the basic

objective of financial reporting, needs and expectations of users and the environment

prevailing in the country.

In an under developed country environment, companies disclose mainly

statutory requirements, like balance sheet, profit and loss account, auditor's report,

and a few schedules as appendices, whereas, in developed countries, where economic

environment is predominant, an adequate disclosure involves, besides the above

mentioned statutory requirements, a lot of non-statutory information like, value added

statement, employees welfare statement, social report, environmental report,

108

shareholders information, investors guide, price level adjustment account and human

resource accounting, etc.

In India, the presentation of corporate financial reporting is an annual

report. It contains two types of reporting:

I. Statutory reporting,

II. Non- statutory reporting.

The matters included in the reporting are either accounting information

or non-accounting information.

L STATUTORY REPORTING

The companies Act 1956, section 209 to 233 B give the statutory

guidelines in connection with the accounts and audit of the company.

A) ACCOUNTING INFORMATION

1. Balance sheet [schedule VI, part I, section 211].

2. Profit and loss account [schedule VI, part II, section 210 (2) of income

statement].

The financial statement also includes schedules and notes and the form may

be vertical or horizontal.

B) NON- ACCOUNTING INFORMATION

1. Boards' / Director's report [section 217].

2. Auditor's report [section 227 (4A & 233B)].

109

The respective section prescribes the particulars to be included in the report.

NON- STATUTORY REPORTING

The recent trend in the corporate sector is to focus on more details in

report, which is not required by the act.

A) ACCOUNTING INFORMATION

a) Inflation accounting.

b) Human resources accounting.

c) Social accounting.

d) Statement of value added / economic value added / market value

added / enterprise value added.

e) Financial history and ratios.

f) Statistical presentation — graphs, etc.

g) Statement of transaction in foreign currency.

B) NON- ACCOUNTING INFORMATION

i. Chairman's report.

ii. Corporate objective and profile.

110

CONCLUSION

This chapter has attempted to discuss the corporate disclosure

environment in India. The environmental factors that have been examined are those

that might be expected to influence corporate disclosure practices.

The corporate disclosure requirements have been expanded considerably

over the years in response to various provisions of the Indian Companies Act.

ICAI deserves appreciation for its constructive role in regulating the

corporate disclosure practices in India. ICAI has contributed significantly to the

development of corporate disclosure practices especially since the commencement of

the accounting standards setting programme. Disclosure of accounting policies has

improved, methods of treating various items have been prescribed and so comparison

between companies has been facilitated.

SEBI has been in existence over a decade. It has been somewhat

successful in discharging its primary function of protecting the interest of investors in

securities. Though there seems to be much promise in SEBI, it is yet to be seen as to

what extent it really regulates the corporate disclosure in India.

The informational requirements of the users and the willingness on the

part of the management to disclose the information, also plays very important role in

corporate disclosure environment.

111