12.2.1 The Companies Act, 1956, provides the broad framework of disclosure in the Corporate Annual Report. The format and disclosure requirements have not changed since their amendment in the 1970s. Some of the Indian companies that are tapping the international capital markets are also required to present their accounts as per the US GAAP (Generally Accepted Accounting Principles), which are more transparent and detailed compared to disclosure norms under the Indian Companies Act. The format and contents of Annual Reports of Indian companies may need to be rationalized and recast in view of increasing global integration of capital markets and information needs. Due to non-uniform treatment of various items by companies, the various sources of data on the private Corporate Sector often offer grossly varying estimates of crucial parameters. Unless this problem is addressed, standardisation will have little meaning.
12.2.2 The disclosure norms defined in the Companies Act may be refined to cover the following variables in view of the current trends of globalisation and knowledge-based development:
Employment: An important lacuna of the existing norms of disclosure is that companies are not required to report the number of persons employed by them. Number of employees and their functional composition (e.g. production, marketing and sales, administration and finance, research and development (R&D), etc.) needs to be reported. A similar functional break-up of employee compensation may also be provided. Although disclosure of employment has been included in the SEBI’s Code on Corporate Governance, the Code is applicable only to stock-exchange-quoted companies. To bring in uniformity, all the companies should be required to report this information.
Certain Important Heads of Expenditure: Certain heads of expenditure such as R&D expenditure and advertisement expenditure are required to be reported only if they exceed one per cent of the sales turnover. Hence, many companies, in spite of spending a considerable sum on R&D, choose not to report it, as it is within one per cent of their turnover. While this information is reported as part of the Directors’ Report, it often does not find a place in the profit and loss account. It is important that such heads of expenditure are reported irrespective of their proportion due to their importance in the knowledge-based and competitive economy. Furthermore, R&D expenditure should be broken up into capital and current expenditure. As is the current practice, the Directors’ Report should continue to summarise the focus of R&D activity and notable achievements including the attempts towards absorption of imported technology. In addition, it should require the companies to report any patents obtained in India and abroad.
Overseas Operations: Although exports are required to be reported, sales through overseas affiliates is not. Under Section 212 of the Companies Act, 1956, companies are required to provide profit and loss accounts of their subsidiaries (including overseas ones). However, the activities of joint ventures and other affiliates are not available. Overseas investments are important channels of globalisation of a company’s operations. Hence, a portion of the Annual Report needs to be devoted to overseas operations providing details of exports (their break-up into exports to related companies and others, important markets, etc.), identifying foreign affiliates of the reporting company in different countries and their sales. Similarly, data on imports should be broken up into imports from affiliated sources (such as foreign parents or associates in the case of Foreign Direct Investment (FDI) companies) and others.
Foreign Collaboration and FDI: The reporting company should, in a single block, provide information on the foreign collaborations entered into by it and those currently in force. This will cover the name of the collaborator and country, date of agreement, products and technologies covered in the collaboration, foreign equity involved if any, official approvals, period of validity of the agreement, and the status of implementation. This information will help in reconciling the foreign collaboration approvals and their implementation. Currently, very little follow-up is possible after a foreign collaboration is approved by the Government. Finally, total foreign ownership in the company along with its detailed break-up between foreign collaborators, foreign institutional investors, foreign nationals, non-resident Indians, overseas corporate bodies (OCBs) owned by NRIs, etc. needs to be reported. At present, the extent of foreign ownership is disclosed only to the extent dividend is to be remitted abroad in the reporting year. Given the growing importance of FDI in the globalising Indian economy, this information has become vital.
Foreign Assets and Liabilities: Periodical surveys of India’s foreign liabilities and assets are conducted by the RBI. The relevant particulars are sought from the identified corporate units along with a copy of their balance sheet. Non-response is said to be one of the problems faced in conducting these surveys. In this context, there is a need to strengthen the secondary data sources for filling in the response gap. One such major secondary source is the balance sheet of the companies. The balance sheet, however, does not explicitly state the foreign component either in the sources or in the application of funds. If the balance sheet shows explicitly the figures of foreign participation in equity capital and borrowings and also those of assets held abroad, and of loans and advances to foreign parties and investments made abroad, it would immensely help to improve the coverage of the census and surveys, as such data can be substituted for missing information pertaining to the non-responding companies. Repatriability details that are taken relating to the non-resident components may be incorporated in the appropriate schedules.
Capital Issues: With the repeal of the Capital Issues Control Act, the availability of official data on capital raised by companies from the market has become tentative. One has now to rely on private agencies without knowing their reliability. Hence, companies may be required to indicate capital raised during the reporting period, separately indicating share premia, in their Annual Reports. In case of capital issues by listed companies, close cooperation should be established between SEBI, DCA and RBI.
Mergers and Acquisitions: The process of liberalisation is leading to industrial restructuring in the country. Hence, a large number of mergers and acquisitions (M&As) of companies and sales and purchases of industrial units are taking place. It is important that Annual Reports provide information on the acquisition of a substantial interest in another undertaking, or acquisition of a substantial interest in the reporting company by another group or company. If the acquirer happens to be an existing shareholder of the company, then the total shareholding after the additional acquisition should also be reported. Although SEBI has a Take-Over Code, a large number of M&A deals do not come under its purview either because they involve unlisted companies or because the acquisition is a result of an overseas M&A between the foreign parents of the companies concerned. There is need for a more systematic and purposive reporting on the M&A activity in the Indian Corporate Sector. This information would especially be useful in the implementation of the Competition Policy. Details relating to valuation of M&A should also be furnished in full.
Shareholding Pattern: The present format for reporting the shareholding pattern needs to be modified to reflect the ownership and control characteristics better. Given the level of aggregation and classification, it is not possible from the present format to identify controlling interests and their stake in the risk capital. Shareholding of controlling interests should be identified separately in each of these categories namely, foreign shareholding, inter-corporate investments and individual shareholders. It could conveniently be presented in the form of a short table, which gives the controlling and non-controlling interests in each of these categories. This is in addition to what is presently being reported under the Shareholding of Directors and Their Relatives. The foreign shareholding should be reported separately for foreign collaborators, foreign nationals, holders of American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), foreign institutional investors, Non-Resident Indians, etc. as indicated earlier.
Directors’ Report: In addition to the other items, the Directors’ Report could provide a statement on major litigations relating separately to taxes, duties, labour, company law, environment, etc. and the directors in their personal capacity.
Standardisation of Format: Balance Sheet Abstract (BSA)
12.2.3 In order to facilitate electronic processing of the Annual Report data, the reporting format needs to be redesigned and standardised. For this, various formats for data collection issued by the Bureau of Economic Analysis (BEA) of the US Department of Commerce may provide a useful guide.
12.2.4 The Balance Sheet Abstract (BSA) serves a useful function of providing summary information in a form suitable for Electronic Data Interchange (EDI). It may facilitate the task of periodic entering of data on key variables for the entire Corporate Sector. One major problem with the present BSA format is that it does not enable direct and easy computerisation of the data. It does not enable automatic verification of certain financial data. It does not have even the number of months to which the report refers. As a result, direct comparisons could lead to misleading conclusions (say, the sales of a company whose accounting period was extended to 18 months and that of a company which closed accounts in 12 or 9 months). Comparisons based on BSA can also be misleading because of lack of uniformity in the concepts followed by different companies (e.g., inclusion or exclusion of excise duty when reporting sales). Nor can one get the total assets as the current assets are reported net of current liabilities and provisions. While major products are reported, their relative importance for the companies is not available in the BSA. Companies also do not know which coding pattern to follow in case of services.
12.2.5 Besides removing these deficiencies, the BSA could be expanded slightly to facilitate availability of timely and relevant aggregates for the Corporate Sector. Some qualitative response variables (Yes or No type) could be added to facilitate a purposive sorting of companies. While there could be a case for not increasing the size of the Annual Report, it needs to be underlined that the design of the report plays a major role in determining the size of the Annual Report. A suggested format for the BSA, which does not significantly increase the size of the Annual Report, is given in Annexe 12.3.
Recommendations
12.2.6 The Commission, therefore, recommends that:
The minimum list of variables to be added in the Annual Report or Balance Sheet along with the format of Balance Sheet Abstract (BSA) should be finalised by the Department of Company Affairs (DCA) in consultation with the concerned agencies such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Central Statistical Organisation (CSO), etc.
A standard format should be formulated for uniform and timely reporting of data and to facilitate electronic processing.
