July 25, 2017
2017 builds on positive disclosure-related regulatory requirements – the New Companies Act 2013 and amended Clause 49 SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 – pushing for higher voluntary disclosure standards, including those around board evaluation. The capital market regulator SEBI has posed an apt question – ‘who is evaluating the evaluators?’ (in this case, the corporate board) and is the evaluation a robust process? Superior disclosure practices are a proxy for superior management quality and better corporate governance; and we can now add board governance to that list too. This is a positive development for India, a capital markets jurisdiction where charismatic promoters have traditionally held sway over the boards of their companies.
The India Disclosure Index 2017 report, the third edition of its series, reveals a strong embrace of Voluntary Disclosure by Indian companies, coming on the back of previous year’s progress on Mandatory Disclosure (even though 22% of Top 100 companies, by market capitalisation, continue to fall short on this measure). The 6.8/ 10 Composite Disclosure Score and 5/ 8 Voluntary Disclosure Score for India’s Top 100 companies are good but this significance is evident when reviews movements on individual parameters.
The research methodology for the 2017 report was finalised with the help of an expert research jury (see below). Subsequently, FTI Consulting reviewed publicly available information disclosed by 200 leading listed Indian companies (by market capitalisation) to create a weighted, Composite Disclosure scoring system – with seven parameters for Mandatory Disclosure and eight for Voluntary Disclosure. A re-weighting of parameters marks a significant change in research methodology from previous years, making direct comparisons with previous year’s Composite and Voluntary Disclosure scores misleading. The number of companies that provide information on specific individual parameters has risen steadily (specifically for Earnings Transcripts, Margin Improvement Narratives, Risk Metrics and Whistle-Blower Mechanism):
Three companies – Axis Bank, Infosys and State Bank of India – scored 10/ 10 on the weighted Composite Disclosure score. 22 Indian companies in the Top 200 list scored higher than 9/ 10 and may be considered ‘Disclosure Champions’. Two years back, such champions came from one or two sectors. This year, they come from four knowledge economy and three ‘old economy’ sectors. Each of these companies are setting an example on corporate disclosure for other companies in their respective sectors.
Six companies engaged third-parties for evaluating performance of their boards – an optimistic number given the fairly recent guidance from SEBI on the matter. This number can be expected to grow in following years.
Higher Voluntary Disclosure scores indicate Corporate India is taking a progressive view of disclosure, beyond a legalistic definition. However, one must bear in mind that ‘disclosure standard’ itself is a moving target and this report covers leading Indian companies only. Boards could articulate ‘disclosure policies’ anticipating new risks, regulatory developments and global best practices and better prepare their companies to attract ‘transparency premiums’ from investors.
The research methodology for India Disclosure Index 2017 has been modified from previous year’s methodology after consultations with a specially constituted three-member research jury comprising of eminent professionals from the regulatory, legal and institutional investment fraternity.
The three-member research jury that finalised the methodology for India Disclosure Index 2017 comprised of:
The jury made pertinent observations about how corporate disclosure behaviour and regulatory focus had moved beyond mandatory disclosure to voluntary disclosure standards; and recommended an appropriate re-weighting of parameters. The jury also favoured a more ambitious interpretation of the definition of ‘board evaluation’ favouring ‘evaluation by a third-party’ as a preferred international benchmark. These meaningful interventions ensure that India Disclosure Index 2017 is sufficiently dynamic and updated to the current environment. FTI Consulting expresses thanks to the jury for their time and support for this non-commercial, public-research initiative.
Overall as a group, the Top 100 listed Indian companies (by market capitalisation) have an average Composite Disclosure score of 6.8/ 10.
The Next 100 listed Indian companies have an average Composite Disclosure score of 6.2/ 10, with no company achieving the maximum score of 10/ 10. Furthermore, 23% of the Next 100 listed Indian companies have an average Corporate Disclosure score of five or less.
22 companies across both groups of companies, Top 100 and Next 100, have a Composite Disclosure score higher than 9/ 10. These companies are from a wide range of industries and can be viewed as sector champions for corporate disclosure standards. Classified by industry, they are:
Overall as a group, the Top 100 listed Indian companies have an average Mandatory Disclosure score of 1.8 /2.
The Mandatory Disclosure score for the Next 100 listed Indian companies is also 1.8 /2, with the weakest performance on ‘Analyst Engagement Information AND earning call transcripts’. 53% of these companies disclose this information on their corporate websites (up from 49% in 2016).
Overall as a group, the Top 100 listed Indian companies score an average of 5/ 8 for Voluntary Disclosure, when reviewed against eight voluntary disclosure parameters (see methodology).
The average Voluntary Disclosure score for the Next 100 companies was 4.6/ 8, with the weakest performance on ‘Board Evaluation by Third Party’ (done by only one Next 100 company) followed by ‘Risk Management Metrics’.
While reviewing disclosure information of all 200 companies, the FTI Consulting research team came across two specific noteworthy examples – for the spirit of transparency (in the first instance) and a broad view of risk (in the second):
Both instances are commendable examples of voluntary disclosure in their true spirit, and an indication of how new standards could evolve in the next 18-24 months. Risks arising from international regulations (around anti-bribery, corruption and human rights) will impact Indian companies with overseas operations as well as those that are part of global supply chains. This is an important point for board-level discussions.
The Mandatory Disclosure weighted score of each company has been calculated on basis of presence (1) or absence (0) of seven mandatory information disclosure parameters available publicly, either on the company’s website (W) or Annual Report (AR). The seven parameters are: Quarterly & Annual Financial Information (W), Shareholding Information (W), Corporate Social Responsibility Policy (AR), Board Evaluation Information (AR), Risk Management Policy (AR), Whistle-blower Policy (AR) and Analyst Engagement & Earning Call Transcripts (W). These cover financial and non-financial parameters.
Similarly, the Voluntary Disclosure weighted score has been calculated on basis of presence (1) or absence (0) of eight voluntary disclosure parameters – Profit & Margin Improvement Narrative (W), Operating Metrics (W), Business Strategy Articulation (W), Updated Debt Information (W), Adoption of Indian Accounting Standards (IndAS) and its impact on financials (AR), Board Evaluation by External Third-Party Advisor or Consultant (AR), Details of Risk Management Actions/Mitigation (AR) and Whistleblowing Mechanism via phone number or email (W). The first two parameters of the Voluntary Disclosure score relate to business performance, while the other six are proxies for management quality and business leadership. The Composite Disclosure Score (Composite Disclosure Score = Mandatory Disclosure + Voluntary Disclosure) has been calculated for each company in the BSE 100 and BSE 200 Index, with a weight of 20% for Mandatory Disclosure and 80% for Voluntary Disclosure, as observed during period 15 June – 30 June 2017.
The specially-constituted external research jury for India Disclosure Index 2017 recommended certain modifications to the methodology of previous year’s – specifically inclusion of two new Voluntary Disclosure parameters (IndAS Impact and Board Evaluation by Third Party) to reflect the current disclosure environment and recent SEBI guidance notes. The research jury also recommended a re-weighting of disclosure parameters with a dominant weighting of 80% to Voluntary Disclosure parameters. The jury favoured dropping the earlier ‘Corporate Developments’ Voluntary Disclosure parameter, which used to get a de-facto score of ‘1’. These changes ensure that research methodology is dynamic and captures key changes in regulations as well as expectations of corporate disclosure behaviour.
NOTE: Weights for India Disclosure Index 2017 are different from those used in previous years. Exercise care when comparing 2017 scores with previous year scores.
 Constituents of the BSE100 Index
 Constituents of the BSE200 Index, that are not part of the BSE100 Index