SEC’s Spoke In The Wheel

The

Securities and Exchange Commission (SEC), the regulatory body in the

United States, has recommended certain non-financial disclosures for

non-US companies who plan listing on US stock exchanges. This has put

companies in a catch-22 situation. With the Government of India allowing

Indian companies to go for American Depository Receipts or Global

Depository Receipts, it was natural for more Indian companies to take the

Nasdaq or the New York Stock Exchange route. There were rumors that,

besides Silverline and Rediff.com, there were around five to six companies

lining up for listing in US stock exchanges. Interestingly, the

recommendations for new regulations come at a time when the companies have

already made plans to go for US listings.

The Indian companies have

been following the US Generally Accepted Accounting Principles (GAAP), but

with the new regulations, it would have to come out with a plethora of

non-financial disclosures. The SEC’s argument is that by following the

International Organization of Securities Commission (IOSCO) disclosure

standards, it will make it easier for any company to be listed anywhere in

the world, apart from the US bourses. And the SEC’s claim is that it

will make international harmonization of disclosure requirements.

The areas in question which

will get affected include description of business, description of

property, legal proceedings pending against the company, nature of the

domestic capital market, trading in the secondary market in the country of

incorporation, exchange controls, taxation and compensation given to the

directors and officers. According to SEC, this disclosure document would

serve as an ‘international passport’ to the world’s capital markets

by reducing the barriers to cross-border offerings and listings. The

international disclosure standards would replace most but not all of the

current requirements of Form 20-F–the combined registration and annual

report form for foreign private issuers under the Exchange Act.

The other important change

that is going to come about is the revision in the definition of ‘foreign

private issuer’. The foreign private issuer definition currently

includes a test of whether more than 50% of an issuer’s outstanding

voting securities are held of record, either directly or through voting

trust certificates or depositary receipts, by residents of the United

States. The new definition requires the issuer to ‘look through’ the

record ownership of brokers, dealers, banks or nominees holding securities

for the accounts of their customers to determine the residency of those

customers. According to SEC, "These changes to the foreign private

issuer definition will give a better picture of whether a company

incorporated outside the United States is, in fact, the type of entity for

whom the special rules and forms for foreign private issuers are

intended."

In adopting these

standards, IOSCO says, "Issuers will benefit directly from being able

to prepare a single non-financial statement disclosure document for

capital raising and listing in more than one jurisdiction at a time. At

the same time, investors will benefit from the comprehensive nature of the

required disclosures and the enhanced comparability of information. These

standards represent an important step forward in reducing the costs of

cross-border capital raising without sacrificing investor

protection."

According to SEC, the

reasons for adopting the global standards are the increasing globalization

of the securities markets, which made it important for securities

regulators to work together to promote and maintain high quality

disclosure standards. Agrees James Shapiro, Senior MD, Asia-Pacific, New

York Stock Exchange, "The SEC has always required non US companies to

use a specific format. This change is actually towards a new international

standard and a good thing for international companies. We view this as

good, as this simplifies reporting of foreign companies across the global

stock exchanges."

Another recommendation is

that audited financial statements be no older than 15 months at the time

of the offering or listing, as compared to 18 months. In the case of the

issuer’s initial public offering, the audited financial statements also

must be of a date not older than 12 months at the time the offering

document is filed. Another proposal is that if the date of a registration

statement is more than nine months after the end of the issuer’s last

fiscal year, the registration statement must contain interim financial

statements–including US GAAP information, which may be unaudited,

covering at least the first six months of the issuer’s fiscal year.

As far as Indian companies

are concerned, the proposals make it all the more difficult to go in for a

listing in the US. Most of the Indian bankers spoken to, are still in the

process of figuring out how exactly the new recommendations would hurt the

Indian companies. Agrees Patrick Sutch, Director, Asia-Pacific, Nasdaq,

"I don’t think anybody has had a good look at that, but I don’t

think it should be of much bother to foreign companies. However, Jason

Pontin, Editor, Red Herring, disagrees, "I think it is absolutely

unfair. It is bizarre. The Indian companies have been doing a good job

following the US GAAP standards and all of a sudden they are asked to

follow completely different and rigorous standards. I think that could

damage foreign investment, because all these companies which were hoping

for an IPO now might not be able to do it. My feeling is, it was

unprepared for by the Indian companies, uncalled for by the SEC and it is

probably a mistake."

Ponting doesn’t think

that there is any rationale behind the recommendations, except that the

SEC feels that with the American companies already following stringent

accounting procedures, others should be put to more stringent tests. But

he feels that in a free market the decision should be left to the

investors. "Particularly, in a world where information is sold, leave

it. We don’t need a big daddy to protect us. It is unnecessary," he

adds.

Rajesh

Menon with Yograj Varma



in Mumbai