Companies still averse to disclosing commodity risks

Indian companies are reluctant to disclose commodity price exposures and risks in their balance sheets even as they are relatively forthcoming with information on foreign exchange risks.

According to a study conducted by the Institute of Company Secretaries of India’s Centre for Corporate Governance, Research & Training (ICSI – CCGRT) on “the Level of Compliance to Commodity Risk Disclosure Regulations in India & Abroad”, only 12 per cent of the companies provided detailed disclosures of commodity price risks in their Annual Reports while regarding foreign exchange risks, nearly 30 per cent of the companies provided detailed disclosures.

The Securities and Exchange Board of India (Sebi) had asked all listed companies, under the Listing Obligations and Disclosure Requirements (LODR) Regulations, in September 2015 to disclose their commodity price risks or foreign exchange risks and hedging activities in their Annual Reports. However, compliance with this has remained low. Earlier the RBI had also asked banks to see to it that their borrowers’ hedged their commodities price risks on derivative exchanges but banks did not take this seriously.

V Shunmugam, head (research), MCX, said, “The identification, disclosure and management of risks are important not only as a good governance practice but also as a sound business proposition as they instill a higher degree of faith in the investor community about the company. Adequate disclosures also provide current and potential investors with deeper insights into the way a company’s management treats the myriad of risks confronted by the company.”

ICSI – CCGRT had, for the study, analysed the Annual Reports of top 525 Indian-listed companies based on their exposures in 62 different sectors including oil and gas, refineries/petro products, transport, textile, fertilisers, jewellery, and banking.

According to the study, nearly half (44.38 per cent) of the companies did not disclose commodity price risks, while a quarter of them (26.86 per cent) made passing remarks about them. However, compliance in this regard by companies on foreign exchange risk disclosures was better with 30 per cent of the companies providing detailed disclosures of forex risks; 41.33 per cent did not disclose foreign exchange risks, and 17.72 per cent provided passing remarks about this risk in their Annual Reports.

The trend is not comparable with global disclosure standards about similar risks. Companies listed on global exchanges, according to the ICSI, have provided more detailed disclosures of market risks, which were further bifurcated into qualitative and quantitative disclosures.

Even Indian companies listed abroad have provided detailed risk disclosures, including commodity price risk disclosures, in their annual filings with the Securities and Exchange Commission in the US, while such details have not been provided in their Indian Annual Reports.

The study has asked Sebi to tell the companies to give separate disclosures of each type of market risk exposures in their annual reports, i.e. commodity price risk, foreign exchange risk, interest rate risk, etc.

Sebi had asked all listed companies, under the LODR Regulations, in September 2015 to disclose their commodity price risks or foreign exchange risks and hedging activities in their Annual Reports