The limits of disclosure regime

Regulatory overreliance on disclosures is penalising industry and confusing investors

- AJAY TYAGI

is largely built on the edifice of a disclosure regime. Regulated entities are mandated to make periodic and event-based disclosures. This is surely a time-tested and sound practice — after all, more sunlight is always welcome.

The disclosure system, combined with the principle of caveat emptor — or "let the buyer beware," which implies that the buyer purchases at their own risk — is also comforting for regulators. In a way, prescribing disclosures gives them a certain satisfaction of a job well done. This column examines the efficacy of the much-touted disclosure regime in regulating the financial sector in India.

The world over, "greed and fear" dictate investor behaviour in financial markets. The marketplace is often chaotic, making the regulator's task both tough and challenging. This is even more so in emerging markets like India, due to a lack of awareness and inherent information asymmetry among market participants. Balancing the interests of all stakeholders — and striking the right balance between "ease of doing business" and appropriate regulation — can often prove to be a tricky affair.

The situation could prove to be rather trying in the event of an episode that affects the interests of a large number of stakeholders, or one likely to have systemic impact. Suddenly, the regulator faces an onslaught of criticism from various quarters — including some unexpected ones.

Like any other organisation facing public outcry, perception management becomes the regulator's foremost priority. More often than not, this is typically achieved by adding clauses to the existing regulations and prescribing additional disclosures. What often gets lost in the milieu is the possibility of over-regulation of the market.