Robust equity markets promote economic development. Most developed nations have stringent disclosure requirements for companies that intend to raise capital through stock markets; which further helps in strengthening equity capital markets. Following their footsteps, developing countries like BRICS have enacted such regulations. This research is doctrinal where a systematic approach is undertaken to examine the current legal framework about asymmetric information in the equity capital markets of BRICS countries. This research shall act as a testament to the claims of securities regulators in BRICS countries who want to create a safe environment for investors by promoting transparency. This research aspires at contributing to the existing literature on primary equity capital markets by identifying such laws that help in reducing information problem between market participants. While this is regulatory driven analysis; additional research could be carried out to check the implementation of these laws in BRICS countries.
The Primary market acts as a springboard for both issuers of securities and investors. Through primary markets, firms (and governments) raise the capital that comprises an integral part of their financing needs. Information asymmetry is indispensable in capital markets scenario. Howbeit, its reduction could be achieved through disclosures. Therefore, disclosures become essential, as they benefit both companies issuing shares and the investors. Especially in the primary markets, information disclosure becomes all the more critical for the protection of investors so that no charade company can scam them. While voluntary disclosures remain useful in reducing information asymmetry, they are not substituted for the mandatory disclosures while informing the informational anomalies. Following these lines, securities regulators around the world, including the five specific high profile emerging market economies of the world namely Brazil, Russia, India, China and South Africa (BRICS), have adopted stringent disclosures norms to enhance transparency. This transparency is aimed at strengthening the stock markets of these nations to promote economic growth.
The relation between equity markets and economic growth has always been a field of research, explored by scholars in abundance. Levine [
The concept of asymmetric information first introduced [
Jan et al. [
However, several researchers argue [
Scholars have analyzed and concluded that disclosure norms not just reduce information asymmetry but also have positive effects on stock markets. A positive relationship between “stock market disclosure system” and “market development” was proved by examining memberships at the World Federation of Exchanges [
While, the objective of corporate governance mechanism [
“BRICS grouping is a symbol of the changing world economy” [
These five countries have adopted measures to strengthen their equity capital markets and to protect investors. As such, disclosure regulations are essential for maintaining the quality and integrity of markets. The present study examines the regulatory framework of the five emerging power economies, to scrutinize those regulations that mitigate information asymmetry for the smooth functioning of their equity capital markets.
Undoubtedly, information asymmetry is a barrier in facilitating robust equity markets worldwide. While it can never get removed from equity capital markets; instead, it can only be diminished in the markets. Regulators all around the world have taken steps to reduce information problem. Scholars [
Several empirical studies are available assessing the effect of information asymmetry on various aspects of equity capital markets [
The current study is limited to the primary equity capital markets. The primary markets are for initial public offerings and form an integral component for the companies in fulfilling their financing needs. The primary market acts as a springboard for both issuers of securities and investors. The doctrinal outline of the study is made by a systematic approach to examine the current legal framework about the reduction of asymmetric information in primary equity capital markets and how it has evolved in BRICS.
Data CollectionSources used for information are primary and secondary. Primary sources include laws governing disclosure in BRICS countries (
In the next section, the sources listed in
Nation | Source | Related Article | Reference |
---|---|---|---|
BRAZIL | 1) Law 6.385/76, known as “Securities Laws of Brazil”, 1976. | Article 4, 19 | [ |
2) Law 6.404/76, known as “Corporation Law of Brazil”, 1976. | Article 84 | [ | |
3) CVM Instruction 400, 2003. | Article 1, 38 - 42, 52, 56, Appendix III | [ | |
While “Securities Law” (Law 6.385/76) regulates the securities markets and establishes Brazil’s regulatory authority CVM; the “Corporation Law” (Law 6.404/76) and Instruction-400 make it obligatory for companies to disclose material events, hence enforce disclosures. | |||
RUSSIA | 4) “Russian Joint Stock Companies Law (Federal Law No. 208- FZ)”, 1995. | Article 7.1 | [ |
5) “Russian Securities Market Law (Federal Law No. 39-FZ)”, 1996. | Article 22, 23, 30, 51 | [ | |
6) “Russian Regulation on Information Disclosure by Issuers of Securities” (No. 454-P), 2014. | Appendix-2, Part B | [ | |
The laws allaying asymmetric information are “Securities Law (Federal Law No. 39-FZ)”, “Joint Stock Companies Law (Federal Law No. 208- FZ)” and “Regulation on Disclosure of Information by Issuers of Securities” (No. 454-P). | |||
INDIA | 7) “Securities & Exchange Board of India, (SEBI) Issue of Capital and Disclosure Requirements) Regulations”, 2009. | Schedule VIII | [ |
8) “Indian Companies Act”, 2013. | Section-26 | [ | |
In Indian primary equity capital markets, the “Indian Companies Act”, 2013 and “SEBI (Issue of Capital and Disclosure Requirements) Regulations”, 2009 reduce information asymmetry. | |||
CHINA | 9) “Companies Law of the People’s Republic of China”, 2005. | Article 86 - 87 | [ |
10) “Law of the People’s Republic of China on Securities”, 2005. | Article 52 - 54 | [ | |
In China, “Companies Law of the People’s Republic of China”, 2005 and “Law of the People’s Republic of China on Securities”, 2005 help in reducing information problem. | |||
SOUTH AFRICA | 11) “South African Companies Act”, 2008. | Section-100 | [ |
In South Africa, “South African Companies Act”, 2008 curtails asymmetric information. |
framework of the five emerging power economies, to scrutinise those regulations that mitigate information asymmetry for the smooth functioning of their equity capital markets.
Disclosure regulations are quintessential for progressing countries including BRICS [
Invariable risk of asymmetric information exists for any investor or analyst when evaluating companies because the companies always have information of their ebb and flow, which investors and analysts lack. Financial specialists assess organizations dependent on data they can gather from financial articulations. However, that information may be correct or may be manipulative, because of an organization’s picked bookkeeping strategy, and thus, not precisely mirror the organization’s real condition. Disclosure laws help in mitigating information problem and in providing market participants with a safe environment to function [
In Brazil, the law that regulates securities markets is Law 6.385 (“Securities Laws”) [
The corporations in Brazil are governed by Law 6.404/76 known as “Corporation Law” which was enacted in 1976 [
Another enactment to strengthen disclosure norms in Brazil was issued in 2003 by CVM called “Instruction-400” [
Important disclosures [
· Brief information about the issue: Disclosure about the operation that the company has planned, details of corporate brokers involved, recognizing the ideal audience, cost of the issue, and disclosure about the arrangement with the stock exchanges.
· Information about the people involved in the issue: Names, Telephone numbers and address of managers who shall give clarification related to the issue, auditors, bankers and legal consultants.
· Detailed information about the offer: This includes disclosures related to the capital structure before and after the issue; offer’s Terms and Conditions; details of all contracts signed such as securities distribution contract, the contract relating to liquidity guarantee or Price stabilization; socio-economic viability of the issue. It shall also state the necessary authorizations that the company has taken from the requisite authorities, obligations of the founder post the issue, names and other details such as marital status and nationality of the founders and subscribers to the issue
· Risk Factors: The issuing corporation must disclose all risk factors associated with the investment in the light of the financial culture of the targeted audience.
· For an investor to comprehend the details relating to the financial state of the establishment, the issuer must disclose quarterly reports, last year financial statements and independent reports of the auditors and management of last three financial years.
· Information about the issuer: Information regarding the company’s background; plant and property belonging to the company and disclosure related to lease agreement, if any; detailed disclosure of companies operations of the last three financial years; composition of company’s capital, disclosure of any changes made during the last three financial years; disclosure of shareholder’s agreements, if any; details about the members of the management board; disclosure of related party transactions, if any; disclosure related to all employees (including company’s relation with the labour unions of its employees) in the last three years.
· Contingencies: Apprehension of any judicial or administrative or any other event that seems probable to the company because of its existing practices need to be stated.
· Financial information of the company not disclosed in the prospectus for which clarification can be obtained from the CVM;
· All such minutes of all Annual General Meetings or Board of Directors meetings that authorise the issuance of the issue;
· All the details of the debenture deeds, if any;
· Latest “Bylaws” of the issuing corporation; and
· Report of a specialized agency for identifying risk factors.
It also mentions the documents to be attached with the prospectus. Article-41 further states that in case of incomplete information or any other factual mistake which are essential for an investor to make an informed decision, the distribution of the prospectus shall be terminated until the necessary changes are made. Also, Article-42 makes it mandatory for the corporations to deliver a copy of the catalogue (prospectus) to the investors through electronic means.
Any joint stock company in Russia can go public under Article-7.1 of Federal Law No. 208-FZ, by altering its charter and stating that it is public [
It further provides that for joint stock companies who go public for the first time must send a prospectus for registration containing the following vital disclosures:
1) Quarterly report of the issuer: It includes a financial report of the last reported year along with the auditor’s report of that particular financial report. It shall also include an Interim (financial) report for the last reported period inclusive of three months of the said year;
2) Consolidated financial reporting of the issuer;
3) Any event (including a resolution adopted in a shareholder’s meeting) that may lead to an alteration in the value of securities.
The proforma for the prospectus is prescribed in “Regulation on Information Disclosure by Issuers of Securities, 2014 in Part B of its Appendix-2” [
The important disclosures [
· Introduction: Here, the issuer needs to state the company details, brief about the categories of securities that the corporation (entity) wants to issue along with the usage of the funds obtained from the issue.
· Essential information about the bank accounts and people involved in the issue of the prospectus: The issuer must disclose his bank accounts, and information about the auditor or the audit organisation, company’s advisers on the securities markets, and any other person who has signed the prospectus.
· Financial Position of the issuer: The company should give detailed characteristics of the economic activity of the entity, issuer’s market capitalization, credit history and current liabilities. The issuer must further, support the financial position with the data showing its financial results, issuer’s liquidity, reasonableness of capital and circulating assets, structure of issuer’s capital and working capital, detail about issuer’s strategy and expenditure on scientific and technological development, a general analysis of issuer’s performance in the market, factors affecting issuer’s development and issuer’s competitors in the market.
· Risks: The issuer must specify in details all kinds of risks associated with the issue such as industry risks, risks related to acquisition of securities, country and regional risks, financial risks, legal risks, strategic risks, reputation risks, banking risks, risks arising out of issuer’s activities, market risks, liquidity risks and operational risks.
· Detailed information about the issuer: This shall include a disclosure about the brief history of the issuer, major economic activities of the issuer, brief description of the prospects of the company, issuer’s participation in its holding corporations and its subsidiaries and issuer’s capital composition and details of its assets.
· Information about the management of the issuer: Here, the issuer must disclose the structure of management bodies, details of the persons constituting such bodies, their remuneration and benefits availed by them, details of persons managing the financial and economic activity of the issuer, their risk management and internal control systems. It should also include a list of employees of the issuer.
· Details about shareholders of the issuer must disclose: 1) exact number of shareholders at the time of issue; 2) the percentage of shareholding of members holding not less than 5 percent of shares, 3) the percentage of shareholding of members holding not less than 20 percent, 4) shareholding by the state or any municipal organization, 5) disclose the restrictions on the shareholders in terms of the maximum number of shares 6) voting rights and 7) transactions by shareholders who have been approved by management body and information on the receivable amount
· Financial information and accounting statements of the issuer: This shall include disclosure of annual financial statements, intermediate accounting statements, consolidated financial statements, necessary provisions of issuer’s accounting policy, details of total exports and share of such exports in total sale, substantial changes accrued in last year in issuer’s property and issuer’s role in any litigation that may affect it economically.
· Information about securities: This shall include information about kind and form of securities, number of securities and their nominal value. The issuer must also state a total number of securities placed earlier and their owners. Further, the issuer must lay out in detail all the specific conditions and procedure for the placement of securities. Also, the manner of disclosure for the issue shall be specified. Additionally, information about Russian depository receipts shall be stated along with restrictions on acquisition and circulation of securities as imposed by Russian legislation.
· Other Information to include disclosure of any other material relating to the financial structure of the issuer that has not been specified (as listed above) in the prospectus. Here, the issuer shall state data on each category of issuer’s shares, information about previous issues of shares, information of record-keeping entities of the rights of the issuer, declared or accrued dividends, and any other information that the issuer may deem necessary for the investor to know.
Further, Article-51 (1.1) makes the issuer of securities legally responsible for any loss suffered by any investor or security holder, in case any wrongful or misleading information is conveyed to him or stated in their prospectus.
In India, “The Capital Issues (Control) Act”, 1947 governed the recent issues in equity capital markets. Post liberalisation, to be at par with securities market of other developed countries, India set up the “Securities and Exchange Board of India, (SEBI)” for disclosure is driven to prune information asymmetry [
Earlier, Indian Companies Act, 2013 (Section-26) used to contain a detailed list of provisions for the prospectus, now omitted by the Indian Companies (Amendment) Act, 2017 [
To mitigate information asymmetry; the disclosure requirements regarding the issuance of securities are explained in detail in SEBI (ICDR) Regulations, 2009. These Regulations have revolutionised disclosure standards in India about offer documents and have brought radical changes in the functioning of public issues [
To abridge, the necessary disclosures [
· The sequence to include a front cover page, followed by the
· To include separate section information on the structural risks linked to the issuer and any other risk identified by the issuer based on “materiality” and how the issuer propounds to mitigate them;
· In the introduction section, information about the issuer and all disclosures concerning the entity’s [
o Management team members, Board of Directors, and various committees;
o the Capital structure and the shareholding pattern (pre-issue and post-issue);
o the Security’s bank account number;
o the holdings of the promoter/promoter group and the employee stock option plans, if any.
· Under Specifications [
o the issue including the total request (requirement) of funds;
o an undertaking in the offer document endorsing the organisation’s provisions of finance (75 percent) through certifiable means; and
o appraisal of the project, if any, embarked on, by the issuer.
· To reveal details about the business operations and examination of issuer’s entity in the offer document;
· All discussion by top management as reproduced in an entity’s financial statements for the past three years;
· Any pending litigations where the “entity/promoters/promoter group/directors/ group entities” is involved. All the outstanding loans and licensing dispositions shall also be stated [
· Financial particulars for the last five years preceding the issue of the offer document in the offer record.
As per the “Companies Law of the People’s Republic of China” [
A combined reading of Article-1, 3 and 4 of “Law of the People’s Republic of China on Securities, 2005” demonstrate that honesty and transparency are the cornerstones of their “Securities Law” [
The important disclosures [
· As per Article-53, the company to release relevant documents (after approved by stock exchange), at assigned places for public access.
· These documents include the recent prospectus of the company, audited financial statements of last three years immediately preceding the application, listing agreement, shareholder’s resolution about the listing of securities, Articles of Association, business licenses, legal opinions and other documents as prescribed by the stock exchange.
· Additionally, Article-54 asserts that once a company enters into a listing agreement, it shall make known to the public the decided date on which the shares shall be floated on stock exchange, names and shareholding of top ten shareholders of the company, details about people who directly control the company and names and shareholding and bond holding of directors and senior managers of the company.
Chapter 4 (Section-95 to Section-111) of the “South African Companies Act”, 2008 [
The critical disclosures [
· Includes information related to the assets and liabilities of the company depicting its financial position by showing its profits and losses and cash flow statements.
· Must state the prospects of the company in which a right or interest is to be acquired. Further, it should also state the rights attached to the securities that are offered to the public.
These provisions are arduous and if any statement in the prospectus is proven to be untrue, then every Director of the establishment (at the time of issuance of prospectus), every promoter of the company or any person associated with the authorizing and issuance of the prospectus shall be responsible to pay compensation to any person who suffered loss or damage by keeping faith on the contents of the prospectus, as stated in Section-104 [
To be at par with the developed countries, BRICS have incorporated essential disclosure-related provisions in their regulatory framework. These countries have successfully merged the provisions with the Companies Laws of their respective jurisdictions, thereby obliging companies from their incorporation to follow the disclosure regime. As such, disclosure regulations are essential for maintaining the quality and integrity of markets. Analysing from the above, one can conclude that the disclosure regime adopted by BRICS is based on the International Standards and doctrine of materiality. However, Brazil, Russia and India have more intense disclosure requirements as compared to China and South Africa.
The above study is a systematic approach to examine the provisions of rules and regulation enacted by securities regulators of BRICS nations to reduce information asymmetry in their primary equity capital markets; to enhance transparency and for investors to make an informed investment decision. In turn, it supports the smooth functioning of primary equity capital markets. This research acts as an exemplification of the fact that securities regulators have taken reformative measures to mitigate information asymmetry and boosting their primary equity markets. However, this study is limited in its approach as it has not examined rules made by stock exchanges to improve transparency. Further, this research could also be extended in assessing the practical implications of such provisions in these countries.
The authors declare no conflicts of interest regarding the publication of this paper.
Pruthi, T. and Koul, S. (2019) BRICS: Information Asymmetry in Primary Equity Markets. Theoretical Economics Letters, 9, 1817-1833. https://doi.org/10.4236/tel.2019.96116