Listed entities may soon have to disclose if they hold raw materials in their portfolio and whether the holding of these raw materials or commodities are hedged or not. Commodities’ exposures are hedged on futures exchanges.
This drive is an initiative of the commodities market regulator the Forward Markets Commission and part of the enhanced disclosures as part of the Securities and Exchange Board of India’s (Sebi) new listing regulations.
“We are examining a proposal from the commodities regulator to ensure that listed companies as a part of annual disclosures also declare their holdings of raw materials that are hedged against their financials,” said a source. Many companies including IT companies disclose their foreign currency exposure and their hedging levels. FMC had held discussions with capital market regulator to have similar disclosures by the companies and since Sebi has jurisdiction over listed firms beginning can be made from there.
Earlier in the month of September the Forward Markets Commission (FMC), had sought from the market regulator to make provisions in the Sebi act so that listed companies disclose the raw material holding hedged on their balance sheet.
“We have discussed this with Sebi on various occasions and as recently as few months back,” said an FMC official.
If the proposal gets the requisite clearances then the companies would disclose their hedged and unhedged raw material on the stock exchange platform. It is also in the interest of companies to hedge their raw material price risks. So far most companies, including small and medium enterprises, find that commodities exchanges don’t provide enough depth in many commodities. However, of late FMC had allowed increase in open position limits to facilitate hedging.
“Such a move will increase transparency and make individual shareholders aware of the commodity exposure that a company has,” said a source privy to the matter.
Market experts opine that this will enhance accountability and push companies to hedge their commodities on the Indian commodities exchanges and will help increase the depth in the market.
Companies will also become more aware of how much of their raw material they have hedged and how much more they can hedge to protect themselves from fluctuations in the price of the commodity,” said an FMC official.
As far as currency risks are concerned even accounting standards require them to disclose everything and account for the risk, while for commodities there are no such standards said an official with a commodity exchange.