India’s need for a mandatory R&D disclosure standard, Pg6

Key Highlights:

• India's corporate R&D intensity is low at 0.23% of GDP due to lack of information for capital markets to accurately value innovation.
• A proposed Mandatory R&D and Technology Disclosure Standard under SEBI's LODR 2015 aims to improve transparency.
• The standard will require listed entities to disclose innovation metrics across five dimensions including R&D expenditure, patent activity, and technology workforce composition.
• Mandatory disclosure is expected to reduce information asymmetry, lower the cost of capital, and improve innovation productivity.

Detailed Insights:

• George Akerlof's "Market for Lemons" illustrates how lack of information leads to undervaluation of quality products, applicable to corporate R&D in India.
• Transparency in R&D disclosures can increase R&D intensity by 6%-12% in OECD economies.
• Evidence from China shows mandated disclosures spurred higher innovation, especially in non-state, high-tech, and financially constrained firms.
• The proposed standard will not mandate R&D investment amounts or technological pathways but will require structured disclosure of innovation metrics.
• A voluntary disclosure period of two years is suggested to familiarize firms and build data quality before mandatory implementation.
• Structured disclosure reduces information asymmetry, lowers the cost of capital, strengthens market discipline, and improves innovation efficiency.
• Mandatory disclosure is a non-distortionary policy instrument that allows the market to decide how to reward or penalize firms based on accurate information.

Key Concepts Involved:

• R&D Intensity: Ratio of research and development expenditure to a company's revenue or a country's GDP.
• Information Asymmetry: Situation where one party in a transaction has more or better information than the other.
• SEBI (Securities and Exchange Board of India): Regulatory authority in India for the securities market.