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

George Akerlof’s classic 1970 paper, The Market for Lemons, showed that when buyers cannot tell high-quality products from low-quality ones, they discount everything and good products exit the market. The same logic applies to corporate research and development (R&D) today. Corporate R&D intensity in India stagnates at 0.23% of GDP, far below global peers, due not only to firms’ risk aversion but also to the lack of information in capital markets to price innovation. When innovation is invisible, it is systematically undervalued. When undervalued, it is underproduced. Worse, in the absence of structured disclosure, there is no mechanism to systematically weed out low-quality, copycat or purely rent-seeking “innovation” projects.

Fuelling growth

An analysis by Brown and Martinsson (2018, Management Science) shows that when transparency and quality of disclosures improve, R&D intensity rises sharply, by 6%-12% of average R&D intensity in OECD economies and 3%-14% in large cross-country firm samples. This is especially true in equity-dependent, innovation-driven sectors. Crucially, capital expenditures on tangible assets do not rise in the same way, confirming that transparency pushes investment specifically towards risky, uncertain innovation rather than brick-and-mortar assets.

Recent evidence from China makes this point very clear. Mandated disclosures on the Shanghai Stock Exchange spurred higher innovation, especially in non-state, high-tech, and financially constrained firms (Liu, Ye & Liu, 2023, China Journal of Accounting Research). There is also a caveat, especially in cases such as pharma; once firms are required to reveal detailed pipeline information, disclosure becomes a Bayesian signal that prompts industry-wide learning. Companies update their beliefs after observing competitors’ project quality, overlap, and timelines; weaker or cash-constrained firms recognise when their projects are dominated and rationally terminate or scale them back. The result is portfolio purification — low-quality, duplicative, or high-risk projects are pruned early, capital shifts toward stronger scientific bets, and safety improves, though fewer long-shot projects survive because the learning effect outweighs pure competitive pressure. Crucially, this does not weaken the case for R&D disclosures. Transparency reallocates innovation effort toward higher-quality opportunities, enhances investment efficiency, and improves social outcomes.

The framework

India’s R&D ecosystem today operates under the opposite condition. To correct this structural information failure, we propose the Mandatory R&D and Technology Disclosure Standard, under the Securities and Exchange Board of India’s Listing Obligations and Disclosure Requirements Regulations, (LODR) 2015. This will not be a mandate on how much firms must invest in R&D, nor will it direct the technological pathways they should pursue. Instead, it will require listed entities to disclose a structured set of innovation metrics across five critical dimensions: first, R&D expenditure (capital and revenue) with segment-level granularity, enabling investors to separate genuine research spending from general operating costs; second, patent activity, including filings, grants, expirations, and maintenance, allowing assessment of IP pipelines; third, technology workforce composition, which signals capability depth; fourth, Technology Readiness Level (TRL) status of major innovation projects, providing a standardised view of pipeline maturity; and fifth, innovation turnover, measured as the percentage of revenue derived from products introduced in the past five years. These disclosures are routine in some geographies but absent in India, leaving analysts and investors to operate in a data-poor environment. Also note, we are not pushing for disclosures of proprietary information.

Before full implementation, the Board should require these disclosures.

The Board should mandate these disclosures before full implementation. This can be made public on a voluntary basis for the first two years, to familiarise firms and build data quality. After this transition period, disclosure should be made mandatory.

The rationale for adopting the R&D standard rests on five arguments. First, structured disclosure reduces information asymmetry. In simple terms, when investors cannot tell which companies are genuinely innovating and which ones are not, they treat everyone as average. This mispricing discourages firms from investing in technology because they know the market cannot tell the difference.

Second, better disclosure lowers the cost of capital. When companies are more transparent, big investors feel more confident, share prices become more stable, and firms can raise money more cheaply. This matters even more for companies whose value lies in intangibles such as R&D, design, or patents.

A boost for market discipline

Third, transparency strengthens market discipline. When innovation metrics such as R&D spend, patent counts, or project maturity are visible to investors, firms with weak performance feel pressure from shareholders, boards and competitors to improve. Korea saw this effect clearly after introducing mandatory intangible disclosures under the Korean International Financial Reporting Standards (K-IFRS), companies increased R&D once they knew everyone could see the numbers.

Fourth, disclosure improves innovation productivity and efficiency. According to the OECD’s 2021 Intangibles Report, countries that make innovation reporting compulsory get more patents and better commercial outcomes for every rupee, or dollar, spent on R&D, because transparency leads to more efficient allocation of research funds.

Fifth, mandatory disclosure is a non-distortionary policy instrument. It does not force companies to spend more, it does not cost the government money, it does not favour any sector, and it allows firms complete freedom in how they innovate. All it does is to ensure that the market has accurate information, after which investors, not the state, decide how to reward or penalise firms. ‘

Markets cannot make lemonade from invisible lemons. India should shine a light on R&D. It would definitely ensure that the orchard grows, the juice flows, and innovation flourishes.

Varun Aggarwal is Co-founder, FAST-India and Change Engine. Aditya Sinha writes on macroeconomic and geopolitical issues

Published – March 04, 2026 12:08 am IST