India offers investors a fairly high degree of protection from unscrupulous companies, promoters and merchant bankers. From the pre-IPO stage to the process for open offers and delisting, Indian companies are required to meet an elaborate set of conditions that ensure they cannot pull the wool over shareholders’ eyes. However, there is plenty more that can be done.
Why should we continuously raise the bar for shareholders’ entitlements? This is because they provide risk capital to a business, and do so as non-promoters. Unlike buyers of other financial products, such as insurance, loans, credit cards, etc, shareholders do not buy any clearly identifiable service or product. Their funds are different from those of loans/debts. Banks secure their loans by hypothecation of assets of an enterprise, while equity money carries the highest risk. So it is surprising that shareholders don’t get information that lenders can easily access. The reason is that bankers can choke off credit lines or freeze company accounts. Shareholders, on the other hand, can only grumble because their money is already with the firm.
Here are a few areas where better or increased disclosures from companies can help shareholders.
Availability of data: Many companies don’t post even their contact details or annual financial performance on their Websites. This, and other basic information like annual reports, should be available the minute it’s published in statutory channels such as the BSE and NSE.
Balance sheet information: Of what use is the fact that XYZ Co. earned a net profit of Rs 200 crore if it blew it all in bloated inventories or, worse, diverted cash to non-core activities? As a shareholder, I would be able to spot this sort of anomaly if companies were required to publish their quarterly balance sheets with schedules.
Product volumes: Higher profits don’t mean much unless they are backed by greater production, despatches and sales. Some companies, especially in FMCG and pharma, get away by not declaring product-wise break-up of sales in their annual reports, citing competitive pressures. This is untenable and absurd. Quarterly disclosures of product-wise value and volumes of sales should be made compulsory.
EO & forex items: One the most contentious issues relates to the interpretation of extraordinary and exceptional items in financial performance. What is outside the ‘normal’ course of business is still ambiguous. Whether it is forex losses on hedges, or value adjustments on debt or assets denominated in foreign currencies, I find companies uniformly reluctant in providing data. As Indian businesses turn into global enterprises, their operations will acquire a foreign currency hue that must be addressed in their disclosures.
Subsidiaries: A number of Indian enterprises now have overseas and domestic subsidiaries, joint ventures and associate firms that need to be consolidated in their financial performance and reporting—every quarter. Otherwise, it’s pointless trying to look at, say, Tata Steel or Tata Motors on their standalone or Indian operations.
Companies must disclose information as concisely as possible. There is no dearth of fat, glossy annual reports, where reams of paper are needlessly used to wax eloquent about the company’s ‘core values’ and the ‘shining vision’ of their promoters. Perhaps we need to impose a limit on the quantum of disclosure as well.
Dipen Sheth is Vice-President, Institutional Equities, BRICS Securities
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