The new regulation by Sebi banning companies and merchant bankers from sharing additional information or financial projections with institutional investors has not gone down well with the high and mighty on the Street. It seems several foreign institutions have approached the regulator presenting their case to relax this rule. Their side of the story: by taking away forward looking projections, the regulator is denying an investor insight into how the company is poised, the management’s vision for the future and its business prospects and such stuff that is necessary to appropriately value a company and aid price discovery. And – this really takes the cake – that in India retail investors follow the institutions and therefore it is important to present a fair view to them on what is being hawked. On behalf of those deprived retail investors, I say, thank you very much for the concern, we are really touched.
Now, let’s look at this issue from two angles. First, is the issue of whether there should be selective disclosures made to institutional investors, and the answer to that is deceptively straight – there should not be. The regulator may want to take note from this column, (presumably, they have not yet taken notice) that there are several companies that do not allow media reporters/analysts entry into analyst meetings and conference calls. At times, these have included some of the biggest listed companies. Their eternal crib has been that media reporters often do not understand the substance of what is discussed in these meetings which results in misinterpreting information and misreporting. Some companies also admit that they avoid media so that they do not get into any regulatory hassles if there is a slip-up on the part of the management.
| | | | What Sebi is saying intentionally, or otherwise is, hey guys, do not tell us your dreams, show us the report card | | | | |
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Selective sharing of information should be completely banned – that would be a step in the right direction. And that is not just for primary issuances, but also with respect to thousands of listed companies which side-step rules because the regulator does not go beyond making them.
The second question is how much information is enough. Do investors really need management inputs to understand companies better? The simple answer to this is that investors should get just as much information as is required for them to assess what the company is worth. One can do that based on the financials of a company, its track record and a reasonable assessment of how big the business opportunity is and how the company could leverage itself in that space based on its past performance.
But to be fair, investing is multi-dimensional in nature and investors are not looking to value the company based on what it stands for at present, but what it will be worth in the future. That is why forward projections become important to get that all important “edge”. And that is where the trouble lies, as fair disclosure can easily be compromised.
Companies approaching public markets are stories sold to investors, and these are sold not just to gullible retail investors, but to the smartest fund managers whose sole objective is to beat the benchmark. Taking forward projections away from the sellers is editing an important marketing facet of this story-telling.
What Sebi is saying intentionally, or otherwise is, hey guys, do not tell us your dreams, show us the report card. While such stories can be told in private to lead investors or venture capitalists, better have the report card ready when you come to the public markets. That is not a bad thing to say. It’s another matter though that the same story-telling happens all the time in the secondary markets, right under the nose of the regulator.
mahalakshmi AT outlookindia DOT com