The “Massacre” on our bourses and the debris thereof appear to be slowly settling down even as the Sensex is still in the red for the 7th day at a one month low. The 12-trillion-rupee Market Cap erosion (around 85% of that of the Group in the report) is the real loss which retail investors (even a mere 5% of the holdings) faced. There will be rebound effects how-so-ever small they may be, from public-sector banks and financial institutions as well, LIC’s stocks have fallen by 17%, losing around $2.8 billion from holdings in the group.
I view two sides, post the Reports from Hindenburg, Forbes and Credit Sights. a) the real loss that already has happened in terms of Stock price volatility and b) the allegations of Stock manipulations, Round-tripping and Accounting Frauds and repudiations thereon from the reporters and the reportee.
I shall not like to comment on b) above at this moment, since in between prolonged spells of its silence SEBI have finally stated before the Supreme Court that they are investigating matters emanating from the Hindenburg Report. I choose to leave that subject there.
My Take: On side a), I observe the Supreme Court has with its characteristic dexterity ordered the set-up of a panel to come up with a set of safety proposals insulating Investors’ (particularly retail) from turbulent spikes and unacceptable volatility, Douglas Adams would have said “We demand rigidly defined areas of doubt and uncertainty!”
in his “The Hitchhiker’s Guide to the Galaxy”!
By hindsight, I can now see, irrespective of whether allegations in the report are true or concocted, we need to do much better on fronts of Corporate Governance, on mandatory reporting and on setting down functions more clearly of Independent Directors and Independent Auditors and Regulators, Rating Agencies and Public Sector Lenders far away from compliance towards actual education on what’s good for stakeholders. And its URGENT.
My thoughts: I have this eight-point prescription for the Panel!
First and foremost, we need clarity for the lay investor, to understand what he’s reading. For example, when I open a pdf file of a 600-page Annual Report, I get sometimes lost in Petroleum Prices in a Software Company’s report, finally I don’t remember what I read, an Economic Survey of the Union Government or the Company’s Progress Report? The Annual Report should carry ONLY six things and should be limited to say, just 50 pages. The Directors’ Report, The Financials (the Balance Sheet, Income Statement, the Cash Flow and Notes to these), the Independent Auditors Report for Stand Alone and Consolidated). The Investors’ focus should not be lost on laudable public-policy statements and “Economic Scenario” of Timbuktoo! All printed on nice glazed paper.
Next, on reporting, I would suggest six mandatory disclosures 1) the Price Earnings Ratio, the Price to Book Ratio, the Debt Equity Ratio, the Current Ratio, the EV/ EBITDA (Enterprise Value divided by Earnings before interest, depreciation, amortisations and tax) Ratios of each quarter, along with a set of prescribed definitions and benchmarks for the industry, rolled forward showing trends for the last 5 years set down by the Rating Agencies and audited by the Independent Auditors for Investors to make an informed decision on valuation and his hold period. This is about the Annual Report itself.
Third, in terms of Corporate Governance, every large listed-company (should be defined) shall be allotted a threshold of “float of shares” – in other words, there has to be a higher threshold limit for retail public holding – which may be reviewed periodically but certainly before any public offering, to ensure availability of the counter at the market to make it difficult for cornering shares artificially creating demand. Now this has to be the functions of the regulators, because it’s difficult to measure uncharted waters, needs special thoughts.
Fourth: Insider Trading should be treated with stricter penalties (the 10 lakhs to 25 crores) is just not enough for present-day numbers any more.
Fifth: The threshold for limits for disclosure and approvals of Related Party Transactions have to be lowered. The current 5% of Turnover or 20% of Net Worth for determining Materiality is too high for huge Companies.
Sixth: Shell Companies designed for assets and funds-movements (round tripping and tunnelling) should be clearly defined and struck off the register and commensurate penalties imposed.
Seventh: Disclosures of Related Party transactions should mandatorily also include transactions with entities having significant beneficial ownership. And lastly,
Eighth: Cases where remuneration of Key Managerial Personnel or that of Independent Auditors exceed the previous years’ figures by 20% or more, reasons should be clearly explained after approvals of the Remuneration Committee.
Positive Views: I don’t see “irreparable damages” to our capital markets in terms of Investors’ confidence, following this melt down, but at the same time great care has to be taken by this panel to usher-in reforms in Corporate Governance of tomorrow, with more and more of infrastructure spending, greater and greater leveraging and higher and higher investors’ risk appetite ensuing. Between the SEBI and the Exchanges, they showed resilience during the last one month, the counters operated thru out, no defaults in settlements, no bans (considering that the group in question used to be nearly 7% of the total market capitalisation of all its members together). If at all, it showed that the Indian Capital Market stayed on its feet and Investors at large believe the India Infrastructure Story.
And before I conclude, I think let’s wait for the SEBI briefing the Finance Minister and the next hearing at the Supreme Court later this week, and like Adams’ Arthur Dent, “..let’s insist on definitions in areas of doubts and uncertainty” immediately they arise!
(Binayak Datta is a Finance professional)
