When I start drawing an analogy between the state of investor relations in India and the sight of bovines intermingled with traffic, I figure I’ve been on the beat too long. That or I’ve begun to lose my mind after three months in the sub-continent.
Picture the scene: a sea of bicycles, cars, motorcycles and buses with questionable exhaust systems are trying to push through a clogged thoroughfare. In the road stands one of Delhi’s ubiquitous cows – considered holy by Hindus (thus the lamb rather than beef burgers at McDonald’s) – bringing a lane of traffic to a standstill. So the analogy: investor relations in India has made tremendous strides forward, and yet problems common to all developing nations, as well as unique to the sub-continent, continue to throw up roadblocks, or at least slow moving obstacles, some with sharp horns.
‘I would say the current status of investor relations – disclosure and corporate governance – is that there is an awareness of a need for improved disclosure and credibility on the part of companies, but there’s lots of inertia,’ says Tejpavan Gandhok, country manager at management consultant Stern Stewart. ‘We’re at the stage where we know we need to do something.’
Some of that ‘something’ has already been done, including improved accounting standards, quarterly as opposed to semi-annual reporting and corporate governance reform, particularly with regard to independent directors. But if you are among the 20 mn shareholders in US-64, the most popular plan offered by the Unit Trust of India, India’s largest mutual fund, you probably don’t agree. After all, the government-sponsored financial institution attempted to freeze withdrawals for six months when the unit price tanked, and its former chairman has since been arrested and charged with misappropriation of funds.
Equally disheartening is the March capital markets scandal, which resulted in the arrest of the former president of the Bombay Stock Exchange and the suspension of all seven broker members of the BSE governing board amid accusations of insider trading. The case continues to suck in financial institutions, public companies, government figures, shady stockbrokers and the directors/promoters of Cyberspace, a company whose share price crashed from Rs1,000 to Rs1.15 before trading was halted.
Foreign exposure
India is by no means a newcomer to the capital markets scene.
The BSE was established in 1875 and today there are more than 20 different exchanges operating throughout India, although only the fully-automated National Stock Exchange of India (NSE) and the BSE can be deemed significant.
But this proud history notwithstanding, prior to the early 1990s the government relied more on official and commercial borrowing rather than capital flows. Meanwhile, local investors were not the most vociferous group in demanding improved disclosure and management accountability. ‘A fair proportion of institutional investors that are government run, like the UTI, have not been the most proactive or demanding of performance,’ says Gandhok.
One offsetting force has been the arrival of foreign institutional investors (FIIs). As the country’s capital markets develop and investors mature, the demands made upon companies and regulators have grown. ‘Investors hadn’t been active up to now, but with the FIIs coming in, they are taking an interest,’ adds Kali Prasad, director of management assurance services at Ernst & Young India.
Another factor has been foreign listing requirements. As Indian companies have sought access to foreign capital by issuing GDRs and ADRs, they’ve adhered to the standards of overseas markets. ‘The first half of the 1990s, when liberalization started, is when we started seeing changes, including better IR. Disclosure has been the most improved. Now you see disclosure about promoters’ holdings in the annual reports, and you have quarterly reporting and greater detail in the reporting. I think international listings have helped,’ says Ur Bhat, director and CIO, Jardine Fleming India.
Rediff.com is perhaps one of the most extreme examples. The company’s only listing is on the Nasdaq Stock Market, where its shares debuted in a June 2000 IPO. Debasis Ghosh, head of IR and corporate communications at the Bombay-based internet portal, says the company turned to the US markets because at that time Indian law stipulated that companies had to be profitable for three years before listing.
‘Indian companies have a long way to go as far as investor relations is concerned,’ says Ghosh. ‘For us, it has been a learning experience having the US listing. The market is learning from the SEC, whether it be corporate governance or fair disclosure. We hope to list here in India now that the law has been changed. When we do, we won’t need to do much given what we’ve already done.’
Exposure to the outside world has helped to change the environment, though it has come at a price – when Nasdaq plummets, Indian shares with Nasdaq listings follow. Still, the introduction of foreign capital has led to greater scrutiny of governance, disclosure and accounting practices. The Securities and Exchange Board of India (Sebi) has issued a number of rules that have or will soon become mandatory listing requirements. One highlight is a set of corporate governance standards based on the code of standards issued by the Confederation of Indian Industry (CII), a not-for-profit organization with a direct membership of over 3,900 private and public companies.
‘Before the listing requirements, there were companies that voluntarily chose to disclose more and follow the CII code,’ explains Omkar Goswami, chief economist at the CII. ‘As of now, 148 companies are mandated to meet the rules, and in 2002 it will expand to 1,400 or so companies. For example, companies now have to give the exact compensation and the attendance record of all directors. There are some other good rules that have come out recently. For example, like the SEC’s rule [FD], you cannot disclose to analysts what you do not disclose to other shareholders.’
Other significant improvements focus on accounting, covering what Goswami calls ‘the four major drawbacks’ that needed to be addressed under Indian accounting standards: consolidation of accounts, segmented reporting, deferred taxes and related party transactions.
‘The trend is for Indian accounting standards to be in line with international standards,’ says Prasad. ‘This will improve IR because investors will get better information. As for governance and boards, Sebi has mandated a lot of new listing standards. All companies are required to implement that code, such as setting up audit and compensation committees.’ The code also requires audit committees to be majority independent.
Leading the pack
Perhaps the most significant sign of change is the number of Indian companies with IR departments or staff. Again, the most advanced IR operations can be found in the growing ranks of Indian companies that have sought capital abroad – mostly technology companies with listings in Europe or the US.
‘New economy companies are the main growth companies, and these are at the forefront of IR. They’re run by new management teams, rather than typical industrialists who have less regard for shareholders. Many have foreign listings and disclose accordingly. That has pushed other companies to improve and investors to demand they improve,’ says an IT analyst with JP Morgan
Chase in Bombay.
In the case of Rediff.com, the company hired Boston-based shareholder communications specialist CCBN to help create its IR web site, a notable development since many Indian companies don’t have web sites, let alone separate IR sections. ‘We use our web site extensively to communicate. It provides investors everything: SEC filings, stock price – our webcast conference calls and all our press releases are archived,’ says Ghosh.
Another influence on local IR has come from the large multinational corporations that have publicly-traded Indian subsidiaries. Even when the IR efforts aren’t formally linked globally, best practices built up over years of experience often flow through the entire organization.
‘We started providing consolidated reporting four years ago to be in line with Siemens Germany. Next year it will be mandatory for all listed companies in India,’ explains Ashok Jangid, corporate secretary at Siemens India. ‘For the last three years, our annual report has included management’s discussion and analysis (MD&A), giving an overview of the performance of each business division, and an ‘information to investors’ report. From April 1, Sebi has made it mandatory for companies to provide such information in their annual reports as part of the corporate governance report. We also get suggestions from the IR group in Germany, some of which we may implement in India for better disclosure and transparency, although it is not required by any statute or other regulation.’
A growing industry
But this does not mean every company with foreign exposure is a model of superior IR. As tech stocks have fallen to new lows, some companies that were showing a commitment to disclosure and good governance have now lost interest – just as investors have lost interest in them. In other cases, IR efforts are directed toward the US, and web sites list information solely for US investors.
As for companies with no listings abroad or foreign parents, the majority have yet to institute the disclosure and governance standards sought by Sebi. But this too is changing. Companies such as Tata Infomedia, a publishing firm that prints annual reports, are taking steps to improve their shareholder communications. The company’s own annual report is, not surprisingly, very professional-looking in a field of often poorly bound, cheaply produced annuals. But Tata Infomedia has also focused on content.
‘We include FAQs, which is unusual in India. Our PR agency asked investors what they wanted to know from us, such as whether our web site is sufficient and whether we provide the information they’re looking for, and in response we’ve increased our disclosure. We’ve had the FAQs for the last two or three years, but they have changed based on the feedback,’ says Girish Mallya, assistant manager of business development and corporate communications.
Another sign that the IR profession is coming into its own is the growing industry of service providers. In addition to companies like Stern Stewart and Ernst & Young providing corporate services, firms such as Citigate Dewe Rogerson handle public relations, corporate communications, and also more specialized IR services, including web IR.
‘In putting together corporate communications plans, we look at all stakeholders, and companies now understand that must include investors. What we do is figure out what perceptions are out there among certain groups – investors, analysts, financial media – and then we structure a plan,’ says Mahnaz Curmally, South Asia president of Ogilvy Public Relations Worldwide, the firm behind the Tata Infomedia shareholder audit.
Curmally, who notes that the next frontier the PR firm plans to conquer is web-based communication for clients, says India’s relatively robust capital markets put it ahead of other South Asian countries: ‘The demand and growth are linked to the demands being put on companies by regulators to be more transparent.’
But some of those lauding the improving investor relations environment say that it will take more than regulators and investor activists – still a rarity here – to ensure continued improvements.
‘I’m not a great believer in mandating too much because you end up with a lack of quality as it gets substituted for quantity, and India has had this great heritage of mandating everything. Having said that, the teeth behind our market regulations are not there,’ says the CII’s economist, Goswami.
‘It comes down to this,’ he concludes. ‘Does management believe that stakeholders are central to a company? If they do, then they will behave in a manner that is consistent with this belief. If they don’t, no amount of mandating will help you. At the end of the day, it will be a separation between those who believe that shareholders count, and those who believe that shareholders’ money is only a proxy for their own control.’
Above and beyond
While some things have changed since we profiled Bangalore-based IT powerhouse Infosys in our February issue (in mid August, Infosys’ ADR was trading in the low $60s, as opposed to the February $90-$114 range), one thing has not: many investors continue to hold up the company as a standard for other companies to follow. Indeed, Infosys won best IR by an emerging market company in Investor Relations’ Asian and UK awards in 2001.
Infosys began discussing corporate governance in its annual reports four years ago, before its 1999 Nasdaq listing. The company’s IR web site prominently discusses corporate governance, listing its disclosure policy based on the standards it voluntarily adheres to, including the CII Standards. ‘Investors do notice what we’re doing, and I think we are relatively better off in this market because confidence in us is high. An investment in equities is a matter of faith. You have to trust management and prospects. It’s not like bonds. So you have to make sure people trust you, and you have to manage the business well in a good and hostile environment,’ says CFO Mohandas Pai.
