Capital markets in India have come a long way since 22 men gathered under a banyan tree in a Mumbai park to form the Native Share and Stockbrokers Association in 1875.
Today more than 7,000 companies are listed on the Bombay Stock Exchange (BSE), as it is now known, with at least another 150 companies expected to come to market this year. Together they’re expected to raise $10 bn, according to Prime Database, an agency that tracks primary listings.
The BSE’s benchmark Sensex index burst through the 10,000 barrier for the first time in early February – just one of the many signs of an equities boom largely driven by the foreign institutional investors (FIIs) that now own 30 percent of the market (see page 61, Shared value). In 2005, FIIs put more than $10 bn into Indian equities. And as they continue to invest in this market, they are forcing companies to improve their IR.
IR on the rise
It’s no coincidence that the first companies to seek out foreign investors through American depositary receipts (ADRs) or global depositary receipts (GDRs) are often the first to develop their IR programs. Take Grasim Industries, part of the Aditya Birla Group, which established its GDR program in Luxembourg in 1992. This move led Grasim’s CFO, DD Rathi, to launch the first ever non-deal roadshow by an Indian company in 1994.
Speaking at IR magazine’s debut conference in Mumbai on February 23, Rathi pointed out that the market capitalization of the BSE has risen spectacularly, from $303 bn in December 2004 to $604 bn in February 2006. This increase in equity has pushed the need for better IR, he added.
‘The rising interest of FIIs has had a significant impact on IR practice in India,’ explains Rohan Suchanti, vice president of Pressman PR. ‘Analysts from these institutions have played an important role in making companies see the value of sound investor relations.’
Ved Prakash Chaturvedi is managing director of Tata Asset Management, one of India’s biggest institutions with nearly $2 bn under management. He believes the IR mindset has been evolving over the last 15 years but, despite this, he feels there is still a lot of room for improvement, particularly ‘in the way companies go about targeting potential investors’.
At present, only 5-10 percent of mid and large-cap companies here have an IR function, according to MS Anand, deputy general manager of share registry and investor services company Karvy Computershare. He feels that IR will continue to expand in India as long as the market continues to do well, but is concerned this growth will tail off if there is a major correction or a crash. So it seems the link between good IR and valuation is still to be fully accepted by many in India.
Leading the way
Infosys Technologies is at the forefront of Indian IR, consistently commended by analysts and investors at the IR Magazine Asia Awards. NR Narayana Murthy, Infosys’ chairman and self-styled ‘chief mentor’, has argued that ‘the raison d’être of every corporate body is to ensure predictability, sustainability and profitability of revenues year after year’.
Infosys applies this philosophy directly to its IR. As S Krishnan, the company’s head of global taxation, puts it: ‘We know we have to give investors what they want.’ Krishnan says Infosys’ management is committed to open investor relations, and there is no discrimination between FIIs and domestic funds or between shareholders and non-holders.
To keep investors as up to date as possible, the company usually issues results within two weeks of the end of the quarter. ‘Infosys always prices share offers at a level that is attractive to the investor – a lower price if necessary,’ he says. ‘That was the philosophy when we listed on Nasdaq and continues to be today.’
Challenges ahead
But the IR picture in India isn’t all rosy. The country has a burgeoning financial media, and while this presents numerous opportunities for companies to convey their message, it also means there is an army of eager hacks waiting to pounce on any perceived inconsistency or poor performance.
There is no doubting the power of the financial media, according to R Ramaswamy, CFO and company secretary of MRO-TEK, a network solutions firm. His company was faced with an IR crisis after a set of results was misinterpreted by a TV station and the share price dropped by 10 percent. He explains that it is very difficult to correct erroneous media reporting and that it was vital to communicate directly with shareholders in this instance.
Rathi emphasizes that Indian companies also face significant difficulties in identifying who their non-domestic beneficial shareholders are. Only those FIIs registered with the Securities and Exchange Board of India are allowed to invest in the market directly. But non-registered individuals and institutions can invest indirectly through participatory notes (PNs), a type of derivative contract issued against the underlying security. However, the Reserve Bank of India, among others, has raised concerns about PNs because they mask shareholder identity.
Identifying your shareholders and dealing with a vociferous media are common challenges for IROs in an emerging market. But, as the discipline becomes more established in India, there are also great opportunities. ‘IR is gaining in prominence and getting bigger by the day,’ concludes Rajat Dutta, general manager of planning and corporate communication at the Great Eastern Shipping Company. ‘It’s an exciting profession to be in.’