Thursday, August 23, 2012

Indian investors needs communication …Beyond Awareness


Indian economy has been recently downgraded by global rating agency. Well that is the half hearted knowledge being carried by one simple investors, broker and among the financial community.Well why half hearted and where are the loopholes between investor awareness is the obejective of the article.

We find investor awareness programmes being designed exclusively designed for upgrading and reducing the gap of knowledge epidemics. Well that is an excellent effort being adopted and carried ahead but we need to understand the ways things are being read and interpreted.

Don’t Misunderstand Ratings

Rating agencies are the organizations who are exclusively take the responsibility of deriving valuations and rankings to financial products. In fact they guide us which product to buy and which one to go for the waste bin. That might sound hard but the truth is that many rating companies might have engaged themselves into some partiality projects which has been in the lime light during 2008 crisis. But that does not mean that rating agencies are only engaged in foul practices and their valuations are only biased.

In an economy like India where prevention is better that cure is being sung, rating agencies carries the highest level of security in financial markets. But many of my readers will jump up that in IPO segment we have found rating agencies best grades of rating failed to fill the pocket of the investors. This is the place where the variations of understanding and interpretations of rating agencies various matters come into active play. 

Grading of IPO by rating agencies don’t interpret that on the day of listing they will shoot up with a premium. The date of listing and market sentiments are the vitals that play their cards. Rating agencies are not the guarantor for the performance of the listing prices. On an average basis all rating agencies does valuation of IPO grading upon assessment of the fundamentals of new public issues. It includes an assessment of business and financial prospects, management quality and corporate governance. It does not take into account any monetary valuations of listing of the IPO. More over governance and investors protection issues are the most highly demanded aspects being adopted and followed by the rating agencies.

Now imagine that you don’t have an rating system and the individual investor decides to do some investments but have no idea about the ins and outs of the company as well as of the business. He will ask various people and will hot around the walls and pillar to get an idea about the company. This will taken an as an opportunity by various people due to no rating agency and various people will influence the investor from various angles. The situation becomes more difficult in absence of a proper rating agency. Rating agency is a compass and not a map or direction.
  
Disclosure & Investor Awareness
Disclosure norms are another most important aspect of guiding the investors. Companies finds annual general meeting to be one of the prime platform to discuss about companies health. Now as the meeting is being held once in a year and subject to many constraints, investors depend heavily over third party report. Now imagine that if an company come up each quarter with an meeting with its investors then imagine the prospects about the companies investors and their change in investment attitude. Investors will depend less on third part reports which are biased towards companies. This will also reduce the gap between the companies to come up closure to the investors which will help the companies to develop a relation with its investors over a long period of time. Even open discussion platforms can be arranged by the companies to derive ideas from the investor’s community. Many prime management decision and polices can be framed from investors meet once the companies start sharing the matters. Now a question will come about leak of secrecy of business process. Companies can design their discussion in accordance to the limitations of the annual report which itself is self sufficient for making the investors and companies bonding to be strong enough.

In these terms SEBI can also come up with its code of meetings where companies will open the gates for investors to share and discuss as well as improving better governance. Investor awareness issues will get a better way to improvise as well as third party biased products will find its way out of the market.

Moreover third party reports are designed and commented according to individual process which will not align with one another, causing more trouble for the investors to decide on investments. We will find that one company is getting different valuation reports from different parties since every one has a unique process of deriving the valuations. Moreover reports are biased from market whispers too which makes the report more non reliable. Many well valued companies’ gets negative rankings from third party companies due to negative whispers. Even often valuation metrics fails to derive the true valuations of companies which lead to more fiasco within the investors.
Companies should understand that depending on third party reports are no longer safe. Now my friends must confuse with ratings and disclosure. Well rating is being predominately done by expert of the industry who under the SEBI guidelines adopts the method of ratings, whereas valuation is just an open space done by broking companies predominantly.

Ratings Disclosures does not ask only abiding compliance, it goes beyond that in today’s intricate financial markets. Companies needs to understand that if their business processes are sound and stable over a longer period of time companies needs to bridge the gap with investors and eliminate the third party reporting system. Building investors awareness should focus on these factors of strengthening the corporate governance mechanisms.

We find companies are aggressively expanding their business and needs capital to do so. Private Equity comes into most of the cases where exit is based only on stock prices. Companies depend upon third party reports to increase their stock prices for making a way for the PE to exit. Now just imagine that if the same company comes in close interaction with the investors and not with the third parties just imagine how much successful the companies will be term of stock price appreciation. They will get better place to communicate their business plan to the investors which will help the investors also to understand the growth prospects being envisaged by the company. Disclosure to bridging the gap between investors through proper communication does not mean  display of business secrecy in the open market.

Only new financial disclosure norms will not be sufficient. We need companies to come forward and innovate new avenues for bridging the gap between investors. It high time that in these turbulent times, PE is just winding up their business due to poor performance of equity market despite of investments being made in  a quality company. Hence companies need to come up to build investor awareness. In coming days we will need investor communications and not investor awareness. The times of awareness are over since information is available on internet, Indian needs investor communication beyond the traditional methods.

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