A few days back I received an SMS that was pitching fixed deposits for a company. The returns promised were as high as 14 per cent for a three-year term. Nothing unusual about this. However, the SMS set me thinking about the quality of the information that shareholders get about their companies. The reason is that the SMS was about a company whose business and finances I am reasonably familiar with. I was asked my opinion about it by a friend not too far back and while it was clear that it had more debt than was comfortable, there's a lot of difference between that and hawking deposits the way it is. Adding debt at over 14 per cent would be completely ruinous in the business it is in. Incidentally, it wouldn't be unreasonable for me to say that this SMS that I received substantially changed my opinion of this company.
However, the point is not this particular business, it's about the channels of information that are open to shareholders and analysts. The way things work, a company's management has shareholders' approval to raise secured and unsecured loans. However, there's a world of difference between a pro-forma approval and knowing what kind of money is being raised in what manner and at what kind of interest rates. Oh, I suppose eventually one would get to know, but I'm not sure if eventually is quick enough. Practically speaking, a shareholder has little chance of being able to get information like this at the time when he should.
And the issue here is not just about debt at all, but about the depth and width of investment research in stocks that is available. Sure, there's a great deal of research that is available from a wide variety of brokerages and research houses. However, practically all of it is based on the same set of information that the companies themselves put out. There's very little information flow that is not part of the standardised framework that is initiated by the companies themselves, and a good part of the research is simply a different set of analyses of the same set of information.
It may be useful as far as it goes, but this framework is not good at revealing company-specific information that the management would rather not tell you. If it's something that requires a statutory disclosure then that's great, because otherwise no one is going to go looking for the information and certainly, no one is going to reveal it. It's this information gap that is one of the causes of the narrowness of activity and the short-term focus across our stock markets. Outside a small set of stocks, it's difficult for investors to trust the quality of information, and so it's difficult to do anything, but do anything but chase momentum.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
