Have you seen the TV ad in which an investor at a company's
shareholders' meeting stuns the management by his in-depth knowledge
of the company's annual report? The ad is interesting because it
suggests-quite correctly, I believe-that businesses routinely hide or
obscure information that they are required to reveal. Companies are
supposed to reveal a great deal of information but the sheer quantity
makes it easy to hide or disguise facts. Even if the information is
not actively obscured, its sheer mass means that selecting what is
relevant is a task.
Whether it is the offer document for a company's IPO or a new mutual
fund, the issuer complies perfectly with the rules of disclosures but
the final effect is mostly useless. To see proof of this, just get
hold of a dozen people who have invested in IPOs or mutual funds
lately and ask them if they have read the offer documents. If these
are typical retail investor then the number of investors who have read
the document will inevitably be zero. To my mind, this is the fault
less of the investor and far more of the way such documents are
written and the regulations that govern them. The focus seems entirely
on the quantity of information that is revealed, rather than the way
it is presented and prioritised. It's a bit like the difference
between Altavista and Google. Old internet hands would remember a
search engine called Altavista which, for a brief period, was very
popular before Google dethroned it around 1997 or 1998. Altavista was
all about quantity and was good at throwing up a huge number of pages
in which your search term existed. Google, on the other hand, was all
about quality and its real ability lies in being able to put the most
relevant links right on top of the first page. When it comes to
providing information, what really matters is not quantity but the way
things are prioritised and presented. Offer documents-and other
mandatory disclosures-need to be designed with the focus not on how
much information can be stuffed into them but how easy it is for the
relevant information to be found and understood.
It is interesting to see that the SEC (America's security markets
regulator) has just released a model executive summary of the offer
document for mutual funds that is just three pages long. These three
pages have only a small amount of the most relevant information that
is presented in easy to understand language in an easy to read print
size. What is most interesting is that the design of this document is
clearly based on the idea that when it comes to information, the way
to emphasise what is important is to leave out what is not important.
Full disclosure is also available, but in a separate detailed
document. There's no reason why such a principle cannot be applied in
India, not only to the offer documents and prospectuses of company and
mutual funds, but also to financial results and annual reports. I
think the structure, content and design of such documents should be
specified to the last detail with the actual language, prioritisation
of information and even the fonts and font sizes laid down with
nothing but the ease of understanding and comparability in mind.
Investors, analysts and mediapersons often talk admiringly of experts
who can understand such documents. I think the fact that experts are
needed to read such documents is the real problem.
Ask Value Research 
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