Disclosures and Accountability

President Obama once said, “A democracy requires accountability, and accountability requires transparency.” One could substitute the word democracy with corporates, given the developments in the corporate and banking world since Enron blew up in 2001 and the latest LIBOR fixing scandal. When I started reading and analysing Indian annual reports in the 1990s, I realised what a wealth of information they contained, especially if one was analysing sectors like steel, aluminium, cement etc. Analysts like me could model with details like raw materials input output ratio, analyse volume trend over a number of years, unit price trends, work out power consumption and costs from different sources and so on and so forth. These details are available usually in the Annexure to the Directors Report (Energy consumption and energy conservation) and Notes to Accounts.

During my first trip to Europe, I carried back annual reports of a few steel and aluminium MNCs for a comparison with the Indian companies on operating metrics. For those who are surprised, why I was carrying back hard copies of annual reports, this was before the days of internet and when email attachments in MBs were unknown. I was surprised to see that the MNC annual reports did not have such details. At least not the kind of details that I was looking for. There, of course, were other disclosures like region-wise sales, margins, cost trends, debt maturity profile and very detailed discussion by management on strategy and outlook, which the Indian annual reports did not have. It left me disappointed since the production, sales, inventory, raw material consumption quantitative and value data reveal a lot.

With the advent of reforms and liberalization, some companies sought exemption and were granted the same. The defence sector was an obvious one for strategic national interests. Reliance Industries was another along with some MNCs. But most companies continued to disclose quantitative details. Therefore, I am very disappointed that when the demand and trend from the corporate sector is for greater disclosures and transparency, the corporate sector has convinced the government to get a blanket exemption from disclosing quantitative details vide Press Note 2/ 2011 dated 08th February 2011 issued by the Ministry of Corporate Affairs. It says: “These requirements date back to the era when there was industrial licensing etc., and there was a regulatory purpose in monitoring quantitative aspects of production etc. Their relevance in the present economic and regulatory environment has been re-assessed. Such disclosures are not required in other countries. Indian companies have represented that such disclosure puts Indian companies at a competitive disadvantage where their details are known to foreign competitors, but they cannot get the details from the other side.”

How valid is the above argument? While the need to protect competitive advantage cannot be debated, quantitative details were never disclosed to an extent that compromises on competitive advantages. For eg, Tata Steel discloses its sales volumes in broad categories like hot rolled coils, cold rolled coils/ sheets, billets etc. It never discloses the tonnes of cold rolled sheets it has sold to the passenger car industry for inside panels or outside panels. Now that is relevant competitive information. ITC used to disclose the number of sticks sold and its value, and never disclosed volume or value by different segments of cigarettes (by length or price) and now we get only the aggregate value of sales.

Does Reliance and Tata Steel or Dabur or ITC lack knowledge of market share of their competitors? The competitive disadvantage argument is valid when major competitors are unlisted entities – domestic or foreign. In the domestic market, annual report of all companies, including unlisted entities, are available with the Registrar of Companies (RoC) and thanks to internet, most annual filings are now available at the click of a mouse and a payment of small fees.

MNCs discuss each of their businesses in great detail in their annual report, which attempts to give a fair picture of the year gone by and the future prospects. The revenue growth or otherwise is broken down into volume impact, price impact, exchange rate impact etc. Further most of these MNCs, as far as I know, give guidance on revenues, ebitda and net profits on a quarterly or annual basis. Most Indian companies do not do. They do not need to do so and I have no issues with that. In India management discussion and analysis (MDA) is now a mandatory section in the annual report but in most annual reports there is very limited discussion or information and is mostly couched in generalities and platitudes on different business segments, unlike US corporations where the MDA has serious discussion on each business segment.

I can give multiple examples from my experience as an analyst where these quantitative disclosures have helped me to ascertain the level of expenditure that was being capitalised, or interest capitalised was being added to inventory and thus, boosting the value of the inventory of finished products and raw materials and depressing interest costs. This is not competitive sensitive information, but necessary information on the health of the company. Trade secrets like what exact quality of steel does Hyundai buy for its outer panel or what is the secret formula of Coca Cola, I do not want to know. The information that the companies were providing was not compromising with the competitive positioning within the industry or the health of the company.

The intent of the discussions and disclosures in annual report should help in understanding the business and its health. While not improving the level of discussion and disclosures that are available to shareholders and readers of annual reports, this move to limit the level of extant quantitative disclosures is not healthy in my view. So why this move towards lower transparency? If it is just about market share, the data is available with various third party vendors and therefore, within the industry it is by and large an open secret. Shareholders and analysts who may not be able to access such third party vendors or may find such services very expensive are the only ones who are then being denied the information.

While under US GAAP there is no specific rule to disclose volumes, many MNCs like Exxon, apple and Coca Cola do it. Not only that, the 10-K, 10-Q and 8-K mandatory filings needed by the US companies have a lot of additional details that any shareholder or individual has access to. And when we are looking to set standards and moving towards greater transparency and disclosures, why should we adopt something from the USA or any other part of the world, which is a step back? And if indeed India listed companies believe that disclosure levels in India are more stringent, why don’t some of them delist and list in USA or London?

This is not intended to be a diatribe against the home grown Indian corporates. Over the last few years, AC Nielsen stopped selling subscription of the FMCG market share data to the financial community. One can speculate if the FMCG companies had a role in this decision of Nielsen since the companies are the largest customers of this data. Let us consider the decision of the Competition Commission of India (CCI) against Cement Manufacturers’ Association (CMA) for collecting data on volumes and prices from each manufacturer and sharing it with everyone else. CMA shares the data not only with cement manufacturers but will anyone else that wants the data. CMAs data collection and its wide dissemination to all stakeholders introduced a level of transparency which is unknown in most sectors. If the data was being used towards cartelisation, then CCI should rightly go after the cartel. But the data which was being made publicly available for a small price was in the greater interest of all stakeholders. SIAM collects information on automobile production. The government collects this information for its Index of Industrial Production (IIP). There is sanctity about this data, the like of which is not there when data from China comes out.

Similarly I have never understood why the Indian authorities switched over to quarterly results announcements from the half yearly ritual that was there earlier. I know that globally results are announced quarterly, but who does it benefit apart from adding to the noise level? Assuming it is for shareholders, does the shareholder really benefit or would he benefit more if there were meaningful disclosures and discussions every six months, including balance sheet data? Indian authorities should focus on the substance of the regulations and disclosures rather than trying to ape everything from other countries. We seem to be taking steps back towards lower disclosures rather than more disclosures and transparency. In whose interest is it – the shareholders, the consumers, the employees, the public at large?

I would like to encourage a larger discussion on this. What are your views, especially the other view point?

The thoughts and opinions shared here are of the author.