CLSA’s open letter to Infosys CEO S D Shibulal last week kicked up a storm. The letter, which said investors were showing ‘rare frustration’ in the company, shocked many. The reports said it was expressing “consolidated thoughts of 600 institutional investors who have $15 billion invested in Infosys.”
CLSA is not an exception. It is representative of a trend sweeping Indian capital markets, with investor activism having finally come here.
More and more research, especially from foreign houses, is increasingly vocal in pointing out problems within Indian companies. In the recent past, research house Espirito Santo criticised family promoter groups as being much worse than government in their treatment of minority shareholders. Then, there is Veritas, which with its reports on RIL, ADAG, Kingfisher and DLF has used rather strong language.
| A NEW ACTIVISM Analysts, brokerages and research firms are shedding light on companies, their performance, deals that they sign, and their corporate governance standards. A reason could be that they are now being paid by investors, and not corporates, for their reports | |
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Reasons
The reason is simple. Over the past 12 months, brokerages have their traditional pay-masters — corporates — taking a rain check, as equity markets have been in the doldrums. What is keeping brokerages afloat are the investors, who are also buying their research. Saurabh Mukherjea, head of research at Ambit Capital, which has been rating companies on their corporate governance and accounting practices for a while now, says: “To a large extent, this trend is driven by who the paymasters are. When the markets are doing well and there are plenty of issuances, brokers are wary of irritating companies. Brokers are realising that institutions are under pressure to generate returns for their investors. This is putting pressure on research to deliver. We spotted the broader drift towards corporate governance a while ago.”
Historically, brokerages and promoters have enjoyed a cosy relationship. Besides, research was also relatively shallow then. Pradip P Shah, chairman, IndAsia Fund Advisors, said, “In the past, in India, a majority of analysts were not doing intelligent analysis. They were taking cues from the management and lapping up what the latter was saying. It was not independent analysis either. Satyam was a wake-up call. However, currently, while there has been some improvement, it is not significant and a lot needs to be done.”
But this has changed over the past 12 months, as equity issuances and fund raising has nearly come to a standstill. Today, investors want information that would help them improve their returns in even a bad market. This shift has forced analysts to view companies in a different way. Today, analysts no longer wait for a company to share details with them. Channel checks have replaced meet-ups with management.
This has forced brokerages to concentrate on catering to the needs of their other customer segment – institutional investors. The reason is not difficult to find, as foreign institutions have cumulative investments of nearly $110 billion in Indian equities. And, in a difficult market, generating returns is a challenging task, which is why equity analysts are under pressure to offer differentiated products that deliver the goods. There is a huge demand for such proprietary research, claim heads of research.
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Nick Paulson-Ellis, country head of Espirito Santo Securities, says: “Generally, research is being forced to change, as over-capacity necessitates a more differentiated approach in order to stand out. Today, politics, regulation and governance are impacting companies more than it did in the past, and analysts are adjusting to that. We have a proprietary methodology that looks at corporate governance standards in companies. This apart, we have also increased our focus on primary research, whereby we do a 360-degree analysis of a company or sector by talking to customers, suppliers and distributors. We don’t just wait for results to come.”
Pressure on firms
The pressure on companies is evident. Analysts say after several quarters, Reliance Industries has given a detailed presentation on their exploration and production segment at the end of the fourth quarter. Details of wells and their output has been shared for the first time. There are many such examples that may not be front-paged but are altering the analyst-investor-promoter equation in India.
The Children’s Investment Fund’s letter to Coal India for compromising the interest of minority shareholders is another example of this and Indian promoters are increasingly feeling the heat. The Los Angeles County Employees Retirement Association (Lacera), a shareholder of Cognizant Technologies, is seeking amendments in the software major’s procedures so that corporate governance improves.
This is a clear departure from the past, say most analysts. While things are improving, the pressure is not as much as it should be. Paulson believes most brokerages continue to be deferential towards corporates and that still hasn’t changed much. “You still don't see very many ‘sell’ calls or reports questioning strategy or governance in companies,” he adds.
Shah points out that analysts have to do a lot more questioning. Even now, in conference calls with the management, many analysts ask unintelligent questions. It will also require the analyst to take a judgement of the management and its credibility. But things are beginning to improve.