The ministry of corporate affairs has knocked a few paragraphs off annual reports, but has lowered their disclosure value by far more. It has exempted firms from disclosing quantitative details. Indian companies give details of their installed capacities, production, sales and raw materials consumed, and opening and closing stock in volume, and also in value terms.
This is valuable information to analyst and informed investor alike, as they can calculate the per unit realization and cost. Investors and analysts forecast financial performance using these variables, among others, and use it for sensitivity analysis. For example, if coal prices were to go up by 10%, how much would profits fall by?
The ministry has given several exemptions, depending on sectors, such as defence, shipping, export-oriented units, but under the broad head of manufacturing, it has given two exemptions. Manufacturing companies will be exempt from giving product-wise sales, product-wise raw materials, and opening and closing stocks. This will dilute the analytical value of annual reports from fiscal 2011 onwards. The notification has been issued without a consultation paper asking for comments, which is strange.
What is the rationale for the change? One, giving capacities was a throwback to the licence raj and two, these details apparently gave away competitive information, especially to that old bogey of foreign competitors. They could have stopped asking for installed capacities, but let the other information remain.
The second reason appears illogical, because Indian companies have prospered for two decades since liberalization, despite all this top-secret information being available. And, competitors rely more on current market intelligence than annual reports, which will provide last year’s information.
Also, foreign companies give far more information, in other forms. US pharmaceutical companies, for example, routinely provide drug-wise sales of major drugs with a continent-wise break-up. Indian firms have it easy compared with Securities and Exchange Commission requirements on listed companies in the US.
One opposing argument can be that Indian companies also give segment-wise information. If all companies uniformly did so, it would be good, but the accounting standard gives too much leeway. Many companies define their business as broadly as possible, not giving this information. After exempting companies from attaching subsidiary annual reports, and not forcing them to give quarterly consolidated results, this is a new low for corporate disclosures.
Investing was never an exact science, but this change will make it even more of an art. If the Securities and Exchange Board of India insists that listed firms should continue to give this information, it will bring relief to minority shareholders.
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