BackSunshine needed on subsidiary accounts
Sunshine needed on subsidiary accounts
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Last week, a curious incident may have got only a passing glance from some investors. IRB Infrastructure Developers Ltd had sent to the stock exchanges its response to a news report in the Daily News and Analysis newspaper. The news report referred to a Goldman Sachs research note on IRB not disclosing an aircraft purchase in its annual report. IRB said it complied with applicable disclosure norms. The aircraft was purchased by its subsidiary Modern Road Makers Pvt. Ltd in November 2010, and has been used for business purposes. The aircraft cost Rs105 crore and amounted to 1.5% of IRB’s consolidated gross block of Rs6,600 crore. The aircraft was clubbed under plant and machinery, under the basis of materiality. One could argue that its purchase amounted to 89.7% of the additions to plant and machinery in the year, making it material. But that’s not what the law says.
Subsidiary accounts became a rarity after the government made it optional to publish them. Most companies give a consolidated table of subsidiary financials, which is inadequate. For example, revenue, assets and liabilities are disclosed, but key heads such as other income, interest, fixed assets, net working capital and total debt are not disclosed. The government’s intention was to make annual reports less bulky, reduce the cost of publishing for companies and save paper. This is well-meaning, but it also has the unintended effect of hiding valuable information about subsidiaries.
Shareholders can write to the company for these accounts, but it’s not the same as them being freely available. What if an investor wants to study these financials before making an investment decision? In the case of large subsidiaries, shareholders would rightfully want easy access to full information.
When consolidated numbers show a significant variance from stand-alone numbers, it would be easier to decipher which subsidiary may be responsible for it. For example, if interest cost is showing a significant variance, investors may not be able to find out why because the schedule of subsidiary financials does not provide interest cost separately.
There is an easy solution for more transparency. Markets regulator Securities and Exchange Board of India has asked listed companies to upload their financials and important investor communication. It can mandate annual reports of subsidiaries also to be made available online. Investors will get access to this valuable information and companies won’t lose money printing bulky annual reports. Corporate disclosures will get a big leg-up, at no extra cost to a firm or the environment.
We welcome your comments at marktomarket@livemint.com
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