Break it slowly? The timing of company releases

Should the State Bank of India (SBI) have pre-warned the market about its paltry profit of ₹ 20 crore in the fourth quarter of 2010-11 as against expectations of ₹ 2,500-3,000 crore?

There is a load of literature as well as regulatory deliberation on how much should be disclosed, but precious little on the timing of disclosures. Except probably a pedestrian rule that one cannot disclose any aspect of financial results before sending them to the stock exchange, or that financial results must be published within 45 or 60 days after close of the period. The Securities and Exchange Board of India (Sebi) did apply its mind on this, and pretty early on, in the late 1990s when it had ruled that results cannot be declared during market hours, but reversed that as it took away half the working day and with many stocks listed overseas, India’s market timings weren’t the only consideration.

But considering moves from time to time and quite a few of late, this aspect appears to have acquired increased salience. Wipro, a large information technology (IT) services company, changed its earlier practice to now declare results outside of market hours, a few quarters ago. Even the finance ministry, which appears more obsessed with the stock market than our fraternity, decided to declare inflation and gross domestic product (GDP) numbers after market hours.

At one level, these measures are laudable. When financial releases are made, even the most transparent organizations cannot realistically provide all clarifications along with them. Since there is a near-universal quest to beat the markets, this leads to undue speculation and volatility. Hence, the revised timing of releases is well intended, to let everyone absorb the relevant information and seek clarifications, instead of jumping the gun. It is, of course, debatable as to whether top managements of companies or the finance ministry should be so concerned about the welfare of stock market participants.

At another level, it is pure opportunism. When a prominent bank was passing through a troubled and controversial phase, all its quarterly results were declared late Saturday evening (perhaps liquor would take precedence over potentially embarrassing analysis and questions). Understandably, ever since its fortunes improved, a Saturday has not been chosen even once for declaring results.

The Reserve Bank of India (RBI) disclosed the feel-good current account deficit (CAD) numbers well ahead of the time it used to be historically. Here, too, they have taken a cue from a dubious corporate practice—companies typically choose to declare good results early on (there are honourable exceptions though). With credibility of government data already at a low, it remains to be seen whether there will be an upward revision to CAD numbers so declared, perhaps with gold smuggling bloating the balancing figure called “errors and omissions”.

Banks should be particularly conscious of the pros and cons of their release timings, because their results can be immensely volatile on account of large treasury profits/losses and shifts in credit quality. For example, SBI should have forewarned the market about its Q4FY11 results because of the mammoth scale of decline. More importantly, the decline was not due to what can be really classified as extraordinary—extra provisions to cover up pension deficit, which was a tacit admission of the fact that pension provisioning was inappropriate earlier.

Human nature abhors sudden shocks; hence there is some merit in the sustained release style of disseminating information, especially when the information is not palatable. For becoming a member of the British medical association, a doctor has to undergo training on how to break bad news. Every doctor will tell you that this art is harder to master than the science of an involved surgery.

I have often heard arguments against these seemingly pointless nuances about timing in the Indian context as leakage of classified information is rampant. But this line of thinking is unduly fatalistic; potential misuse does not mean organizations do not apply their mind to a system of dissemination that best serves their purpose. After all, it is consistency (and of course quality) in the style of releases that has earned many companies respect from the external world. Leaks benefit only a few, not everybody.

Indian companies do not have a culture of pre-announcements, and neither have Sebi and RBI formulated rules for the same. But it needs to be developed and furthered, not because pre-announcing bad news will make it good, but it will show that the company management is pro-active, and will also go towards reducing the information asymmetry between the management (in most cases promoters) and ordinary shareholders.

Dipankar Choudhury has been a senior research analyst on financial services as well as other sectors at various investment banks, and is currently an independent consultant focusing on banks and financial services. Comments are welcome at theirview@livemint.com