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Retail investors discriminated against - Views on News from Equitymaster
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  • May 11, 2007

    Retail investors discriminated against

    In yet another instance, the retail investor is finding himself short-changed. The Securities and Exchange Board of India (SEBI) has directed all stock exchanges to change their listing agreements and allow companies to send abridged annual reports to their shareholders unless the investor asks specifically for the complete copy. Rising costs and availability of all the necessary information on the web site of the company and the stock exchanges are cited as the reasons. This step is retrograde and has to be strongly contested. Why should the onus be on the shareholder? Typically an investor would be invested in more than ten company stocks; so he/she would have to write so many letters every year to each company requesting access to information that should be legally given to them.

    A simpler solution would be for the Depository to capture whether the Account holder wants the complete or abridged annual reports for the companies in which he has an interest. Every year, as companies prepare to ship the annual reports, they can send either abridged or complete report depending on the choice of the shareholder (as captured by the Depository). Ofcourse, the Depository should capture the choice of the account holder explicitly (prepaid post cards would work well here).

    Misguided thrift
    The basic function of the annual report is to give the Director's Report, balance sheet and profit and loss numbers and the details behind them in schedules. If the company has subsidiaries, the number of pages increases commensurately. To print this data in single colour, on the most inexpensive paper would cost a company less than Rs 100 per annual report. In fact Mr Deepak Parekh has mentioned in his Chairman' speech that they spent Rs 21 to print one HDFC annual report in FY06.

    Instead we find many companies utilising annual reports as an extension of their brand building exercise, so the expense on paper goes up. More colourful the plates, more the outlay. But is that for the benefit of the investor or of the company? If the companies do take this April 26, 2007 SEBI directive seriously, and send an abridged version of the report to its individual retail investors, will they not have to incur double the expense when an investor asks for more details and the company has to re-post the full version annual report?

    Quantifying costs
    To take an example of Infosys, one of the most widely held companies in India. If the company decides to cut costs and print a basic annual report, it would spend about Rs 47.5 m on sending one full annual report to all of its 475,000 individual shareholders. This would be 0.05% of its total expenditure and 0.13% of its net profits in FY07. A mere drop in the ocean.

    Besides many investors are not computer and Internet savvy. Owning a computer is still a far off dream for many Indians with computer penetration at 2% of the population. With cyber cafes and access at work, Internet usage is slightly higher and covers about 39m people. But yet to surf the net for information on companies would probably require most old dogs to learn new tricks. So they have to write letters upon letters to different companies to get what is legitimately theirs. This must be the most desperate attempt yet to shore up the postal department's finances!!

    Returns do not outweigh the costs
    Very few Indians actually put their hard-earned money in buying up equity. With compulsory dematerialisation, there does exist some handle on the actual number of investors in the country. NSDL has 7.8 m investor accounts registered with it encompassing 6,566 companies. And this is the group that the various companies have to keep informed. Not as daunting a task as it is made out to be. By printing a fewer pages of the annual report for some will definitely not be able to single-handedly shore up their operating margins! However, the pain and confusion for the investors will be more discouraging.

    Retail participation is directly proportional to the prosperity of any market. By discriminating against the flow of financial information to investors, the SEBI has taken a step backward.



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