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Does a company's name affect your view?
Wed, 10 Jun Pre-Open

"What's in a name? That which we call a rose by any other name would smell as sweet." - William Shakespeare

This is one of the most famous lines from William Shakespeare's all-time classic play Romeo & Juliet. What the celebrated playwright said makes complete sense. But people do sometimes get drawn by fancy names, without paying much attention to the underlying.

What is the relevance of this in the context of investing and stock markets? Let us see...

What is the first thing that you notice about a stock? Obviously, it is the name of the company. Now, ideally the name of the company should not matter at all. It is the underlying business that counts, isn't it? But the human mind is not as objective as we think it is. Whether we realise or not our minds do create first impressions based on names.

And sometimes, dubious companies may take advantage of this human tendency to trap the gullible investor. We came across an article in Business Standard that says that about 800 listed companies changed names in the seven years since the end of the bull rally in 2008.

Companies change names for various reasons. Sometimes it is for valid reasons such as change in the business and product mix.

But sometimes companies simply change names to cash in on the ongoing fads. For instance, during the 'dotcom' bubble, many companies used terms such as 'tech' and 'software' in their names to appeal to enthusiastic investors and to drive up share prices.

One may ask: Isn't there any regulation to ensure that companies do not misrepresent themselves to investors? The article mentions that as per SEBI norms companies can indicate a new area of business in their name if the segment contributes a certain proportion of total revenues. For example, a company called AAA Ltd can be called AAA Finance Ltd if the finance business forms a certain portion of its revenues.

However, there are no such regulations when it comes to overall name changes. For example, AAA Ltd can be changed to ZZZ Ltd. And there are no limits to how many times a company can change its name. Sometimes, this can be tricky for investors.

In conclusion, it is best not to read too much into a company's name. Follow Shakespeare's advice and judge the flower by its smell.

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Jan 18, 2018 03:35 PM