June 17, 1997
The Taraporevala report means Indians can invest in the secondary markets abroad to the extent of hundred thousand dollars by the turn of the century
A really big bomb went unexploded in the financial papers in the last fortnight: The Taraporevala report recommended that Indians be permitted to invest in the secondary markets abroad to the extent of hundred thousand dollars by the turn of the century.
This is historic. It means that the capital market is beginning to get truly liberated: Currently we are confined to suffering the Indian market, whether it drifts, stays flat or plunges. The man who is committed to investing on the capital market must emerge as some sort of a trapeze artist; he must continually find stocks that beat the decline. This is impossible as a sustained expertise.
But look what the same investor might be able to do once he can invest in international equity. He might decide to play the Hong Kong market if that looks like moving up; he might prefer to put his chips on NASDAQ in view of the greater corporate transparency standards in the west; he might pick on the Chilean market and, who knows, he might consider it safer putting his money on Pakistani equity.
The Taraporevala recommendation is interesting because, if implemented, it could well lead to the second most important impact on the secondary markets within a decade -- the first being the decision to permit foreign institutional investors to invest in Indian equities. And if one goes by the change in the character of the market following the FII entry as an indicator of what one can expect, then one can predict a momentous upheaval in the years to come.
I use the word 'upheaval' deliberately. I foresee changes that will have the kind of impact on our capital market like any Indian industry is affected once the customs tariff is lowered to a negligible level. In the latter case, the industry struggles to survive. While I am not predicting that the Indian capital market will collapse, I am venturing to say that perhaps it will face the kind of challenge it has not even visualised.
These are some of the things that I foresee might happen :
- An IPO by an Indian company may fail not because of the perception regarding the company or the industry but because a Chinese company with better prospects may be going public at the same time and Indian investors might be more keen in putting their money there.
- Research departments attached to broking houses will start asking Indian companies questions like: 'Microsoft has a pre-interest margin of 'x'. Why is yours lower ?'
- Analysts will fly abroad for company visits and drop lines like 'When I was at Nucor...'
- Clients calling brokers to ask whether the market is strong will be met a voice at the other end enquiring in turn, 'Which market ?'
- Brokers and their research boys will become more global in their outlook. When appraising corporate strengths, they will be more inclined to ask whether the company can compete on the global level.
- There will be a greater exposure and awareness of what is happening internationally. An increasing number of corporate observers are likely to get themselves informed about the polyester production in Indonesia in the last quarter, the soya crop in Brazil, the cotton crop in China and export incentives in Pakistan.
- The gloss that has gone off equity research will return as analysts become better informed and find a number of prospective investors willing to pay for this specialised knowledge. R&D units might start developing not merely industry experts but also country experts who might have a better grip on whether Hong Kong appears to be peaking out and whether South Korea is considerably underbought.
To extend this logic, the stronger research units might start employing political science graduates with a focus on international relations instead of B Com graduates only.
- The world is likely to shrink for India quicker than ever before. For example, you will have players on the market knowing precisely how the student protests in South Korea can have an impact on government stability and, in turn, on stock prices; how pyramid marketing is likely to destabilise east European economies and case a civil war etc.
- To facilitate the information requirements of their clients, I see a number of stockbrokers forging relationships with brokers in other countries on a reciprocal basis with Indian brokers emerging as India experts.
- One will see more columns in the media devoted to what is happening at IBM and General Electric than today's levels. The Indian business newspapers might start carrying quotes of the foreign markets as well. Zee TV's business news might carry the last closing of Dow in addition to that of the Indian market.
This excitement comes with a caveat. Since the proposed permission to invest in equities abroad means that there be less money to chase Indian equities, Indian companies might suffer on their market capitalisation. This is because Indians have a strong failing for most things that are 'phoren' and since international equity represents a stake in global companies, there might be a greater willingness to put money in international paper than some of the domestic ones. This is an extension of the same logic which makes Indian investors today prefer FERA stocks over competing and successful Indian companies.
If Indian companies find it difficult to compete with the foreign names it would be because of 'perception'. The foreign companies are good at precisely that at which we are terrible: information transparency.
Most Indian companies conceal more than they reveal, they treat the exercise of information-sharing with distrust, they treat shareholders like insects. Their annual reports carry the pictures of the promoters, the format of the directors' report can be predicted comfortably in advance, the decision to use what kind of paper to print the annual report is influenced more by the cost than with readability, and most often it is easier getting more information on these companies from a research report prepared by any second-hand stockbroking firm than from the company's annual report.
Four annual reports that
are a pleasure to read
Infosys: Has recreated the definition of an annual report. An education for every Indian investor.
Balrampur Chini Mills: Has, over the years, raised the profile of its industry by demystifying the thousand complexities concerning the industry. Raised its p/e in the process as well.
Gujarat Ambuja: Liberated annual reports from static, numerical boredom by writing about people.
Hindustan Lever: Gives a fair idea about the company.
On the contrary, a number of global companies are highly transparent with their information. They create a better image, a letter to their chairman or even the investor services department more often than not elicits a prompt reply and the company gives the impression that it cares. Gradually, such companies raise pride adequate enough in their shareholders to make them hold for the long term, which influences the p/e ratio and market capitalisation. The shareholder is happy, the media writes favourably and one finds investors buying stock even at the higher prices in the anticipation of continued appreciation. It is a virtuous cycle.
A number of Indian companies, suited to working exactly like they were in the 1950s, might need to look at the annual reports of companies like Infosys and Balrampur Chini Mills to get a fair idea on how they must evolve if they need to survive in public memory -- or get extinguished.