Disclosures: Tune in with the times

S. Vaidya Nathan

THE kind of information flow investors in the Indian market get today is definitely superior than the case five or three years ago.

This is no small measure considering the edicts issued by the Securities and Exchange Board of India from time to time.

Without the regulatory requirements, it is quite unlikely that India Inc would have come around to sharing information on the level it does now. Of course, there would have been a few exceptions such as Infosys Technologies and Balrampur Chini Mills.

The quantum of information has certainly taken a leap. But the same cannot be said of the quality of information. Especially so in the context of a rapidly restructuring India Inc. Mergers, de-mergers, takeovers, desubsidiarisation, consolidation, brand ownership changes, restructuring of debt by replacement of high-cost debt with low-cost debt and asset sales mark some of the changes taking place.

But if one looks at the earnings announcements every quarter and the balance-sheet, it is virtually difficult to get a true picture of a company's performance due to these changes. Just plain numbers are dished out for every company without comparable figures for the previous period.

Needless to say this renders the information virtually useless, except that it can be taken as an indication of the scale of operations. This defeats the very purpose of the disclosures mandated by SEBI. One need not look further than Hindustan Lever, the company which has largest market capitalisation.

For the most part of the last two years -- in successive quarters -- Hindustan Lever's earnings numbers have not been of a comparable nature. The numbers furnished for the January-June 2001 quarter and the April-June quarter (announced in the past week) also fall in the same category. Mergers -- big and small -- have made evaluating Hindustan Lever's performance a tough task.

Its numbers for the next quarter and, indeed, of 2001 would also fall in the same category, as one more merger -- that of International Bestfoods is set to be sealed. Look at the range of aspects that have rendered meaningful comparison impossible in the January-June 2001 period: The HLL earnings announcement states:

``The results for this quarter and half year are not comparable to those of the corresponding previous period to the extent of the following:

* Sale of animal feeds business of the company to GoldMohur Foods and Feeds, a subsidiary of the company effective April 1, 2000.

* Integration of tea exports business of Lipton India Exports, a 100-per cent subsidiary with the company, effective April 1, 2000.

* Integration of the personal products business of Lakme Lever Ltd, a subsidiary, with the company, effective April 1 2001.

* Sale of Quest Flavours and Fragrances business effective April 1 2001, and exceptional income arising from the same during the quarter.

* Exceptional item in the half year being Rs 22.59 crore (net of tax Rs 22.59 crore) income arising from the transfer of interest in Animal Feeds business to the Godrej group, in addition to the aforementioned exceptional item.

The company has indicated the net sales and profit adjusted for these items. In some accounting periods, the differences are sizeable and in others not so sizeable. Hindustan Lever is not an exception in this regard. There are quite a few companies that have ushered in such exercises.

For instance, the overall profile of Indian Rayon has undergone a dramatic change in the last three years. Whether the change has been for the better or not is not clearly reflected in its report card. Much the same would hold good for its sister concern in the Aditya Birla group -- Grasim Industries.

If the problem is fairly acute even among big names, the less about the small and mid-cap companies, the better. All the restructuring options unveiled by companies from time to time have the same effect. SEBI has to sooner than later look at this issue objectively, and come up with tighter disclosure norms that facilitate comparison of information, and hold more meaning for investors.

Surely, companies do have the dis-aggregated numbers and those can be presented in detail, if not in newspaper advertisements, at least in reports to the stock exchanges and on their Web sites. This assumes importance, as every corporate action makes unavailable comparative numbers for at least two years, if not three.

Now since quarterly announcements are made, the figures of quite a few quarters are vitiated by such corporate action. At the basic level, companies should be required to disclose comparable numbers for the following parameters: Sales, expenditure, operating profits, interest, depreciation, tax, post-tax earnings and exceptional items.

Any changes in the equity base and the ownership profile, as a consequence of the corporate action must also be indicated. These details should be provided for as many periods as needed before the numbers for two periods become comparable without the additional details.

SEBI needs to quickly put in place a norm in this regard for the corporate actions indicated earlier, and ensure that companies adhere to them in letter and spirit. What an investor ultimately needs is comparable numbers that would give an idea of the company's sustainable growth.

Picture: Mr M.S. Banga, Chairman, HLL