The Hindu Business Line : Focus shifts to Q3 results, moves of promoters

The last week of the calendar year, truncated by holiday, may not throw up a negative surprise. This week the near-term futures and options contract settlement is also expected to not cause any hiccups in the cash segment. But if rupee trends to weaken against the dollar, sentiment may be affected.

Market in the beginning of the New Year would focus on the third quarter results for valuation and outlook clues. In a year, already marked by slowdown in GDP growth coupled with declining profit margins, the performance of companies and behaviour of their promoters may dominate the investment sentiment.

In couple of recent studies, an Anglo-Indian investment bank, Noble, has come up with interesting revelations.

According to Mr Saurabh Mukherjea, head of Indian equities at Noble, their research experience show that the corporate governance standard in about 50 per cent of the 200 listed local companies having market capitalisation between Rs 1,000 crore and Rs 10,000 crore was at a “worrying” level.

Shareholders hit

He said in the last six to seven months, many promoters have boosted their wealth, jeopardising the interest of minority shareholders. The mode of actions varied between the “textbook market abuse” and inflated invoices.

“Certain promoters are prone to acquisitions (lawfully and unlawfully) before a positive announcement. As the price shoots up, much of the acquisitions are offloaded and the announced actions either do not take place are withdrawn or modified,” he explained.

In the recent “bear period”, the Nobel study shows, there were sudden spurt in small expenses, on an average 25 per cent, for the BSE 500 components. “Through inflated invoices, decent amount cash is siphoned off to the promoters,” Mr Mukherjea said.

Falling cash flows

“Creative accounting” is another tool, adopted by Indian companies to show “performance” in 2007-08 when they were under pressure to deliver. Noble’s analysis of the BSE 500 companies pointed out the prevalence of five types of “creative accounting practices” during 2007-08. It said at least 30 companies in the BSE 500 were found using aggressive revenue recognition techniques. “This is evident from the deterioration in their cash flows from operating activities in spite of a rise in EBITDA suggesting early booking of revenues.”

It further said: “Around 60 of the BSE 500 seem to have booked sales, which might have arisen from investment income or other income.” At least 10 of the BSE constituents seemed to have shifted expenses away from the current period by significantly reducing depreciation rates. Noble also said that 15 companies, which figure in the same index, had disbursed bulk of their loans and advances to companies in which directors have an interest.

“When we summed up the revenues and profits shown in the quarterly results of firms and compared them FY8 results, we found that at least 25 firms in the BSE 500 had profits shown in the full year results significantly lower than sum of the quarterly results,” the study on creative accounting said.

Responses may be sent to jayanta_mallick@thehindu.co.in

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