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The market focus is likely to shift to fundamentals. A sombre but steady mood may return in a results-bound week. Further panic selling on corporate governance issues is unlikely.

However, the week may begin with nervousness before Infosys results are out on Tuesday. A significant short position in IT stocks suggests that investors are uncomfortable. The fear is that if Satyam has been losing unexpectedly on sales and margins with its delivery and service quality intact till recently, others may also have fared worse than anticipated.

If Infosys can stick to their earlier guidance, it would send a very positive signal for the market sentiment in the recovery process in the short term.

It is not a sense of deja vu, but a backlash of suspicion, that was ignored earlier, and a feel of helplessness influence initial market response to a corporate fraud. Capitalism’s history is replete with instances of lessons not learnt. India is not an exception.

India Inc’s track record of corporate governance is by no means enviable. The weakness in regulations and monitoring is taken for granted. The shareholder activism is also in its infancy. Whistle blowing from within is practically unheard of in view of absence of legal protection. (There have, however, been isolated cases of employees unions raising governance issues; but that never emerged as a trend.)

In a bear market, corporates are under increased pressure to perform and may fall victim to the lure of cooking up their books to prop up share prices. The Satyam affair last week induced the market sentiment to dip. Though an isolated scandal is unlikely to change the market, a few more such instances in quick succession may dent confidence seriously.

When Dalal Street is grappling with valuations in apprehension of a decline in numbers in the weeks ahead, the Satyam fraud would, however, help market to factor in “suspicion” on corporate governance, at least in the short term. Investors can ill-afford a miscalculation in pricing and misstep in terms of investment decisions at this juncture.

If Indian equities appear historically and comparatively cheap at current prices set against changing economic and corporate fundamentals, how to price in corporate governance issues? Are there failsafe metrics to ascribe discounts or premiums based on available data?

Even institutional research into off-balance sheet data and numbers is not only tricky, costly and time consuming, but its result are prone to be subjective also.

Investment strategist would be bothered by questions whether to make stock specific checks or to approach the issue at a macro level. In the investment world direct interactions with the management and the promoters play a crucial role in making an investment decision. Often a clinical distance remains in theory and recommendations are made on “impression” gathered by an analyst or investment advisor.

It seems that investment strategists for some time would be a little more conservative and cautious in their pickings while avoiding sweeping generalisation in the near term.

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

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