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B. Venkatesh

THE statement by Mr Rahul Bajaj to the press last week that Bajaj Auto may demerge into two companies has raised many an eyebrow. At the heart of the debate lies the issue of information dissemination. Should corporate intentions be disclosed to the stock exchanges?

Stock exchanges as part of the listing agreement insist that companies inform them first about any corporate development before the same is announced to the public. The practice of informing the stock exchanges of any corporate development stands on solid ground; stock exchanges ensure proper dissemination of information and provide the market microstructure for trading and investment.

But should the regulation require a company to inform the exchange of its corporate intention? An intention when materialised becomes a corporate development. The argument by those in favour of disclosing corporate intentions is that investors would be benefited by such a regulation. How? Suppose Bajaj Auto demerges into two companies, but informs the exchange after the event has happened. Experts argue that investors would be at loss, because they would have traded the stock based on the corporate intention. Perhaps, the stock price may have risen if it the company's decision were perceived as beneficial to shareholders.

This argument can also be turned around its head. What if the company states that it intends to hold a board meeting to decide a demerger, and then later shelves the proposal? Needless to say, the announcement of the proposal would send the stock soaring, only to bring the price back to lower levels after the proposal is pushed into the backburner. Is such volatility, caused by a forced exogenous factor, good for the investors?

Besides, mandating companies to report corporate intentions has no end to it. What is corporate intention anyway? At any point in time, every company will have more than dozen proposals on hand. Should all of them be reported to the exchange? Apparently not, for that will only lead to loads of unwanted noise rather than information. This necessarily means that the stock exchanges have to add another layer of regulation to define corporate intentions.

It may, for instance, suggest that all proposals that are considered price sensitive and material should be reported to the exchanges. Besides being difficult to define, materiality as a concept for regulating information has its problems. Acquiring a new client, for instance, is material information for software companies. Now, if corporate intentions need to be disclosed, a software company may have to state its efforts to woo the potential client.

Not only does this sound ridiculous but may also scotch the software company's chance of including the other company into its client list. This is because most clients, especially the US-based ones, prefer to remain anonymous, and may threaten to find another vendor if the Indian company were to report their name to the stock exchange.

And even if corporate intentions are few in numbers so as to reduce unwanted noise, what if the regulation requires disclosure only after the event has happened? The argument that the investors will be at a disadvantage does not really hold much water.

The impact of the news on the stock is unlikely to change. It is just that the timing of the impact will be shifted from the date of the announcement of the corporate intention to that of the date on which the company reports the development. That is all.

If anything, reporting corporate intentions can only add to the uncertainty in the stock prices; for intentions could remain just that. In which case, the stock price may see needless fluctuations, caused by an exogenous factor — a regulation requiring the reporting of corporate intention.

Having said that, company officials should not be allowed to freely voice their corporate intentions to the press. Corporate intentions should be largely inside information. It should not be deliberately and selectively let out for public consumption. SEBI, the stock exchanges and the companies should play a major role in this process. That is the only way investors will be better served. Not by imposing regulations that require reporting corporate intentions.

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