The Hindu Business Line : <I>Misguided guidance? </I>

The Securities and Exchange Board of India (SEBI) Chairman, Mr M. Damodaran, could not have been more correct. The practice of issuing quarterly guidance pioneered in India by the darling of the share market — Infosys — is fraught with grave danger; it is best discontinued, which is what SEBI is mulling over. Should this happen, it would be the second seminal change for the better to be brought about by the market regulator after its decision to make the regime of IPO (initial public offering) ratings mandatory. The demise of the quarterly guidance practice would not be mourned by many but the birth of the mandatory rating regime will be hailed by small investors. The quarterly guidance statement, it must be noted, is issued by the company. And this exactly is the danger. Whereas rating, which is also a sort of guidance to investors, is done by independent agencies that apparently have no axes to grind.

Engineering results?

The Listing Agreement requires companies to publish quarterly reports. Normally, the aggregate of the quarterly results should correspond to the actual results of the financial year. But more often than not, this does not happen for a variety of reasons some of them defying resolution by the very nature of things. And the Listing Agreement itself gives latitude up to 20 per cent in deference to the genuine reasons that account for the deviation. Now, when the results published after the event can be off the mark by as much as 20 per cent, the results predicted can be even more erratic.

At any rate, with prognoses having been made the management is on tenterhooks to engineer results, whereas as Mr Damodaran quotes with evident approval of an international regulator, "We want our CEOs to strategise rather than to engineer results." Manipulation of results and accounting jugglery will naturally be on the ascendance in such a scenario... " The publication of quarterly results despite its potential inaccuracy at least serves a noble purpose — to disseminate price sensitive information to the public, which would otherwise remain in the domain of insiders thus facilitating insider trading. The quarterly prognosis, on the other hand, has the dangerous proclivity to further insider trading by enabling the management to throw a red herring at unsuspecting investors.

And while the Listing Agreement calls upon a management to explain the deviation in excess of 20 per cent in the ultimate annual results vis-à-vis the aggregate of the quarterly results for whatever its worth, there is no such accountability on the managements making prognoses of the events to come. In the event, prognoses can be made with gay abandon with motives ranging from the mundane to the sinister.

Mr Damodaran is equally perturbed by the advice and prognoses proffered by experts, in the media, especially electronic. Anything coming from the horse's mouth is taken seriously which is why the quarterly guidance statements from companies must be stopped.

(The author is a Delhi-based chartered accountant.)

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