The Hindu Business Line : Quarterly reports — Still short on some critical information

THERE has been an improvement in the quality of disclosures made by companies on a quarterly basis. The initiatives taken by the Securities and Exchange Board of India (SEBI) over the past three years have paid off. Encouragingly, quite a few companies, such as Grasim, Hindalco, Nicholas Piramal, Balaji Telefilms and Dr Reddy's Labs have provided information well beyond what is required by SEBI.

However, there are some critical areas where the quality of disclosures needs to be toned up. The SEBI has to make it mandatory for companies to provide detailed information in the following areas:

Mergers. Rare is the case where companies provide comparable information. Even if they do, it is usually confined to a few parameters such as revenues and profits.

The absence of meaningful comparable information detracts from the earnings announcement. It just about provides an idea of the scale of the merged entity.

The lack of comparable information for a quarter also affects the utility of the annual numbers over a couple of years.

Companies are well-placed to provide comparable information for past quarters/years. Only a SEBI directive can ensure that they place this in the public domain so that investors get quality information when a merger takes effect.

SEBI should also mandate comparable disclosures for other corporate restructuring exercises such as demergers, asset-sell offs, equity restructuring through capital reduction and spin-off of existing businesses into joint ventures.

Such corporate action has become commonplace over the past five years as companies try to get leaner and meaner.

Quite a few companies have mobilised capital through a variety of instruments that can be converted into equity, which impacts per share earnings. Now the latter is given based on the existing equity and on the likely equity after conversion. Often, the conversion takes place in phases.

This has a gradual effect on the floating stock and can affect spot prices. Companies should be required to give the time-frame over which the expansion in the equity would take place, the quantum of addition at every stage and the conversion price. This will alert investors to imminent equity expansion.

Over the past year and half, companies have been actively restructuring their debt by prepayment, replacement of high-cost debt with funds sourced at lower rates in domestic markets, and recourse to overseas loans, which have incremental implications on account of exchange rate factors. Investors only get an approximate idea of the effect of such exercises through interest costs.

Only if companies give a profile of debt at the end of each quarter will there be clarity on the effect of such an exercise on profitability.

A snapshot on cash flows from operations, investments and financing (the expanded version can be given in annual reports) would offer a good idea on whether the company's reported profits are translating into cash flows in a timely manner or doing so with a time lag, and the extent to which they do so.

Often, companies that report profits have a sorry tale on cash flows. This information is too important to be reserved just for the annual report.

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