Analysis of Indian Corporate Financial Reporting

Submitted in partial fulfillment of the requirements of

Independent Project (Term 4)

By

Anandh Sundar (PGP 10032) Miheer Desai (PGP 10195)

on 10th September 2011

Guide

Prof. Sobhesh Kumar Agarwalla

Abstract
Do Indias premier companies go that extra mile to disclose relevant information to investors? One would certainly expect so, given the high institutional holding in these stocks. To test this hypothesis, we ranked 62 companies on 10 non accounting parameters, to assess the quality, quantity and user friendliness of their non financial reporting. The results are tabulated in the exhibits, and while Infosys (predictably) seized the first spot, the other companies threw up some surprises. From FY 2011-12, companies can save on printing/postage costs by sending annual reports/other communications electronically, and can now devote more resources to making the online version of the report more comprehensive and informative. In that light, this report should be useful. The criteria, along with their explanation and assigned weights, are tabulated as an exhibit for use in future research.

Key Words: - Indian corporate financial reporting, financial reporting ranking, disclosure quality, disclosure scores, qualitative financial reporting

Contents
Introduction ............................................................................................................................................ 5 Reporting Requirements under Law ....................................................................................................... 6 INCORPORATION LAW .................................................................................................................. 6 REGULATORY EDICTS .................................................................................................................. 6 ACCOUNTING STANDARDS ......................................................................................................... 6 Selection of Companies........................................................................................................................... 7 Literature Review .................................................................................................................................... 8 Methodology........................................................................................................................................... 9 Discussion of Criteria ............................................................................................................................ 10 NON-MANDATORY CRITERIA ................................................................................................... 11 Data Analysis (10%) ....................................................................................................................... 11 Aesthetics and Lucidity (5%) ......................................................................................................... 11 MANDATORY CRITERIA ............................................................................................................. 11 Helping investors understand the business (10%) ........................................................................ 11 Industry specific disclosures (10%) ............................................................................................... 12 Performance Drivers (15%) ........................................................................................................... 12 Comparative analysis (10%) .......................................................................................................... 13 Risk Analysis (10%) ........................................................................................................................ 13 Risk Impact (5%) ............................................................................................................................ 13 Management and Directors Information (5%)............................................................................. 14 Corporate Citizenship.................................................................................................................... 14 Information on third party assessors (5%).................................................................................... 14 Additional information to investors (10%) ................................................................................... 14 Discussion on Ranks .............................................................................................................................. 15 SECTOR SPECIFIC INFERENCES ................................................................................................ 16 Limitations and Further Study .............................................................................................................. 19 Best Practices ........................................................................................................................................ 20

List of Exhibits
Exhibit 1: Grades of evaluation criteria ................................................................................................ 22 Exhibit 2: Criteria-wise scores of company reports .............................................................................. 24 Exhibit 3: Exceptional historical data by Tata Steel .............................................................................. 25 Exhibit 4: Many PSUs present in two languages .................................................................................. 26 Exhibit 5: HDFC Bank fails to highlight section headings ................................................................... 27 Exhibit 6: Innovative business description by Tata Steel ..................................................................... 27 Exhibit 7: Ackruti explaines changing strategies .................................................................................. 28 Exhibit 8: Airtel explains M&A rationale for both sides ...................................................................... 28 Exhibit 9: PNB makes a vacuous and possibly misleading claim ........................................................ 29 Exhibit 10: Glenmark explains how exogenous factors determine its strategy .................................... 29 Exhibit 11: GAIL discloses methodology of the award ........................................................................ 30 Exhibit 12: GAIL mentions no threats/risks in the relevant section ..................................................... 30 Exhibit 13: DCM Shriram gives capex and revenue splits ................................................................... 31 Exhibit 14: LIC Housing Finance breaks up its loan portfolio ............................................................. 31 Exhibit 15: Colgate Palmolive (FMCG) gives due importance to advertizing spends ......................... 32 Exhibit 16: Infosys takes performance driver reporting to the next level ............................................. 32 Exhibit 17: GAIL does a good comparative analysis vis-a-vis the market ........................................... 33 Exhibit 18: Elegant and comprehensive risk analysis by TCS ............................................................. 33 Exhibit 19: Cairn (India) clarifies contingent liabilities ....................................................................... 34 Exhibit 20: Infosys management remuneration .................................................................................... 34 Exhibit 21: Serious analysis of CSR activities by Sterlite .................................................................... 35 Exhibit 22:TCS relates CSR activities with core competencies ........................................................... 35 Exhibit 23: Tata Steel makes analyst reports available ......................................................................... 37 Exhibit 24: Sun Pharma presents additional information in one view ................................................. 39 Exhibit 25: Final ranking of company reports ...................................................................................... 39 Exhibit 26: Sector-wise scores of company reports .............................................................................. 39

Introduction
Indian managements are world famous for their jugaad - which fortunately has not extended to their financial reporting. While the world has been repeatedly racked by crises exacerbated by poor accounting (1987 S&L crisis, 2000 dot com bubble or 2008 subprime mortgages meltdown), India has just seen a single case (Satyam). Indian finance

professionals are respected globally, so at first blush, the temptation is to laud them for this as another example of India Shining etc. Still, mere compliance with the letter of the law does not imply achieving excellence (or even fair disclosure of accounts). This report highlights several examples of the same.

Still, there is little reason to gloat over this. This may be due to the lack of investigative reporting/academic research on this subject, and if studies are conducted in greater depth, the results may be different. In the last quarter of 2011, Indias leading lender took a blood bath of provisioning against teaser loans. This u-turn (earlier its CEO supported by the Board of Directors refused to provide for this) coinciding with the change in CEO/MD, invited criticism from all and sundry including ICAI, RBI and analysts. This may seem a trivial accounting malaise, but the rot is deeper. When the going gets tough, the weak cook the books. Companies have stopped conference calls post 2009, made disclosures more infrequent etc, in response to worse industry conditions. This is true especially for the midcaps. In this light, we decided to study whether Indian companies walk the talk when it comes to optional/ voluntary disclosures, which are standard in other developed markets. There is enough literature in the form of committee reports/listing agreement voluntary sections etc. Analysts, in our view, would be more than happy to suggest improvements in a companys reporting practices, if the company asks them. Hence, given that Nifty companies are Indias most tracked companies with an expected sizeable analyst following, they should have been pace setters. And hence this study was conducted.

Reporting Requirements under Law

Indian law on financial disclosures can be categorized under 3 parts INCORPORATION LAW Most Indian companies are incorporated under the Companies Act 1956. Schedule VI of the Companies Act 1956 and other provisions of the companies act apply to most Nifty companies. Special entities like LLPs, banks are incorporated under other Acts like LLP Act, Banking Regulations Act. REGULATORY EDICTS Regulators like SEBI (for listed companies), IRDA and RBI prescribe certain additional disclosures via listing agreement and circulars respectively. These disclosures are not necessarily investor focussed (as are accounting standards), but directed towards other constituencies as well. For example, many of the RBI directed bank disclosures are aimed at customers, to allow them to assess the quality and safety of their bank. ACCOUNTING STANDARDS They generally apply to most legal entities irrespective of form, industry and activity. While most of these disclosures relate to financial items, some allow for non financial analysis such as segment disclosure, quantitative disclosures, risk management etc. Now, legal/regulatory edicts often dictate the presentation format leaving little to the imagination. While accounting standards related disclosures merely outline the basic principles, leaving most other choices to the reporting entities. That is why we defined the base score 1(of 3) as mere compliance with legal/regulatory edicts, 2 for good presentation and 3 for innovative disclosure. The mandatory non accounting disclosures are 1. MD&A where management gives its take on the companys performance v/s earlier year, and gives the industry SWOT analysis too, as per Section 217 of the Companies Act 1956. 2. Quantitative information(production/sales/energy consumption) is to be disclosed as per Schedule VI of the Companies Act 1956 3. Listing agreement mandates that the company layout its risk perception/ management policy in brief. There are several other recommendatory disclosures that are rarely adhered to.

Selection of Companies
We aimed at analyzing the reporting of all 50 S&P CNX Nifty(viz Nifty) companies, which constitute around 53% of Indias market cap (NSE website). In our view, these companies influence a lot of investing decisions, both individually and collectively (index futures, economic barometers etc). Given the large extent of public scrutiny, they were expected to set the lead in disclosure practices.

Some of the companies were not included either because their 2011 reports were not out at the time of freezing the list, or because their sector had already been adequately represented. Quite a few PSU blue chips came in this list. Given their tendency to stick to the letter of the law and avoid any additional disclosures, our rankings would be penalized them heavily, thus dragging them to the bottom of the list. In our view, the Nifty companies we excluded did not carry any educational/informative value. The final cut of 62 companies is, in our view, representative of India Inc's sectoral representation. Further rankings could add to or detract from this number. The list below reconciles the company selection to the Nifty companies list. Note that FY10 annual reports were analyzed for 9 companies- HCL Technology, RCOM, Tata Communications, Idea Cellular, Hindalco, Sun Pharma, and Reliance Capital

Literature Review
We could not find any prior publicly available academic research on this topic. While a private website (Reportwatch) publishes its annual report on annual reports to rank 500 global annual reports, it does not transparently reveal its criteria weights, which in our view are essential for a better understanding of the rankings. While Indias professional institutes ICAI & ICSI confer awards on companies for best corporate financial reporting/corporate governance, they have more of an accounting fidelity/legal compliance mindset, and do not follow a remotely similar objective.

We searched SSRN, Google Scholar and Science Direct using multiple keywords such as financial reporting ranking, disclosure quality, disclosure scores, qualitative financial reporting etc. We observed several examples of research which had touched upon some of our criteria but none that was as comprehensive as this study was. We list them below 1. In their landmark study on An Empirical Analysis of the Quality of Corporate Financial Disclosure, Singhvi and Desai examined variables like assets size (A), number of stock-holders (N), listing status (L), CPA firms (C), rate of return (R) and earnings margin (E), and hypothesized a conceptual relationship between the index of quality of disclosure (I) and the above-mentioned variables to be of the following order: (I) = f (A, N, L, C, R, E). While these factors identified all ring true to us, we were not able to do the detailed statistical analysis appropriate for a study of this nature. 2. In their study on study on Relationship Between Annual Report Readability and Corporate Financial Performance, Baker and Khare claimed that more profitable companies are more verbose in their letters to stock holders than those with lower profitably. An intuitively appealing finding, which even we found to be largely true (it is a different matter that that verboseness was mostly fluff!). 3. Beattie, McInnes and Stella Fearnley published a methodology for analyzing and evaluating narratives in annual reports: a comprehensive descriptive profile and metrics for disclosure quality attributes. This proved useful to shape our thinking.

Methodology
We considered only reports/presentations/transcripts prepared for Indian shareholders. This was done to avoid penalizing companies with no ADRs/GDRs, which therefore need not file 20-Fs with the SEC. The 20F document being much more exhaustive in disclosure practices/norms, it would have rewarded companies for statutory(as per foreign norms) disclosures. Our scoring pattern tried to follow this approach on all parameters 1. Merely meeting statutory/listing agreement compliances would merit 1 point 2. Good presentation/some slight extra innovation would merit 2 points 3. Exceptional disclosure practice on par with global best practices, would merit a 3 points 4. Not meeting even the minimum criteria would result in 0 points We could have merely evaluated one document (the annual report) and its usual constituents. However, the reality is that investors rely on the website for additional information, as well as non statutory documents like investor relations PPT, conference call transcripts, sustainability report etc. Ignoring this information would have penalized those companies which take pains to customize their report/website and show creativity (in presentation not in accounting!). We thought that thinking from investors perspective would instead lead to much more appropriate evaluation criteria, and therefore the criteria goes beyond just the annual report, and is truly representative of financial reporting. The three grades in each criterion are explained in Exhibit 1.

Discussion of Criteria
While the scoring explained in Exhibit 1 is self explanatory, the rationale behind the weights are not. Incorporating the post presentation feedback, we polled 25 IIMA PGP2 students with an investing background, and 5 analysts, requesting them to assign 100pts to the below criteria, with an option to state another criteria(which nobody did). The results threw up interesting insights that compared to other MBA students; we gave more importance to data analysis/additional information while giving less importance to risk and third party reports. Analysts (not surprisingly) did not desire general information (industry/business) and preferred to do their own data analysis. But they did want more performance drivers, comparative analysis and risk disclosure from the companies. Criteria Used for Evaluation Weights by us Industry Specific Disclosures Helping investors understand underlying business Performance drivers(past, current and predictive data) Comparative Analysis(with own budget/competition) Risk Analysis Risk Impact(quantifies potential impact of risk factors) Management/Directors information Corporate Citizenship 10 10 15 10 10 5 5 5 MBA Student 10.9 12.8 14.7 11.1 11.3 8.0 5.4 3.1 8.7 11.0 7.3 21.7 14.0 9.0 5.7 7.7 5.0 4.3 Analyst

Information on third party assessors(analyst reports, 5 ratings etc) Additional Information available to investors(transcripts, 10 PPTs etc) Data Analysis (quantity of information, use of graphs and 10 table) General Aesthetics and lucidity (ease to read) 5

2.6

5.7

6.0

7.3

5.4

1.3

We discuss the philosophy behind each criterion and extract certain extreme examples below for demonstrating good and bad performance.

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NON-MANDATORY CRITERIA Data Analysis (10%) Whatever the company may wax eloquent, investors know that long term financial data remain the ultimate measure of the companys performance and quality. The more the number of years for which data is presented, the less the possibility of accounting gimmicks and earnings manipulation. Longer term data also show the performance of companies through economic/ sectoral cycles revealing, in the words of Warren Buffett, who was swimming naked. As seen in criteria-wise scores in Exhibit 2, 90% of the companies analyzed have revealed performance for 5 or more years.

In this regard, the reporting of Tata Steel has been extraordinary. They have disclosed production, financial, dividend and ratio data for the last 55 years, starting FY 1956-57. A snapshot of segmented production data is seen in Exhibit 3. In todays world where real performance can be easily hidden under the garb of financial statements, such disclosures engender a lot of confidence in the company. Aesthetics and Lucidity (5%) While this criterion may seem trivial, the overall design of the report plays a positive role to the extent it makes reading easier and a negative role to the extent it makes reading tougher. An overwhelming majority of PSUs include both languages (English and Hindi) side by side or page by page in the same annual report (Exhibit 4). This is desirable given the objective of financial inclusion.

While HDFC Bank report starts off well, a few pages later the aesthetic quotient drops so low that even titles (e.g. Retail Banking in Exhibit 5) are not highlighted and are not distinguishable from rest of the text on first glance. Clearly such reporting exacts unnecessary incremental effort from the reader and is penalized in the criterion score to that extent. However, the bad eggs are few in number, with 95% of companies scoring 2 or 3.

MANDATORY CRITERIA Helping investors understand the business (10%) For a new (potential) investor, this is perhaps the most important section of the annual report. Companies tend to explain about their business across different sections like letters from management, Directors Report and Management Discussion and Analysis. In general
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companies have performed well under this criterion, with as high as 85% scoring the highest grade i.e. 3. There is no dearth of examples of good under this criterion. On the one hand there are companies that show abundant creativity so that the readers may gain valuable insights in the underlying business, as seen in Exhibit 6. Realty and telecom companies had a series of bad years post the subprime crisis and 2G auction fallouts. Yet Ackruti and Bharti Airtel have presented data to give investors a strategic insight into their business. In Exhibit 7, Ackruti reassures investors of its strategic sense over the years. In Exhibit 8, Bharti Airtel displays a rare sensitivity by stating the sellers rationale in M&A, something quite uncommon in hubris driven M&A atmosphere of today. One instance of bad reporting under this criterion is seen in Exhibit 9. This statement is either meaningless or misleading until the company specifies the parameter for which it ranks No. 1 (revenue, profit, balance sheet size, NIM, CASA, etc.) Industry specific disclosures (10%) Because there is nothing sadder than buying a good company at a high price, it is important to know the state of the industry/ sector in which the company operates. This is mainly explained in the management letters and Management Discussion and Analysis (MD&A). As in other criteria, reports which identify trends and provide forecasts are rated higher. The MD&A section often tends to be verbose. However, as shown in Exhibit 10, some companies like Glenmark use innovative means of presentation that capture industry trends in an excellent manner. Most companies simply list the awards won leaving investors clueless about the stature and methodology of the award(s). GAIL (India) Ltd. departs from this practice, much to our delight. In Exhibit 11, the reader can possibly infer that since GAIL is the monopoly gas utility in India and hence has high revenues, assets and profits by definition, it may not be any great achievement that GAIL has won the award. In their bid to fit in with conventional reporting templates, companies may miss the spirit of reporting. This is starkly exemplified in Exhibit 12, where GAIL gives a prominent title to a section in the report but mentions absolutely no threats or risks in the text. Performance Drivers (15%) One can liken the performance drivers to the technical specifications of an automobile. Skilfully chosen advertising words and pictures can sway the mind of the buyer, but the technical specifications will tell them the truth of the matter. Performance drivers like sales
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mix by product/service, geography, R&D progress, employee productivity etc. help the investor predict the real performance of the company independent of what the management says. As seen in Exhibit 13, DCM Shriram takes investors through the logical process from capital expenditure to revenue generated in each segment of business in the concise form of a pie chart. Such charts directly help the investor to evaluate the capex efficiency. Many times, KPIs are industry-specific. LIC Housing finance breaks down its portfolio really well allowing investors to get a sense of the impact if interest rates or credit risk change drastically (Exhibit 14). Colgate Palmolive captures advertising spending, a key variable for FMCG companies, perhaps to drive home that the company is not cutting back on strategic (here advertising) spending to inflate profits in the short term (Exhibit 15). In the true spirit of cost accounting, Infosys goes a step ahead to directly attribute contribution of various factors like volume, price, mix and FX to revenue growth (Exhibit 16). Comparative analysis (10%) It is important for the company to explain why results have changed over the year. It is even better if it quantifies its locus standi in the market. As seen in Exhibit 17, GAIL does a good job in this regard with little fuss. Risk Analysis (10%) Investors would like to know about systematic (market) as well as unsystematic (companyspecific) factors affecting the company. Once these are understood, a natural progression is the need to understand what the company is doing to control these risks. An excellent example of systematic risk disclosure is Exhibit 18, where key risks, their specific impact on TCS and (most importantly) the steps TCS is taking to mitigate them are tabulated elegantly. Risk Impact (5%) Contingent liabilities and off-balance sheet items can have incredible real effects on company performance as was demonstrated by the subprime crisis. Thus, it is important to know the maximum possible impact of these on the profits. As seen in Exhibit 2, this is one criterion where scores of companies are distributed relatively uniformly between 3, 2 and 1.

Cairn India is locked into several disputes with Government/ONGC on oil royalties, tax holiday under Section 80IA, service tax disputes etc. While the standard practice (which Cairn follows) is to disclose this under contingent liabilities, most companies shy away from quantifying their potential outgo, and instead play a game of whispers with Dalal Street. As
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seen in Exhibit 19, Cairn India sets a good example, by quantifying its potential liability in the event of outflows, and supporting its estimate by legal opinions and citing the case facts in brief. Management and Directors Information (5%) Fiduciary duty of management is the cornerstone of the modern corporation. The shareholders (principals) need to know the selection policy and procedure and remuneration of management (agents). Interestingly, 57% of the companies surveyed scored low on this criterion (Exhibit 2: 1 point for merely mentioning names of senior management). This goes well with the impression of Indian companies being heavily influenced by promoters even today. As per the Indian Companies Act, the information of employees drawing remuneration above Rs 5lakh/month is to be disclosed as part of the annual report. However, it is permitted to avoid sending this information by default, and instead dispatch the information only by request. Some companies go out of their way to provide such information in the report itself, as seen in Exhibit 20. Corporate Citizenship (5%) As seen in Exhibit 21, Sterlite makes it a point to report about CSR activities in fair detail. Even well meaning corporates are often accused of destroying investor/social value by plunging into ill planned initiatives or not leveraging their core competencies. In this regard, the CSR disclosure by TCS is exemplary, where it clearly distinguishes areas where it has core competencies from mere volunteering (Exhibit 22). Information on third party assessors (5%) This was a very low-scoring criterion where most companies (87%) had a score of 1 or 0. (Exhibit 2). Indian companies have not yet accepted the convention among better American companies to disclose all sell side analysts that are following the company and their reports on the company. Tata Steel does a great job in this regard, as seen in Exhibit 23. Additional information to investors (10%) Revealing additional information like analyst presentations and conference call transcripts on the website serves to reduce the information asymmetry between institutional and retail investors. Almost half the number of companies uploaded conference call transcripts on their website (Exhibit 2), which is a good sign. Sun Pharma is the best performer here, as it makes all data available on a single page, as seen in Exhibit 24.

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Discussion on Ranks
Given that the points scored in each criterion can be {0,1,2,3} and the weight of each criterion is {5%,10%,15%}, least count of the score is 0.05. One of the tests of any rating or ranking system is the relative differentiation in generated scores between the bet and the worst. The current system seems to be doing reasonably well, with the best score being 2.9 and the worst being 1.35 out of maximum 3. The 62 companies surveyed resulted in 22 distinct aggregate scores. Based on the criteria described above, the criteria-wise and aggregate scores of each company and consequent ranks are shown in Exhibit 25.

Mean Scores and Range for Various Sectors

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1.5 1.7 1.9 Aggregate Telecom Healthcare Banks

Range

IT-ITeS Auto Oil FMCG& Gas Infra Conglomerate Realty Metals & Mining Financial Services 2.1 2.3 Mean 2.5 2.7 2.9

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SECTOR SPECIFIC INFERENCES Sector-wise scores are shown in

16

Exhibit 26. The following inferences can be drawn from analysis of scores: 1. Telecom annual reports are released late maybe due to sectoral turmoil. Barring Airtel, none of the other telcos had released their FY 2010-11 annual reports by 18th August. 2. Underpeformers gloss over their reasons for non performance (Tata Communication) and hence score less in comparative analysis. 3. Companies with lumpy revenues (real estate, healthcare) do not focus beyond past 5 yrs, in general. Hence they score fewer points in data analysis relative to other sectors. 4. Market leaders have more to lose (in terms of competitive advantage) by better disclosures - or so they feel. That is why only a few market leaders/innovators disclose well. 5. Has boilerplate killed banks incentive to innovate in the financial reporting? Banks have lower overall score than expected (Exhibit 26). However, they show an upward bias in their scores on Risk Analysis and Risk Impact because of a strict regulator in the form of RBI, which mandates several disclosures via its annually updated master circular on this subject. Banks also show lower variation in their aggregate scores (difference between maximum and minimum is only 0.20), possibly because of stringent regulation. 6. The IT industry has been in the forefront while setting standards for manpower recruitment/training, facilities management, branding, foreign capital raising etc. No wonder then, that their investor relations is among the best in India, if not globally. Right from conference call transcripts, investor presentations, other conferences etc, data is frequently updated and uploaded on the website, with focus on both individual and institutional investors (

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7. Exhibit 26). Admittedly, a Golden Peacock corporate governance award winner was destroyed in the infamous Satyam scam, but otherwise the industry has acquitted itself quite well, setting new records in transparency and responsiveness. One may argue that this is due to their ADRs, FII investor base, etc. (who are habituated to similar treatment in their home markets), but whatever be the reason, one must admire the industry. 8. Healthcare being technically complex (both operationally and from investor view point) and intangible asset heavy, one would have expected companies to put their best foot forward and use non financial disclosures to educate investors and analysts. However, we do not find any such industry effort (

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9. Exhibit 26), not even in the market leaders. Even the companies which disclose well lose themselves in the alphabet soup of poorly presented jargon. We found that companies with ADRs/GDRs did better than those with purely domestic listings. Indian investors are wary of new fangled healthcare companies (Biocon is the only major unconventional listed player in this space), and maybe the poor sector understanding/communication is a contributory factor to this state of affairs. 10. PSUs being low scorers:- The 7 PSUs we considered(GAIL, SBI, ONGC, PNB, Coal India,LIC Housing Finance) had an average score of 2.01, which drops to 1.95 excluding the professionally managed IDFC. As the main shareholder(GOI) has internal reporting, C&AG audits etc as information source, we suspect that public reporting is given short shrift. The graph below gives an idea of the scores distribution(selected companies listed on the X Axis), which we notice is clustered near 2.2(the mean).

NUMERICAL ANALYSIS OF FOREIGN INFLUENCE AFFECTING SCORES During the project presentation, it was suggested that companies with greater foreign exposure(customers, suppliers, lenders, shareholders) would have better investor disclosure records. We decided to test this hypothesis by collecting data on shareholding, exports, imports and foreign debt. These percentages were converted into numerical scores on scale of 0-3(0%-0, 0% till 20%-1, 20% till 50%-2 and above 50%-3). These scores were then regressed on the total score of the company. The results below indicate that where powerful parties need information(customers, FIIs), it correlates well but not when parties with private information hold sway(lenders, promoters, suppliers with L/C).

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The table below analyzes the various and overall foreign influence factors. Sl No 1 Correlation of Score with Promoters - Shares held % Value -0.21 Comments Significantly negative as expected because accountability to external shareholders reduced Significantly positive as expected because accountability to external shareholders increased FIIs are even more activist than domestic institutions, so this slight extra is only expected. Unexpectedly lower, because the foreign promoter effect significantly erodes the FII advantage. Foreign customers would look to the financial stability of the company, so this correlation is expected as it prods the company to disclose more publicly. This would include other income also, so the correlation is weaker there. Still, it measures the overall cash realization so somewhat reliable ratio. Surprisingly, this is quite low. Maybe, the foreign suppliers are shielded against credit risk by EXIM Bank/L/Cs etc and so they may not care about the additional disclosures Lenders have their own sources of information via covenant compliance certificates etc, so again this low correlation is not a surprise The strong correlations of export sales and foreign are somewhat offset by lower correlations to debt and imports. If we change the foreign holding to just include FII, then the correlation increases from 0.16 to 0.21
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Non-promoter Institutions Shares held %

0.26

Non-promoter FIIs - Shares held % Tot Foreign holding(%)-this includes FII+Foreign promoters

0.29

0.05

Export / Sales (%)

0.26

Total forex earnings / Total income (%)

0.13

Raw material imports / Raw material purchases (%)

0.02

Foreign debt(% to total debt)

0.05

0.16 Total Foreign Dependence (Summing points for 4+5+6+7+8). For 0%, we give 0 points. Till 20%, 1 point; 20%-50% 2 pts, and then 3pts. Hence, max points a company can score under foreign dependence is 15.

Limitations and Further Study

1. Due to time and annual report availability constraints, we were able to do just 62 annual reports. Assuming that a full analysis/ranking takes around 1.5hr/company, a study of even 100 companies would need 150hrs, with around 30hrs for analysis/report. A larger group could probably do more justice to it. 2. Given more time/resources, we would have liked to do a inter temporal(year on year) analysis of improvement in reporting scores over a larger time period, compared with the shareholding pattern changes/stock returns during that time. While this would need significant statistical data manipulating for isolating the reporting factor from other noise factors, we think this is doable. 3. Least Count of 0.05 may have skewed the rankings. Mitigated partly by comparing notes on some companies analyzed by both the team members. 4. We assigned weights to factors based on our judgment of what was important to investors. Our small poll ascertained some areas of differences and a larger scale survey may have revealed more valuable insights/factors. 5. We feel that further work can be done in the following areas a. Ideally, this study should be conducted annually. In the post IFRS scenario (where Indian companies have to inform more and better), companies must make their annual reports stand out from the rest in both content and clarity, or else risk being lost in the clutter/downgraded for more accounting risk. Hence, this study will assume practical importance too b. Annual reports going online due to MCA circular-scope for improving quality and quantity of disclosure at little marginal cost c. Regressing scores on market performance-does positive link exist? d. Looking for causal factors- factors-shareholding pattern, size, industry etc

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Best Practices
From the subprime crisis, banks learnt to value their retail depositors. But companies have not learnt that lesson yet. Barring few exceptions, the additional information (beyond that statutorily mandated to be disclosed) is selectively made available to analysts via separate logins etc, rather than being freely disclosed to all investors. This would deter the stable retail investor base which financial inclusion may bring to the table. Hence, efforts should be made to have the information disclosure user friendly by: 1. Tabulating the investor base by city, and then conducting interactive workshops in cities with certain minimum base of interested investors (say 500+). The content could be tailored in the local language as well. No company does this at present. 2. Primers/Business FAQs should be downloadable from the website to demystify the company. For non standard industries/sunrise industries, this is more important. Mundra Port(one of 2 listed ports) gives FAQs about its business and plans. 3. Given the (relatively) slow and expensive internet in India, the file size should not be unnecessarily large, and the format should not be wasteful. For instance, having 28MB annual reports (by just scanning physical copy) is wasteful compared to uploading the digital version of 4 to 5MB. And instead of uploading an mp3/video file of conference call, the text version of transcript should be uploaded. 4. Segmenting investors into analysts and others is fine for the purpose of tailoring information to their needs. But then, the information should be accessible to all interested parties with minimum hassle like how Tata Steel has done. 5. Fundamentally oriented investors and analysts often need annual reports & conference call transcripts for several years at a time. Like how Sun Pharma has done, have a friendly web interface like a shopping cart, allowing investors to select and download multiple documents in a single zip file. 6. Sadly, the reading habit is dying down especially among the generation brought up on a diet of TV, radio and YouTube. Hence, multimedia content like site visits, presentations and the like will keep some interest. JSW Steel sets a good example in this front. 7. Many investors still swear by Peter Lynchs adage of investing in what they think they know. Hence, uploading the ad campaign videos and bringing the brands to life, would increase their awareness and interest, given that investors may have missed the advertisements of their own company in all the advertisement clutter out there.
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8.

When the going gets tough, the meek either stop the investor presentations, skip conference calls or hide behind the excuse of no comments, no remarks on market speculation etc. But the better approach is to maintain, or even improve, the disclosures through good times and bad. And responding comprehensively to bad news is essential; otherwise bears will have a field day. A multinational minerals company with operations in Western India was hit by a barrage of adverse reports about floods/illegal mining etc, but it responded quickly by rebutting the allegations comprehensively, ensuring that short sellers lost momentum.

And finally, when used well, the annual report can be a good marketing tool to prospective employees, investors and clients. It is not just the Finance Departments responsibility, but also that of Corporate Communications/Strategy and other teams too.

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Exhibit 1: Grades of evaluation criteria / Regulation

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Data Analysis (non mandatory)

10%

10yrs data/Ratios calculations

Graphs for 5yrs

3-5yrs past data/Ratios

General Aesthetics and lucidity (non mandatory) Industry Specific Disclosures

5%

Excellent

Average

Unsatisfactory

10%

Forward looking, trend spotting and outlook

Present situation analysis and insights

SWOT Analysis/plain vanilla industry description

Helping investors understand underlying business

10%

Clear description/rationale for strategy

Photos/Maps/Brands /explained well even without graphics

Description of key business units OR functional segment (NOT geographic) reporting AND subsidiary accounts extract (net assets, P&L, %holding)

Performance drivers

15%

Predictive data (order book, % of contracts which are fixed price, estimated, R&D progress stage for pharma)

Analytical(sales mix, customer breakup, geographical breakup of employees/assets), calculating 'core', presenting proforma metrics(EBITDA, Operating profit, Cash profits)

Basic (like sales in MT, number of employees)

Comparative Analysis

10%

Performance compared to own budget/guidance OR explains under/ over performance wrt industry

Reasonable explanation of change

Merely compared to previous year

Expectation

Parameter

Minimum

Average

Weight

Great

Risk Analysis

10%

Risk mitigants also mentioned

Explains the risks in relation to the company

Merely mentions economic risks/industry specific risks

Risk Impact

5%

Sensitivity Analysis wrt interest rates/forex

Management outlook/Max impact assessment on the contingent liabilities/guarantees /litigation.

Contingent liabilities, guarantees(performa nce/bank), litigation

Management/Directors information

5%

For independent directors, is the director appointment policy explained? OR, is the value added by the respective director outlined.

Section 217A employee details report in annual report itself

Names of next level management(next to MD/CEO)

Corporate Citizenship

5%

Sustainability Report section in AR/available online

Linking CSR/energy efforts to the company's activities

Description of CSR Activities + energy saving efforts(if applicable)

Information on third party assessors

5%

Links to the equity analyst reportsequally for all analysts

Names of the equity analysts covering the company on website

Credit Rating mentioned in annual report(if co has debt)

Additional Information to investors

10%

Conference Call transcripts

Investor presentations/ Analyst Presentation

Quarterly Results only

/ Regulation
25

Expectation

Parameter

Minimum

Average

Weight

Great

Exhibit 2: Criteria-wise scores of company reports Criteria Data Analysis General Aesthetics and Lucidity Industry Specific Disclosures Helping investors understand the business Performance drivers Comparative Analysis Risk Analysis Risk Impact Management/Directors information Corporate Citizenship Information on third party assessors Additional Information to investors Aggregate Score 2.29 2.24 0.76 0.34 3.0 0.0 44% 45% NA 8% 3% NA NA 1.11 0.58 3.0 0.0 5% 8% 81% 6% 1.58 1.79 0.74 0.81 3.0 3.0 1.0 15% 1.0 24% 29% 31% 56% 0% 45% 0% 2.85 2.42 2.15 2.26 1.85 0.36 0.62 0.62 0.85 0.81 3.0 3.0 3.0 3.0 3.0 2.0 85% 1.0 48% 0.0 26% 0.0 48% 1.0 26% 15% 45% 65% 32% 34% 0% 0% 6% 0% 8% 2% 16% 3% 40% 0% 2.45 0.74 3.0 0.0 58% 31% 10% 2% 2.45 0.59 3.0 1.0 50% 45% 5% 0% Mean STDDEV Max 2.39 0.66 3.0 Min 3 2 42% 1 0

1.0 48%

10% 0%

2.90 1.35 NA

26

Exhibit 3: Exceptional historical data by Tata Steel

27

Exhibit 4: Many PSUs present in two languages

28

Exhibit 5: HDFC Bank fails to highlight section headings

Exhibit 6: Innovative business description by Tata Steel

29

Exhibit 7: Ackruti explains changing strategies

Exhibit 8: Airtel explains M&A rationale for both sides

30

Exhibit 9: PNB makes a vacuous and possibly misleading claim

Exhibit 10: Glenmark explains how exogenous factors determine its strategy

31

Exhibit 11: GAIL discloses methodology of the award

Exhibit 12: GAIL mentions no threats/risks in the relevant section

32

Exhibit 13: DCM Shriram gives capex and revenue splits

Exhibit 14: LIC Housing Finance breaks up its loan portfolio

33

Exhibit 15: Colgate Palmolive (FMCG) gives due importance to advertising spends

Exhibit 16: Infosys takes performance driver reporting to the next level

34

Exhibit 17: GAIL does a good comparative analysis vis-a-vis the market

Exhibit 18: Elegant and comprehensive risk analysis by TCS

35

Exhibit 19: Cairn (India) clarifies contingent liabilities

Exhibit 20: Infosys management remuneration

36

Exhibit 21: Serious analysis of CSR activities by Sterlite

Exhibit 22: TCS relates CSR activities with core competencies

37

Exhibit 23: Tata Steel makes analyst reports available

Exhibit 24: Sun Pharma presents additional information in one view

38

Exhibit 25: Final ranking of company reports

Information on third party assessors Additional Information to investors 1 1 1 1 2 1 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 0 1 1 1 1 1 1 2 3 3 2 3 3 3 2 2 3 3 3 2 3 3 3 3 3 3 3 2 2 3 3 2 3 3 2 2 2 3 1 3 2 2 3 General Aesthetics and lucidity Industry Specific Disclosures Helping investors understand underlying business Performance drivers Management/Directors information Corporate Citizenship Comparative Analysis

Overall Ranking

Infosys TCS L&T Dabur India Ltd Dr Reddy's Cairn India Tata Steel Reliance HUL Wipro HCL Technologies Glenmark Tata Power Grasim Marico Tata Motors ICICI Bank DCM Shriram IDFC JSW Steel Shriram Transport Finance Punj Lyold Voltas Sterlite Bharti Airtel Ashok leyland HDFC Hindalco LIC Housing Finance Biocon Sesa Goa Sun Pharma Axis Bank M&M Finance Sobha Developers

1 2 3 4 4 4 7 7 9 9 9 12 13 14 14 16 16 16 16 16 21 22 23 24 25 26 27 27 29 29 29 32 33 33 33

228 164 260 183 220 144 244 216 164 212 146 118 172 143 171 155 204 100 124 124 132 112 128 188 160 96 152 160 108 164 149 106 176 156 196

30-Apr-11 20-May-11 19-May-11 15-Jun-11 13-May-11 25-Jun-11 25-May-11 21-Apr-11 20-May-11 27-Apr-11 29-Jul-10 10-May-11 19-May-11 11-May-11 02-May-11 26-May-11 28-Apr-11 06-May-11 13-Jun-11 16-May-11 29-Apr-11 30-May-11 19-May-11 25-Apr-11 01-Aug-11 19-May-11 10-May-11 04-Jun-10 28-Apr-11 28-Apr-11 25-Apr-11 10-May-10 22-Apr-11 25-Apr-11 10-May-11

3 3 3 3 2 2 3 3 3 2 2 2 3 3 3 3 3 2 3 2 3 2 3 2 2 2 3 3 2 2 2 3 2 3 2

3 3 3 3 3 3 3 2 3 3 2 3 3 2 3 2 3 2 3 3 3 3 2 3 2 2 2 2 2 2 3 3 3 3 3

3 3 3 3 3 3 2 3 3 3 3 3 3 3 3 3 2 3 3 3 3 3 3 2 1 3 3 3 3 3 2 3 3 3 2

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

3 3 3 3 3 3 3 3 2 3 3 3 3 3 2 2 2 3 2 3 3 3 2 3 3 2 2 2 3 3 3 2 2 2 3

3 3 3 2 2 2 2 3 3 2 2 2 2 2 3 3 2 2 2 3 2 2 3 2 2 2 2 2 2 2 2 3 2 2 2

3 3 3 3 3 3 3 3 3 2 3 3 2 3 2 2 3 3 3 2 3 3 2 3 3 3 3 3 3 2 3 1 3 3 1

3 3 2 2 2 3 2 2 2 3 3 3 2 1 2 1 3 2 1 3 1 2 2 3 3 1 2 3 1 1 3 1 3 1 1

3 1 2 2 3 2 2 2 1 3 3 3 2 1 1 2 3 1 1 2 1 1 1 1 3 3 1 1 2 1 1 1 1 1 2

3 3 3 2 2 3 3 2 3 3 2 2 2 2 3 3 1 2 3 1 2 1 2 3 2 1 1 2 1 2 3 1 1 1 2

2.90 2.80 2.70 2.65 2.65 2.65 2.60 2.60 2.60 2.60 2.60 2.55 2.55 2.50 2.50 2.45 2.45 2.45 2.45 2.45 2.45 2.45 2.40 2.40 2.40 2.30 2.30 2.30 2.30 2.30 2.30 2.25 2.25 2.25 2.25

39

Aggregate Score

Data Analysis

Risk Analysis

Risk Impact

Time taken

Parameter

Pages

Information on third party assessors Additional Information to investors 1 1 1 3 1 1 1 1 1 2 1 1 2 1 0 1 1 3 1 1 1 1 1 0 0 1 1 3 2 3 2 2 2 0 3 2 1 2 2 2 2 1 3 2 1 3 2 1 2 2 2 0 2 2

General Aesthetics and lucidity Industry Specific Disclosures Helping investors understand underlying business Performance drivers

Management/Directors information

Corporate Citizenship

Comparative Analysis

Overall Ranking

HDFC Bank ITC Reliance Capital Adani Enterprises SBI Ranbaxy ONGC Idea DLF Adani Power Mundra Port Ackruti City HDIL 3i India Coal India Godrej Consumer Products Asian Paints Lupin RCOM Colgate 3M India GAIL Unitech Bajaj Auto PNB Cipla Tata Communications

36 36 36 39 40 40 42 42 44 45 46 46 46 49 50 51 51 51 51 55 56 56 58 59 60 61 61

156 176 114 132 146 155 256 86 194 106 76 123 87 146 210 156 140 91 124 60 76 240 114 107 111 103 147

18-Apr-11 20-May-11 30-Apr-10 12-May-11 17-May-11 12-Mar-11 30-May-11 06-May-10 23-Jun-11 09-May-11 10-May-11 30-May-11 27-May-11 28-Apr-11 12-May-11 02-May-11 10-May-11 12-May-11 15-May-10 00-Jan-00 28-May-11 23-May-11 29-May-11 18-May-11 04-May-11 29-Jun-11 31-May-10

3 3 3 3 3 3 3 2 1 2 2 2 2 2 3 1 3 2 2 3 3 1 1 2 2 1 1

2 2 2 2 2 3 3 2 3 2 2 2 3 2 1 3 3 3 2 2 2 2 2 3 3 1 2

1 2 2 3 2 2 3 2 3 3 3 3 2 2 2 1 2 2 2 2 3 1 2 0 1 2 1

3 3 2 3 2 3 3 3 3 3 3 3 3 3 3 3 2 3 2 2 3 3 2 3 2 2 2

2 2 3 3 2 2 2 2 3 3 3 2 3 2 2 2 2 2 2 2 1 3 2 2 1 1 1

2 2 2 1 2 2 3 3 2 1 2 2 2 2 3 2 2 2 2 3 1 3 2 3 0 1 1

3 2 3 1 3 2 1 2 2 1 1 2 1 2 2 2 2 2 2 1 2 0 1 0 3 1 2

3 2 1 2 3 2 1 1 1 2 1 1 1 2 1 2 1 1 2 1 1 1 2 1 3 2 1

2 3 1 1 2 1 2 1 1 1 1 1 1 2 2 1 1 1 1 1 2 2 1 1 2 1 1

1 3 1 1 1 2 3 1 1 3 1 2 1 1 1 2 1 1 1 1 2 2 1 1 1 1 1

2.25 2.25 2.25 2.20 2.15 2.15 2.10 2.10 2.10 2.05 2.05 2.05 2.05 2.00 1.95 1.95 1.95 1.95 1.95 1.90 1.85 1.85 1.65 1.60 1.40 1.35 1.35

40

Aggregate Score

Data Analysis

Risk Analysis

Risk Impact

Time taken

Parameter

Pages

Exhibit 26: Sector-wise scores of company reports Sector Auto Banks Conglomerate Financial Services FMCG Healthcare Infra IT-ITeS Metals & Mining Oil & Gas Realty Telecom Aggregate 6 6 7 6 5 6 4 5 4 62 2.33 2.26 2.17 2.33 2.58 2.33 2.30 2.02 1.95 2.24 0.20 0.75 1.30 0.65 0.90 0.65 0.80 0.60 1.05 1.55 Companies Mean 3 5 5 2.12 2.08 2.29 Range 0.85 1.10 0.65

41