What investors want

Setbacks to growth plans are more likely to be forgiven than opacity and fudging of numbers

The initial reaction to a long-overdue correction dissolved into panic as the slide of mid and small caps that began early May continued over two months. Of late, even large caps seemed to be losing their stamina in their climb to catch up. An across-the-board secular direction irrespective of performance, usually indicating over- or under-valuation, troubles investors. They are braced up for alternate cycles of boom and bust as they know that policy makers will tighten liquidity to prevent bubbles and loosen money supply to borrow and spend. What investors are not prepared for is disturbing of established agreements. The flooding or starving the market of lubricants essential for smooth operations such as oil by oil producing and exporting countries unnerves them. They detest uncertainty. There seems to be no clarity as to how the US and China trade war is going to conclude. Nasty shocks throw them off-balance. The overhang of social obligations and political considerations in taking business decisions had not diminished investors’ enthusiasm for public sector bank stocks, considered the best vehicle to ride India’s growth trajectory. The magnitude of the investment risk became evident after the Reserve Bank of India narrowed the time-frame for recognition of bad loans from six months to 90 days, restricting operations of banks under prompt corrective action. Investors are prepared to live through turmoil if they know the outcome. Selective picking of mid and small caps by the market regulator for tighter surveillance to nip price manipulation appears right. What they are not sure of is the objective. The selection signifies corporate governance deficit and thereby a warning to keep away or an intervention to cool prices and therefore afford an opportunity to enter at a lower level.

Investors love road maps. Monetary authorities give indications of their approach on policy rates during the course of the year. The inclination is not to cause unnecessary volatility in the equity and debt markets. No wonder many governors of central banks assume rock-star status. Investors are attracted by policies creating higher consumer spending. What they are not reconciled to is to companies growing their sales because of limiting competition. Leadership position due to being first-mover is embraced but not monopoly status that does not encourage cost-efficiency. Long-term capital gains tax on equity is just when the principle is that all income must be taxed in a fair manner. The move is unjust when the revenues are spent on short-term measures such as loan waivers and hiking support prices for farm produce. Investors do display patience while promoters rehabilitate their company following errors of judgment. Inexcusable are issuing bonus shares and announcing grand expansion plans to divert attention from the shoddy performance and reckless raising of capital.

Missteps by companies in spending capital on expansion or downturns in an industry due to change in consumer tastes and technology are eventually forgiven. What are not are siphoning off funds, related-party transactions and window-dressing. The spate of resignations of auditors has spurred questions about the authenticity of numbers of even earlier years. The new accountants of a company that was hammered because the predecessor made an issue of inadequate disclosure of material information have found no evidence to substantiate the claim.  The result is confusion rather than transparency. The problem is while figures can be validated, the quality of governance becomes a victim of subjective assessment.  The failure of a bank chief to disclose conflict of interest while being part of consortium that granted loan to a company that had invested in a family member’s business can be viewed as an oversight as well as lapse of judgment. The market does not seem to have a uniform rule to weigh on such ambiguous matters. In contrast, shares of a jeweler whose co-promoter gifted some shares to a related party was beaten and so also of a tech company for investing in the ornament maker. What follows in an indictment of the entire group that share common characteristics with those found wanting of their fiduciary responsibility. No wonder investors feel irritated due to opportunity missed if the blacklisted category resumes its strides after a time gap. Like fast food, quick judgments, investors have now reckoned, are injurious to health. The valuations at which a public sector player will take exposure to an ailing private bank will leave ample space for capital appreciation compared with if it were to buy into a profitable venture. The long tenure of redemption of policies puts the insurer in a unique position to pluck such low-hanging fruits.

-Mohan Sule