Exposés about Indian companies indulging in questionable accounting or governance practices are cropping up from rather unexpected sources, of late. It started with large institutional investors and their research arms turning activist, citing such practices to give ‘sell’ recommendations on individual companies’ stocks. Now, a new set of ‘proxy’ advisory firms have emerged, who dissect shareholder resolutions and issue public advisories on voting on them. Given the many instances of related party transactions or non-adherence to accounting standards in the Indian context, there is no doubt that the investment community would benefit from an evolved public debate on governance issues. To that extent, the latest trend is welcome. But what the regulators must also recognise are the risks to investors, from a variety of non-statutory entities putting forth their opinion on a company’s prospects or financials.

The most obvious of these, flagged in the recent exchange between the Indiabulls Group and Veritas, an independent equity research firm, is the possible conflict of interest inherent in the situation. When a research firm alerts retail investors to accounting malpractices in a listed company, should the fact that it has already sold its insights to another investor ahead of a wider public dissemination also not be put in the public domain? Even where such a research outfit claims no affiliation with any broking outfit, as Veritas has, institutional investors who get access to these ahead of ordinary investors do gain an unfair trading edge. A related aspect is the sobriety of opinion advanced. Should such an advisory also talk of how a company’s share is a ‘sell’ at any price? In theory, a business can be valued at zero. But, in practical terms, to say that the shares are not worth even a paisa is the height of arrogance. While free speech is fine, it is a well settled principle that such expression should be balanced and fair.

Granted that these are, perhaps, not the best of times for the Indian market regulator to be contemplating rules for investment research firms, especially when it involves something as fundamental as freedom of expression. But it must be done. SEBI should be guided by the dictum that those who claim to be espousing the cause of public interest cannot be averse to disclosing some essential aspects – ownership pattern, personal holdings, etc – of their operations, to the investing public. For no other reason but that such disclosure will only help retail investors assign a better rating to the quality of the advice tendered.

Of course, even with all these checks and balances, research firms cannot stand in for alert shareholders or auditors of companies. Given the complexity surrounding the financial statements, accounting policies and subsidiary operations of companies today, it is institutional investors such as mutual funds, insurance companies and pension funds that are best placed to raise the bar on governance. Getting them to play a more activist role in corporate decisions, and mandating public disclosure of their voting decisions, may be the best way forward.

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