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Towards fuller disclosure

Three recent initiatives of the Securities Exchange Board of India are likely to influence investment decisions by many classes of investors. Probably the most significant of these is the move to compulsorily rate all initial public offers of equity shares (IPOs) by any of the four well-established rating agencies in the country. Such a step is unprecedented. Even in the developed markets there is no such regulatory insistence. In India, it is only recently that even debt ratings have come to be accepted by the issuers as well as investors. But for the big regulatory push given to mandatory rating of fixed deposit schemes of companies since early 1998, debt ratings would not have become popular. However the expectation that equity ratings also would gain universal acceptance might be belied. The methodology of rating equities differs fundamentally from the one used for debt evaluation. Debt ratings, barring in exceptional cases, do not change over a short period. That is one reason why investors find them useful for assessing their risks and returns. Investors in equities are far more likely to be guided by the price of scrip rather than by rating symbols. Besides, thanks to SEBI, the quality of disclosures in the offer documents has substantially improved and even small investors are taking note of them. A rating symbol for all its simplicity — it will be in a numerical scale — might lull investors into complacency.

The decision to permit short selling by institutional investors is to be welcomed for a number of reasons. It should, over time, increase stock market liquidity and check volatility in share prices, as there would always be a large institutional investor willing to take a contra position and sell shares when the market rules high. A notable institutional advance is the development of a vibrant stock lending mechanism. Investors who sell shares short will have to necessarily borrow them from an intermediary specialising in the business. SEBI has done well in asking real estate companies to make much more comprehensive disclosures in their offer documents, especially about their "land banks." Recently some of these companies have commanded unrealistic valuations on the basis of their claims of land ownership and development, which in fact are mere agreements to sell, whose true value is much less than claimed. By insisting on transparency through fuller disclosures, the capital market regulator might be doing a signal service not only to the share markets but to the property market as well. Along with the Reserve Bank of India, which has for quite some time been cautioning against a real estate bubble, SEBI seems to be applying the brakes on overheated property markets.

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