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Cautious investors have new friends — analysts from brokerages. Mainstream brokerage analysts, once happy writing about the rosy picture of the India growth story, are venturing into some not-so-clean areas of corporate India.
While companies at the receiving end have either ignored or rubbished them, such reports have gained momentum.
In a space of a few days, at least five companies from diverse sectors have faced the wrath of brokerage analysts, who questioned their accounting practices, utilisation of cash and other governance-related issues. In a few cases, they even downgraded the company in question to a “sell”.
Shriram Subramanian, founder of Ingovern Research Services, an advisory firm that deals with corporate governance issues, said, “In good times, all brokerages come with buy recommendations. But when times are bad, you need to dig deeper and find value. That’s what they are doing.”
Towards the end of May, Portugese broker Espirito Santo slammed Biocon and Educomp Solutions. In Biocon’s case, the accounting treatment of a couple of deals was questioned, while Educomp was accused of certain conflicts of interest in the appointment of auditors.
Even Sensex firms such as mortgage lender HDFC and IT major Infosys have not been spared. Earlier this month, Macquarie Securities downgraded HDFC on charges of dodgy accounting practices — charges the company trashed. Infosys’ Rs 20,000-crore cash drew concerns from analysts at Kotak, Motilal and Barclays.
While scams and scandals over the past few years, beginning with the Satyam Computer scandal, have sensitised investors to such issues, over the past year the income stream of brokerages has seen a shift from the traditional corporate to investors, say analysts.
“In tough market conditions, only the good and clean companies can survive. With public issues drying up, equity research has become the bread and butter of brokerages. What is keeping brokerages afloat are the investors, who are also buying their research,” said one.
Saurabh Mukherjea of Ambit claims to be among the earliest to spot this broader drift towards corporate governance a while ago. Rightly so, because Mukherjea had started the India practice of the UK-based Noble as its research head. As early as 2009, Noble had published a report on creative accounting practices and promoter tricks such as “pump and dump” and “blab and grab” soon after the Satyam and Pyramid Saimira scandals.
Noble was later bought by Execution and became Execution Noble. In 2010, Execution Noble was acquired by Espirito Santo. While Mukherjea moved to Ambit Capital, some of his team members stayed back.
Espirito Santo says it has “benchmarked reporting standards in India versus developed markets and found several areas where reporting and corporate governance can be improved.”
Both Espirito and Ambit have been rating companies on corporate governance and accounting practices for a while. The Canada-based Veritas, which has come up with occasional, sensational reports, has been routinely criticised for allegedly one-sided views.
Though most companies routinely rubbish or ignore them, some experts say they contribute to the diversity of opinion in the markets, which even regulators prefer. Recently, the regulator itself set up a forensic accounting cell to monitor accounting practices.
Some brokers like Nirmal Bang have gone beyond financials and research reports by arranging for investors to talk to the union leaders of Maruti and Arvind facing labour trouble. Rahul Arora, CEO, institutional equities, Nirmal Bang, said, “We have reached a stage where people want to know every side to each story.”
Varatharajan S of ICICI Securities, SVP and head of research, said, “Companies have always been rated (by the market) on their disclosure level. This wasn’t as talked about as now, possibly because in the past it was largely with relatively small companies.”