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Yesterday, at a Workshop organised by Economic Times (ET) Power Of Ideas and CIIE, IIM Ahmedabad, I gave a presentation on ‘Legal Aspects for a Start Up’. You can view the same below. Do send in your feedback.

Legal Aspects for a Start Up

The Ministry of Corporate Affairs (MCA) has earlier today notified 35 Accounting Standards which have been converged with IFRS*. The notification can be found here.

The converged accounting standards (to be called IND AS) are 1, 2, 7, 8, 10, 11, 12, 16, 17, 18, 19, 20, 21, 23, 24, 27, 28, 29, 31, 32, 33, 34, 36, 37, 38, 39, 40, 101, 102, 103, 104, 105, 106, 107 and 108. The details of each of these is at the end of this blog. The relevant MCA website link is here.

While the industry widely expected a tactical delay in the implementation, this has not happened. While the MCA notification mentions that the date of implementation of the IND AS will be notified by the Ministry at a later date. We believe that it is now unlikely that the implementation would be pushed beyond 1 April 2011. The original schedule for the phased implementation of IFRS is detailed below.

# for all reporting periods starting on or after this date, and comparable financial figures to also be provided.

Details of the 35 IND AS:

* IFRS stands for International Financial Reporting Standards

2010 was an eventful year in more ways than one. Corporate performance is now seen in all hues. From a spectacular growth in the stock market and amazingly good / bad primary market listings to corporate frauds and press manipulation we have seen it all in the past twelve months.

Amidst all this chaos corporates are out there either raising money or attempting to raise valuations. How do they (corporates) gauge (a) investor interest and (b) investor confidence in their company? How many corporates have an effective investor relations strategy? Does anyone have and follow a code of conduct for corporate governance? and numerous other such questions.

To me this clutter and chaos should force corporates to pursue an active investor relations strategy and corporate governance code of conduct. However what should any management which does not intend to raise money or is not enthused by higher valuations do? Should they have an active investor relations strategy or a passive one will suffice? I believe that management’s of listed entities have the fiduciary responsibility towards its shareholders, especially minority shareholders. It is these shareholders’ who had faith and have invested in the company. This makes it their right to know and stay informed about the company on an ongoing basis. The other side of the coin is that it is the managements’ duty to continually let its investors know about the events at the company.

In the last few days I have been thinking and debating about the timing for quarterly communications to reach existing investors. Here I am not talking about the press releases in newspapers or investor presentations sent only to institutional clients. Its also about the timeliness of the communication received by other investors – read retail investors.

What should be the ideal time for them (retail investors) to receive these newsletters or communication? I believe the ideal time is three days with one day for the printing and two for the postal communication to reach the investor. As a retail investor I don’t think it is too much to expect. We should remember that news articles and research reports are available to them by the next day, and hence I believe that any delay beyond three days does not serve the purpose of retail investor communication.

I also believe that the communication to retail investors (as compared to institutional investor communication) needs to be in easier to understand language and in a simple two page format. Anything more and the investors’ interest in reading it is lost.

When I write and design retail investor communication, I try to stick to the two-page rule with the following sections

1. Key highlights – business and overall financial performances
2. Segmental highlights and results
3. Reasons for deviation from expectations of the management
4. Management’s perception of the outlook for the rest of the fiscal and the next year

An additional page can contain the reported financial results for the investors’ ready reference.

In India, a lot of the retail investors are now web and email savvy. Corporates should start accepting requests for email communications from both investor and potential investors. I know a few corporates already do this, and this I hope catches on with the others.

To sum up, I believe and encourage all my clients to use my two-three rule, i.e. keep the communication no longer than two pages and do not delay it beyond three days.

The SKS MicroFinance spat involving the founder-promoter Vikram Akula and the board on one side and the erstwhile CEO Mr Suresh Gurumani continues. In the past two weeks while none of the sides have openly traded allegations, media reports indicate that the spat is still very much alive.

Analysts across the board have agreed that such a sudden change in management is not good for the company and its perception with investors.  Mr NR Narayan Murthy’s (of Infosys fame) PE fund Catamaran has a stake in SKS Micro had reportedly advised the company to make a statement clarifying the details of sacking Mr Suresh Gurumani. The news article also states that a draft statement, circulated amongst board members, mentions investors requesting Mr Vikram Akula to return to a full time operational management position. This is purportedly the reason for the sacking of Mr Suresh Gurumani. However we do not believe this is the full story as in such as case Mr Suresh Gurumani would have been given another profile within the company or given adequate time to decide and move on. A sudden departure is always seen with suspicion.

SEBI, the regulator, has also asked the company to explain the reasons for sacking the CEO. SKS Micro has apparently responded to the query.

It has since transpired that Mr Suresh Gurumani, though sacked as the CEO, continues to be a director on the board of SKS Micro on the back of a Andhra Pradesh High Court Order. The order requires the company to continue Mr Suresh Gurumani as a director of the company. A bigger boost for Mr Suresh Gurumani is that same order also prohibits the new management and / or the CEO from taking any major policy decisions.

We believe that this is in essence bad corporate governance. We expect companies to be more transparent in their major policies, including those related to human resources. The top management drives policies which in turn is likely to drive growth. Any sudden changes therein unsettles investors and undermines the seriousness of founders to professionalize the management. Today’s board and management should remember that investors are well aware of inter-personal friction amongst management, and an open address of the issue is more appreciated.

The board of SKS Micro is slated to meet again on 22 October 2010, and Mr Vikram Akula and Mr Suresh Gurumani are both expected to be present. For investors, we can hope that the board first debates and approves the second quarter (Sept-2010 end) results and then debates the on-going issues within the management.

Since this was the first result declared after the company’s IPO during July-August 2010, I think it was nice of the management to present comparable financials for the previous year comparable quarter (June 2009) and preceding quarter (March 2010) as well. The management also mentioned that the business is cyclical with larger business being derived in the 2nd half (Oct to Mar). It is interesting to note that while the management has indeed provided quarterly disbursements for the past three years, none of the other data, including the Income Statement (Profit & Loss Account) have not been provided for the other quarters (i.e. not provided for quarters ending Sep-09 and Dec-09). In light of the management’s own admission that their business is cyclical and the fact that these were the first results declared after the listing the financial details for the intervening quarters would have helped analysts better.

It should be remembered that beginning October 1st we have entered the earnings season for the second quarter results, i.e. for the quarter ending September 2010; while SKSMicro has declared these results for the first quarter, i.e. quarter ending June 2010. Hence, I believe that these results for the first quarter, i.e. June 2010 could have been announced earlier.

One surprise, and investors do not like surprises – especially without explanations – was the firing of the CEO. Though the whole new management team was announced, the reasons for firing the erstwhile CEO was only hinted at during the conference call as performance related. Having ensured a spectacular listing, investors were left guessing the nature of performance issues within the management. This, in short, isn’t being investor friendly or transparent within a few months of listing. A recent example is that of Mark Hurd, the ex CEO of HP. While he was fired, the Board of HP in clear words spelt out the reasons for the same. Whether investors agree with it or not; or view it as too harsh is a separate matter – the fact is that HP clearly laid out to the investors the reasons for firing its CEO. That is indeed being transparent.

The result presentation is available here.

Since this was the first result declared after the company’s IPO during July-August 2010, I think it was nice of the management to present financial results for the previous year comparable quarter (June 2009) and preceding quarter (March 2010) as well. The management also mentioned that the business is cyclical with larger business being derived in the 2nd half (Oct to Mar). It is interesting to note that while the management has indeed provided quarterly disbursements for the past three years, none of the other data, including the Income Statement (Profit & Loss Account) have not been provided for the other quarters (i.e. not provided for quarters ending Sep-09 and Dec-09). In light of the management’s own admission that their business is cyclical and the fact that these were the first results declared after the listing the financial details for the intervening quarters would have helped analysts better.

It should be remembered that beginning October 1st we have entered the earnings season for the second quarter results, i.e. for the quarter ending September 2010; while SKSMicro has declared these results for the first quarter, i.e. quarter ending June 2010. Hence, I believe that these results for the first quarter, i.e. June 2010 could have been announced earlier.

One surprise, and investors do not like surprises – especially without explanations – was the firing of the CEO. Though the whole new management team was announced, the reasons for firing the erstwhile CEO was only hinted at during the conference call as performance related. Having ensured a spectacular listing, investors were left guessing the nature of performance issues within the management. This, in short, isn’t being investor friendly or transparent within a few months of listing. A recent example is that of Mark Hurd, the ex CEO of HP. While he was fired, the Board of HP in clear words spelt out the reasons for the same. Whether investors agree with it or not; or view it as too harsh is a separate matter – the fact is that HP clearly laid out to the investors the reasons for firing its CEO. That is indeed being transparent.

The result presentation is available here.

This is a new post in a long long time. Be rest assured that I shall now be regular in updating this blog and it shall indeed be alive once again.
During this result season – Q2 FY11 (Jun-Sep 2010) – I shall not analyse the financial results of companies. Here I intend analyse the management’s reporting and corporate governance standards. What I shall also attempt doing is to highlight – without prejudice to the management – how the results releases from investors and analysts point of view could have been more meaningful. Do note that I shall not have access to any more or less information than analysts, and hence I indeed would be biased to that extent.
I shall, thus, focus more on investor relations and corporate governance related facets and issues; and from time to time also give my take and analysis on the various economic parameters.
Do send me feedback if I should also be covering some other critical aspects.
I will look forward to your bouquets and brickbats.

Event: The CERC (Central Electricity Regulatory Authority) earlier today released draft regulations for power trading margins (open for public comments till 10th Nov.,2009).

Impact: We expect this to have a neutral to positive impact on all power trading companies.
The key take-away from these regulations is increase in margins for power traders, from the present flat rate of 4 paise per unit to 1.5% of the purchase price (subject to a maximum of 7 paise per unit – if sale price is more than Rs3 per unit, and maximum of 4 paise per unit – if sale price is less or equal to Rs3 per unit). These regulations are applicable for short-term trades, either through bi-lateral agreements or through any of the power exchanges.

PTC India (Not Rated)
We believe that these regulations, if finalised, would be positive for the company. PTC India is the largest power trader in India with a huge ~40% share. The company derives 44% of its volumes from short-term power trades (FY09: short term power traded volume: 6,064 mn units; total power traded volume is 13,825 mn units). The average selling price for the company was Rs4.60 per unit in FY09, and the average margin was 3.66 paise per unit. Given the company’s revenue and volume composition, we believe that these new regualations can only help the company increase its profitability as all the increases in the regulated margins would flow directly to the bottom-line.

Note: Our assumptions include increase in average trading margins from 3.66 paise per unit to 6.0 paise per unit, and a 20% growth in volumes. In Q1FY10 PTC India’s power traded volumes were up 56% YoY to 4,204 mn units, with average realisation at Rs5.64 per unit and margin at 5.21 paise / unit.

PTC current trades at ~25x the FY11 consensus EPS of Rs4.22. We expect these estimates to be upgraded by at least 60%-70%, indicating that even after the today’s run-up in the stock price, PTC India trades at ~14.8x FY11 estimated EPS.

The other players that could benefit include Tata Power.