What to do when you're the last to know

Sanjiv Shankaran

ANY judgment can be made only if there is adequate information.

The thumb-rule is the more accurate and timely the flow of information, the better the judgment. Access to quality information, therefore, is critical for an investor.

And this is where the problem of selective disclosure arises. The information that circulates among investors is not quite the same. This is a problem with equity markets across the world. Select players, loosely described as institutional investors, seem to have better and faster access to more sensitive information, which gives them an edge in making a call on a stock.

The way the financial sector has evolved over the last few years provides an insight into what is happening. Institutional investors have grown in importance, with mutual funds and investment banks becoming increasingly sophisticated. This puts them in the powerful position of being able to influence the price of a stock in the secondary market or the level of subscription in the primary market.

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In this backdrop, in an increasing number of cases, companies brief institutional investors separately -- and presumably, in great detail. For example, a telecom company which recently approached the primary market to raise huge resources separately briefed institutional investors, giving more relevant information than that given to the ordinary investor.

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An interesting background to the principle of selective briefing for investors is that in the US -- the role model for most markets -- companies were allowed to brief certain investors separately. Institutional investors had the exclusive right to receive more information because conventional wisdom mandated that they were the ones with the savvy to separate fact from fiction. The others were presumably ill-equipped to do so, and had to depend on the crumbs thrown by institutional investors.

Over the last few years, this thinking has changed, and it is believed that everybody has the right to the same quality of information. The law in the US has been suitably amended to reflect this new thinking.

The issue is straightforward: Either have different rules for different people or let everybody enjoy the same benefits. There is no compelling reason to conclude that only some investors should have access to detail. What is good enough for an institutional investor ought to be good for others too. If some do not have the skill to deal with the information, they always have the option of entrusting their money to the ones who do.

Recent trends indicate that India is slowly moving towards a stage where everyone will come close to having access to everything that a company puts out. A couple of financial web sites have begun to reveal the information that companies put out at analyst meets -- a platform that makes a huge difference to the kind of information institutional investors may access.

There is also a trend of companies -- though few now -- taking the initiative to disseminate widely the presentation made to analysts linked to institutional investors. This goes a long way in giving other investors a fair chance when they study the available information to make a judgment call.

But even when the average investor can heave a sigh of relief at the direction in which the market is moving in relation to information dissemination, it may be too much to expect radical changes.

The underlying reason for selective disclosure is unlikely to change -- that is, some investors are in a powerful position to influence the flow of resources into a company's stock. This, then, makes it tempting for companies to help the flow of resources with extra information.

No amount of mandates can really prevent companies from disclosing more to some investors. While one line of reasoning is that spreading information widely and evenly will eventually help the companies, it is unlikely that such an ideal situation will ever prevail.

All the mandates by the Securities and Exchange Board of India (SEBI) will only reduce the extent of disparity in the flow of information. It is unlikely to ever eliminate the inconsistency. In this context, retail investors will have to tailor their strategies to a situation where they may always be the last to know of momentous changes.