Branding: Costly for investors

Suresh Krishnamurthy

THE week gone by had two curious developments. First, there was a report that the SEBI committee had frowned upon naming fixed-income products such as Safety Bonds, Flexibonds and so on. Before one could make out what the fuss is all about, the ICICI comes out with the news that the Big-B would from now on endorse products such as ICICI Safety Bonds.

Judged in this context, it does appear that the committee's viewpoints were justified.

If finance companies, including the institutions, are going to indulge in naming their fixed-income products solely for the purpose of differentiating various fixed-income products issued by the same company or other companies, then naming certainly has a positive role to play, especially in informing investors. However, it does create problems when the naming develops into a branding exercise.

Now, branding costs money. For example, the ICICI jingle advertising `safety bonds', the endorsements by stars, are likely to come only at a cost. Now this cost, or at least a portion of it, would be passed on to the investor in the form of lower coupon rates on fixed-income products. An investor would lose money solely because he liked the ICICI jingle or because he decided to take the advice of Mr Amitabh Bachchan. This is hardly a desirable development.

Another problem created by branding is that it may lead to companies raising money from the market at rates which are not in alignment with their financial condition. Companies which have raised funds from the market, such as Sundaram Finance and HDFC, and also have a reputation for financial integrity, benefit from considerable investor support. This allows them to raise money at fine rates at most times even if their financial position has deteriorated.

While this franchise factor may be justified as having a reasonable basis, branding can create a similar benefit for even companies that do not have a track record. For example, a `safety' tag that has nothing to do with the character of the instrument may be misunderstood by the investors as a fund that guarantees safety of payment. This perception reinforced through constant advertising and endorsements can make an investor part with his funds even if the rates offered are lower than what the market offers. Essentially, branding can distort the information conveyed and lead to anomalies in the capital market which are best avoided.