• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Aarati Krishnan

LOOK through the segmental financial reports of Hindustan Lever and you will find that of the total loan and shareholder funds of Rs 3,043 crore available to the company, only Rs 509 crore is directly deployed in various business segments in which it operates. A whopping Rs 2,534 crore is disclosed as "unallocable" capital employed.

As the notes to the accounts clarify, "unallocable corporate assets relate mainly to investments." This is but an indication of the significant role that management of investments play in determining the performance of Hindustan Lever.

Well, Hindustan Lever is but one of the leading Indian corporates for which investments appear to be a bigger business segment than any of its core marketing and manufacturing operations. The above infographic illustrates how much of their capital some leading Indian companies deployed in their investment activities.

Yet, while the operational performance of a company is dissected, scarcely any attention is paid to the returns from their investment activities. This is partly because of the paucity of data on the company's investment operations.

While there is a fairly rigid framework dictating how a company should disclose the results of its operations, there is scarcely any disclosure requirement for its investment operations. This makes it extremely difficult for an investor to gauge exactly how a company's investments fared in any particular year.

For one, it is quite difficult to gauge from a company's balance sheet exactly how much of its income was attributable to its investment activities. Most companies do disclose interest and dividend income, and profits and losses from investment trading in their annual reports. But the lack of details and the lack of standardisation in how the disclosures are made make meaningful analysis difficult

. For instance, most companies bury their interest and dividend incomes under the innocuous head of "other income", providing no detailed break-up of income from subsidiaries, trade and non-trade investments.

To complicate matters, a few companies net out interest income received from some debt investments, from the interest paid during the year. A few include the profits or losses from investment trading in their profit and loss accounts, while others disclose it as an exceptional item.

Second, even if an investor does manage to total up all the components of investment income from different parts of the balance sheet, he would find it extremely difficult to arrive at a return on investment. When a company's investment portfolio is turned over several times in a year, the opening and closing balances of investments provided in the balance sheet may not give a correct indication of the average investments held by the company during the course of the year.

(For the above analysis, investment returns were computed on a simple average of the opening and closing investment balances for the year).

Given the large proportion of shareholder funds that are deployed in companies' investment portfolios, there appears to be a strong case for toning up disclosure requirements pertaining to a company's investments. A detailed schedule of investment income, broken up into various components, such as dividend, interest, profits and losses from trading on investments, may be a useful addition to the balance sheet.

Separate disclosures of returns earned from investments in group companies (by way of interest on bonds and dividends on equity/preference shares) may also help investors gauge how well investments in group companies are faring. A disclosure of monthly average investment balances held over the year may help the investor gauge the true size of a company's portfolio.

Finally, where investments take up a significant portion of capital employed, there may be a case for treating investment operations as a separate business segment. In this case, investment operations would be subject to all the disclosure requirements now governing the segmental reporting of a company's core operations.

Send this article to Friends by E-Mail

Stories in this Section
Nursing his portfolio through tough times

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line