April 03, 2010

life in financial markets: (part 1) pending reforms

There are many issues in the financial market system that needs improvement. I am starting a series listing these issues one by one.

This first one in the series is on the disclosures that are made "as of xyz date'.

Why 'as on' is average and 'average' is superior!

Detailed and fully audited financial statements of companies in India and most other global markets are disclosed once a year within 1-3 months of the end of the financial year (FY). The FY, for accounting and statutory reporting purposes, in many jurisdictions including India, is from 1 April of a year to 31 March of next year.

Listed companies have to file their stand-alone and consolidated audited financial statements with the stock exchanges once a year. The Balance Sheet and Profit & Loss Account are the two main financial statements in this disclosure process. Unlisted companies, too, have to file these statements within a few months (six months is the limit in India) of the end of every FY.

Listed companies have the additional stock-exchange-listing-agreement requirement of disclosing un-audited or audited revenue and expenditure statement once every quarter. Mutual funds, too, have their statutory disclosures of portfolio holdings and fund/scheme accounts once or twice a year.

Except for the Profit and Loss (or Revenue and Expenditure) statement the statutory disclosures (such as Balance Sheet and Portfolio Holdings) are as of a particular date like 31 March, 30 September, 31 December or other month ends. The Profit and Loss Account is for the whole year -- an aggregate of amount earned, spent or provided for during the entire year.

My contention is that disclosures 'as on' a particular date is not enough for investors, regulators and members of the public. It provides only a snapshot of the financial position or other relevant position as of one single day. And if that snapshot is all you have to go by for months and upto a year then you are losing out heavily in a financial marketplace where fortunes are made or lost in days or weeks and not months or years.

I think regulators, worldwide, should immediately require companies, mutual funds etc to make additional disclosures of their Balance Sheets or Portfolio Holdings in 'average during 'xyz' months' format.

As an investor, I want to have a clear idea of how a company or a fund fared on most days rather than a single day. In this day and age of advanced computing technologies there is no reason why a company or a fund can not have daily or weekly Balance Sheets and Portfolio Holding Statements. They need not disclose these to investors every day, week or month but the least they can do so is give the daily, weekly or monthly averages for a longer duration disclosure (year or 6 months or a quarter). For example, to arrive at an average figure for a year, take 365 daily, 52 end-of-week or 12 month-end data points of 'as on' positions, sum them up and divide by 365, 52 or 12. Similarly, to arrive at an average figure for a quarter, take 92 daily or 13 end-of-week data points, sum them up and then divide it by 92 or 13.

That day will be a very welcome day when a company's annual and quarterly financial statements gives us the average position of Balance Sheet items for the full year. Similarly, we would love to see mutual fund's monthly/quarterly/half-yearly portfolio holdings contain averages of all their holdings during the month/quarter/6months.

In India, the Securities and Exchange Board of India, the Reserve Bank of India and the Government of India's sub-Ministry of Corporate Affairs under the Ministry of Finance ought to move in quickly to mandate these additional 'average during...' disclosures.

No comments: