If you own a portfolio of shares or are looking to invest in one, here’s a vastly under-rated source of information for your research — the company’s annual report for 2014-15.
If you thought annual reports contained only dated financial information, recent changes to the Companies Act and SEBI’s listing agreement rules have enhanced the qualitative disclosures in annual reports.
Here are five new nuggets of information that you will find extremely interesting.
Top management pay Annual reports were always required to lay down the break-up of the pay packets for their directors including their MD, CEO and other key personnel.
But this year on, they are required to disclose far more — the ratio of remuneration of each whole-time director to the median (average) employee of the company, the increase in pay for top employees compared to other employees and the increase in top management pay relative to the company’s performance.
These are useful bits of information to gauge if a company’s top managers or directors are overpaid in relation to the company’s staff and peers in the industry. From the newly minted annual reports for instance, you come to know that ICICI Bank’s MD & CEO had a compensation package that was 97 times that of the median employee, while other directors took home 62-65 times. Axis Bank’s CEO earned 74 times the median employee’s pay. The total pay of ICICI Bank’s directors increased 12-15 per cent in 2014-15.
This was in step with the company’s profit growth of 14 per cent, but way ahead of the increases in employee salaries of 5 per cent.
What top shareholders did Apart from disclosing their broad shareholding patterns, listed firms are now required to provide details of what their top shareholders did with their stock in the past year.
These disclosures are useful to gauge if promoters have been pledging or revoking the pledges on their share, or if a firm’s promoters are buying into, or selling out of the firm. The details on what the top ten non-promoter shareholders did can be even more interesting.
This is a good gauge of what key FIIs and domestic institutions such as LIC are doing with their holdings. VA Tech Wabag’s latest annual report reveals that the Government of Singapore, which is a top institutional shareholder in the company, has been trimming its stake, bringing down its stake from 2.45 per cent to 1.18 per cent over 2014-15.
Dealings with related parties Companies entering into sales, purchases and other deals with their top managers, promoters, directors or parent or associate firms is quite commonplace.
A tangled web of related party dealings can often be an indicator of poor governance. After all, related party loans and advances are the key route through which a company’s cash can be re-directed to group firms or promoters. While old rules required companies to merely disclose all their related party transactions in their annual report, the new ones go one step further.
They require the Board of Directors to certify that such transactions are at market rates and at an ‘arm’s length’ basis.
If the transactions are not at market rates, the directors also have to justify why the transaction was entered into in the first place. But even arm’s length related party dealings can sometimes have interesting insights to offer.
The annual report of HDFC reveals that HDFC Bank, which sources some of the housing loans for HDFC, has the option to buy 70 per cent of such loans off its portfolio, each year.
How indebted is the firm Until now, getting a bird’s eye view of a company’s overall debt position was a herculean task, requiring you to look through multiple notes and schedules in the annual report.
Under the new annual report format, companies are required to present a single and simple statement that captures their overall debt position, broken up into principal and interest dues. The data includes indebtedness at the beginning of the fiscal year, changes through the year, reasons for the change and the debt due at the end of the fiscal.
Not only does this statement give you an overall, stripped-down view of the company’s debt position, it also captures the changes to that debt due to foreign exchange fluctuations or changes in interest rates.
What the company does If you’re not holding a company’s stock but are keen to research it in order to buy it for your portfolio, turn to the section in its 2014-15 annual report officiously tilted as “Extract of Annual Return: MGT 9”.
This multi-page section is required to lay down all the basic details about the company. This includes the date of incorporation and address, key activities of the company broken up by revenue, list of holding and subsidiary companies with the shareholding, identities of individual promoters and top ten other shareholders, shares held by key personnel and what the top managers and directors took home.
In short, this is a one-stop shop for all the initial information you may need before you deep-dive into a firm’s financials.