Mr. Debraj Banerjee, Associate Vice President,Corporate Strategy, Janalakshmi Financial Services
Mr. Debraj Banerjee on the importance of classifying information first before deciding whether there is information symmetry or asymmetry. Information could be data or ratios or it could be information provided by the management. Further, he stated that people like Warren Buffet did their own research rather than relying on company information. On Efficient Market Hypothesis (EMH), he said that it is something that one really cannot achieve. If one looks at market capitalization of companies listed in the BSE, it forms only 20 percent of the total industry capitalization. Further, he stated on the need to have an authority which regulates information issued by companies as they will look to go beyond their means to promote their companies and make them look attractive. He also stressed on the need to have clear and uniform financial reporting standards to bring about more transparency to the system. To end with, he spoke about how Janalakshmi Bank wants to make a difference to the banking sector and will look to cater to the class of people who rely more on the cash flow basis rather than the profit and loss basis.
Mr. Ganti Murthy, Head – Fixed Income, IDBI Asset Management
Mr. Ganti Murthy started the discussion by giving his view on market research. He said that information was available worldwide but it was the responsibility of the investor to filter the noise. The investor has to take the call as to where he should invest and how much to invest.Talking about Mutual Fund portfolio, Mr. Murthy said unrated investments should not be more than 20%. He threw light on the importance of credit rating agencies. Ratings are an investment factor and are critical third party opinions. On the contrary, he suggested that credit ratings should be taken into consideration along with other factors such as past financials, rating history and macro perspective. Talking about 2008 financial crisis he said the credit rating agencies, fund houses and RBI were all taken aback. He emphasized on the investment in safer mutual funds even though they give lesser returns. He asked whether research houses be part of a bank or brokerage house. He said nowadays more ratings, reports and brokers are available for retail investors to take informed decisions. Speaking of the growth of investors in India he said the strength of Mutual Fund industry has grown leaps and bounds and is now worth 13 lakh crores.
Mr. Rohit Rao, Director and Advisory Leader, Grant Thornton LLP
Mr. Rohit Rao spoke about the potential conflict of interests in the research house sector. He said that the research reports are not free of information asymmetry, and stressed on the importance of research firms being independent from the brokerage houses. He talked about the importance of being a savvy investor by looking at market trends rather than solely depending on research reports for making investment decisions. He also talked about the incentive structure of analysts. The lack of stringent guidelines are leading to more instances of collusion between research firms and brokerage houses, he said. He then went on to talk about reputational risks for the various players in the financial sector. Comparing the regulatory structure of US with India, he said that the regulatory mechanisms in India are weak and hence there are low reputational risks for firms operating from India.
Mr. Shreenivas Kunte, Content Director, CFA Institute
Mr. Shreenivas Kunte started off by discussing the concept of market efficiency. He said that the concept of efficiency rests on inefficiency and that the markets would always represent the overall inefficiency of the system. He then spoke about market predictions and the follies associated with it.
He went on to add that making correct long terms predictions of more than one year is next to impossible. Speaking on return on investments, he said that in the long run ROI would not exceed the performance of the underlying economy. Talking about analyst incentive structure, he agreed with the views of Mr. Rohit Rao and added that in most firms budgetary allocation of research departments are based on the performance of trading divisions. Hence potential conflict of interests are always high. He said that the discussions on new incentive structures are going on in European countries which could lead to lesser conflict of interests in the future. Speaking on reputational risks, he said that it could affect the entire country. A loss of faith in the system could even lead to outflow of FII investments from India, he said.