The Veritas Question: Who will Analyse the Analysts?

Yet another company report by Canada-based Veritas has made headlines and put in contrast the research by India-based analysts

 Equities analysts have the power of guns in their hands. 

With a single critical report they can bring a company stock down to its knees. But the artillery is of little use in India when there's a bazooka at their backsides ready to fire at the first hint of troublemaking by any analyst. 
    A foreign company, Veritas Investment Research, located more than 11,000 km away in Canada, critiqued, in June, Reliance Communications' accounting policies. And this month, Veritas recommended a "sell" on all stocks of the Indiabulls group. 
    Veritas, against which Indiabulls has filed charges, says it has no underwriting biases and no trading constraints. "We know that accounting is not standardised and easily manipulated and we do not hesitate to point out when a company is managing earnings or trying to hide something," the research company says. 
    The most prolific India-based producers of equity research are part of larger organisations that provide stock broking services as well as investment banking in many cases. 
    Annoying any large conglomerate puts these brokerage houses at serious risk of losing business from the targeted companies. Typically, these conglomerates have businesses, prospective deals, re-engineering plans, small and big M&A ambitions. All of these could yield fees in millions. 
    In such circumstances, no financial service provider is willing to take the risks of alienating companies on which they depend for profits. The hazard lies not only in the specific company, but also with other companies that could start keeping a distance for fear of being similarly targeted. 
    The most infamous case of an analyst allegedly getting hounded and losing his job happened in the '90s when foreign brokerages had just entered India and weren't aware of the considerable power and influence of large companies in this country. 
    The analyst, who market observers say faced the consequences of his critique, had studied a large conglomerate. The brokerage has since got absorbed into another firm, but this fundamental relationship between the analyst and the analysed hasn't changed much, although so many other things have changed in Indian business. 
    The monetary aspect affects not just the owners of financial service providers. Entry-level analysts' make about 6 lakh a year and star analysts can go up to 60 lakh with bonuses, taking the figure to 1 crore. 
    This is definitely not a figure to be sniffed at and it is certainly not wise to jeopardise a job when other brokerages too would slam the door on an ousted "trouble maker". 
    R Balakrishnan, a veteran in equities and former research head at DSP before its tie-up with Merrill Lynch, says bookkeeping standards too have dipped and accountants have been browbeaten into easier norms with the same stick deployed on financial services providers. 
    Accounting firms make most of their fees from large companies and not from filing returns for employees earning 36,000 a month with leave travel allowance to their native place, by the nearest rail route, of course. 
    In theory, shareholders should choose the company's accountants. For this to work, managements would have to place before the annual general meeting a list of four of five firms and ask the shareholders to vote on their choice. How many companies do this? 
    Typically, company managements simply appoint external accountants of their choice and put it to the shareholders for approval in a routine manner. Why then would any accountant do more than he is asked to unless he wants a one-way ticket to his "native place". 
    Veritas can do this without fear as clients pay top dollar for their research and they don't depend on fees from any other services. Such service providers have always been around — the difference is that web-based news services have made their revelations much more impactful than they could be in the past.

The writer, a former journalist, is founder of a financial firm that advises global private equity funds on real estate in India