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Dec 11, 2023

From transparency to trust: Evolving IR practices and opportunities in India

Indian companies are pouncing on new opportunities as investors turn their attention away from China

As one of the world’s most rapidly growing economies, India’s capital markets remain a beacon of opportunity for investors around the world. In this landscape, IR best practices have had to change significantly for the function to adopt a more pivotal role in shaping the dialogue between companies and their shareholders.

While still relatively new in comparison to other countries, IR is increasingly becoming a driving force within the Indian economy. A surge in domestic and international investment, as well as the implementation of progressive regulatory frameworks such as the Securities and Exchange Board of India (SEBI) guidelines, has helped to set the stage for more effective communications. Through these measures, IR has gone from being a niche profession to a recognized position at a company.

While Indian IR still has a ‘long way to go’, the profession has developed significantly over the past two decades, says Anuj Sonpal, founder and CEO at Valorem Advisors, an IR agency based in India.

Before the late 1990s, the Indian markets were primarily retail-driven, with a limited number of institutional investors, he notes, adding that the need for IR became apparent in the early 2000s, during a period of economic growth and numerous IPOs. Institutional investors during this time began to expect more ‘sophisticated communication methods beyond traditional PR efforts,’ Sonpal says.

Companies like Infosys became one of the first to incorporate investor relations: the information technology consulting firm established a dedicated IR department, began conducting earnings conference calls and presentations and engaging in formal investor communications. But ‘the practice of IR was still in its early stages compared with more established markets like London,’ Sonpal says.

From transparency to trust: Evolving IR practices and opportunities in India
Anuj Sonpal, Valorem Advisors 

Since then, ‘the industry has evolved and there are currently 15-20 IR agencies providing services to around 500 listed companies,’ he notes. But he adds that this ‘represents a small fraction of the total listed companies in India, indicating room for further expansion and development in the IR sector.’

While IR is making its way into the heart of Indian public companies, there still is a lack of awareness surrounding it. ‘The interesting aspect is that there is a need, people are aware... The ecosystem has become very knowledgeable of what IR is, and hence the need for IR is rising fast,’ says Sonpal.

Due to the lack of awareness, the talent pool of IR representatives is lower than in most countries. One of the biggest challenges is managing that lower pool of talent and actively trying to increase it.

Promotional matters

One of the most notable factors in the Indian capital markets is the role played by promoters, which are pivotal. They tend to be majority shareholders and influential figures who have often founded or led the company from its inception. For example, Gautam Adani, the founder of conglomerate Adani Group, is one of the company’s main promoters.

Promoters control a substantial ownership stake, so their voice often dictates the strategic direction of the firm. One of the main issues around promoters is the lack of autonomy for other investors that may never have an equal say on the specific moves an organization undertakes. This can be a challenge for IROs who need to juggle the interests of one large, vocal presence alongside smaller players.

Promoters may also prioritize their personal interests over those of other shareholders, leading to conflicts of interest and a lack of transparency. These factors can impact the company’s governance, shareholder trust and overall market reputation.

With Adani Group, for example, having a promoter as high profile as its founder can often lead to his personal life and negative press influencing the business. In January a Hindenburg report accused Adani of engaging in stock manipulation and ‘flagrant fraud’, alleging that the $36 bn company’s ‘obvious accounting irregularities and sketchy dealings seem to be enabled by virtually non-existent financial controls. Evidence of stock manipulation in Adani listed companies shouldn’t come as a surprise.’

The document was released ahead of Adani Group’s planned IPO on the National Stock Exchange of India (NSE), which at the time would have been the largest in India’s history. Due to a combination of the negative outcome of the short-seller’s report and wider market turmoil, the company called off its stock market debut.

Tightened rules

Under the 2015 SEBI listing obligations and disclosure rules, there are strict requirements for promoters to provide information about their shareholding, taxes and any changes in ownership.  

In the wake of the Adani crisis, these rules are set to be reviewed and tightened. The proposed added measures aim to enhance the disclosure requirements for foreign investors holding large stakes in single stocks or an Indian corporate group, a provision directly linked to one of the concerns from the Hindenburg report that Adani was using offshore entities as vehicles to conceal promoter or insider ownership. 

From transparency to trust: Evolving IR practices and opportunities in India

As it stands, SEBI’s promoter rules require public companies to offer more transparency regarding ownership, economic interests and control of objectively identified foreign portfolio investors (that disclosure is often delegated to the IR function). Through this regulatory lens, promoters are limited in their powers, primarily in their ability to vote.

‘Under the SEBI regulation, there is a significant weightage the promoter is not allowed to vote on: it’s really down to the independent directors who have to vote,’ says Sonpal. ‘Our regulatory body has very strict laws to protect those investors. Although you can’t remove the promoter from a company, there are measures in place to limit his or her weighted vote.’

Investing opportunities

Investing in India still presents a myriad opportunities and potential benefits for discerning investors, says John Ewart, fund manager at Aubrey Capital Management. The country’s robust and diverse economy, coupled with strategic initiatives and reforms, positions it as an attractive destination for those seeking long-term growth and diversification, he explains.

India’s financial markets – including its stock exchanges – provide a platform for diverse investment options. The Bombay Stock Exchange and the NSE are reputable platforms for equity investments, while the debt market and mutual funds offer additional avenues for investors seeking a balanced and diversified portfolio, Ewart says. He explains that Aubrey Capital Management is currently invested in a range of companies including Varun Beverages, which manufactures bottles and distributes beverages as the world’s second-largest bottling company for PepsiCo.

From transparency to trust: Evolving IR practices and opportunities in India

‘Varun is out selling Coke in a country with an increasing population,’ says Ewart. ‘We [as investors] want to ensure the company has all the support it needs in order to get to that position and stay there. Varun is doing very well, and we think the longer term still has a lot of potential in terms of growth.’

India is a very complex country, Ewart adds, but at the same time ‘there’s a lot happening across the income spectrum, which we think is very encouraging for the longer-term development. I think the prospects of Indian IPOs is encouraging. But I think it will be more for domestic businesses as opposed to them having to be India-domiciled.’

Move away from China

As investors move away from China, India poses a credible alternative for foreign investors and is seen by some as the next Asian hub for investment opportunities. With US President Joe Biden’s administration recently calling to limit US tech investments in China as he looks to favor domestic projects, a huge pool of global investment could see India as its next destination.

Examining the opportunities for investment in both India and China, Ewart says: ‘They’re both viable options, but are at different stages of development and opportunity.’ India’s GDP per capita is where China was about 15 years ago, he explains: ‘So China is way ahead of where India is. It doesn’t seem that long ago that China was seen as a huge growth opportunity and it still has a growth opportunity, but it’s at a lower level currently.

‘By contrast, India is many years behind China as a country, but there are already pockets where it will be competing with wealthy Chinese businesses in terms of the behavior and what the businesses spend on. But I think by and large, at the moment, the prospects for India just look better.’

Sonpal says the current market outlook is positive. ‘The markets have been good, especially for India,’ he says. ‘It has definitely attracted a lot more foreign institutional investors as well as domestic investors.’

And with investment opportunities rapidly increasing, the need for an IR role has also grown. ‘Even institutional investors need an IR agency or IRO to keep them updated and communicate with them in a more systematic, structured, consistent manner,’ Sonpal says. ‘It’s almost coming to a point where larger investors, if they don’t see an IR function, they are shying away from those kinds of companies.’