`We Must Be Cautious About Patents'

A significant development in the financial sector this year was the adoption of international accounting norms by one of the major financial institutions, ICICI Ltd. The institution has prepared its financial statements on lines of the US generally accepted accounting practices (GAAP).

This is significant because it is a sign of things to come. More players are veering around to the view that adopting US GAAP is desirable. And the stock market's seem to agree. In the case of ICICI, speculation on the worst-case scenario of high non-performing assets has to an extent been put to rest with the institution making public US GAAP figures.

 

"Although there is a big qualitative element in arriving at provisions against NPAs according to US GAAP, overall it is more stringent. This definitely leads to an improvement in investor perception, evident from the movement in the scrip price" says Anand Shanbag, banking analyst, Kotak Securities Ltd. The share price of ICICI, which was languishing at Rs 45 on the day of the results a month ago, jumped 70 per cent to peak at Rs 75 a few days ago.

While institutions and large public sector banks may take some time in moving towards international accounting norms as they are closely controlled by the government, private sector banks are likely to move faster, feels Shanbag.

According to Bala Swaminathan, partner, Bharat Raut & Co, a KPMG Peat Markwick member firm, "There is pressure on others to follow. For instance, now that ICICI has adopted US GAAP, analysts want to see IDBI financials in US GAAP too. In the next couple of years, there is bound to be around half a dozen players in this field turning to international accounting norms." Bharat Raut & Co has helped around 20 companies, including ICICI, do up their financials in accordance with US GAAP.

On a larger platform, the adoption of US GAAP is not a new development in the Indian corporate scenario. Software major Infosys Technologies was the first to go the US GAAP way, back in 1996. Today, all the larger software companies are US GAAP compliant.

There is a pattern. When one company in a particular sector moves towards more transparent accounting standards, informed investors and analysts expect the same from the other players. With adoption of US GAAP becoming a benchmark issue, as it has in the infotech sector, it will not be long before a majority of India's top corporates adhere to these standards, feels Swaminathan.

Firms most likely to do so are those that need to access international capital or those whose equity already has a percentage of foreign capital. These include private limited companies that are looking for either a private placement of equity or are planning an initial public offering.

For instance, Infosys has already tapped the US markets with an American Depository Receipts issue. Says N Narayana Moorthy, CEO, Infosys, " We have recast out accounts in accordance with the GAAP of eight countries. In a sense, we are ready to act on any opportunities spotted in these countries."

Financial capital flows in an increasingly globalised environment are leading more Indian corporates to pen their financials in a language that international investors can understand. There are two popular accounting standards: the US GAAP and the International Accounting Standards. The former is preferred because most investments in emerging markets are usually US-centric, points out Swaminathan.

Integration with global markets also means that as more Indian corporates look at raising debt and equity abroad, they need to comply with rules applicable to these markets. For instance, the US Securities Exchange Commission recognises only a few accounting standards, and hence the need to present financial statements in US GAAP for companies planning a Global Depository Receipts issue or listing abroad.

Back home, corporates conscious of the latest buzzwords_shareholder value and corporate governance_are going in for US GAAP financials since they are more transparent. To illustrate, a company with subsidiaries does not need to prepare consolidated accounts under Indian accounting norms. "Consolidated accounts, presented under the US GAAP, give a truer picture of the performance of the entity as a whole, as it eliminates material inter-company transactions and takes care of the crucial issue of transfer pricing. Segmental information on profitability of individual subsidiaries is also provided as part of disclosures," says Swaminathan.

A look at the financials of corporates that have adopted US GAAP reveals one common factor_they all show lower profit than in statements prepared under Indian norms. The reasons, however, may be different.

Reliance Industries, for instance, had to make a provision of Rs 301 crore under US GAAP for 1998-99 against deferred income taxation. This is not required under Indian norms. It showed a net income of Rs 1,378 crore under US GAAP against Rs 1,704 crore under Indian accounting norms.

Infosys, on the other hand, showed net income of $17.45 million for 1998-99 under US GAAP against $32.21 million under Indian norms, mainly on account of compensation expense arising from stock dividend, amortisation of deferred stock-based compensation, and loss from Yantra Corporation, a subsidiary.

A major reason for ICICI to show a lower profit of Rs 745 crore in 1998-99 under US GAAP compared to Rs 1,001 crore under Indian norms is the higher provision against credit losses, to the tune of Rs 149 crore. Differences in accounting treatment of mergers, dividend on preference shares and deferred taxes also resulted in an adjustment of Rs 256 crore.

However, it is heartening that corporates do not seem to mind the knocked-down bottomlines when adopting US GAAP, as long as they are outweighed by the benefits. Better perception among investors and analysts seems to be the largest benefit of going in for more transparent systems_a much-needed boost of confidence among investors.

"There is a belief that analysts will perceive corporates as more transparent if they adopt US GAAP and this has a positive fallout on the performance of the scrip in the domestic market. Typically, funds and foreign institutional investors look for more detailed disclosure," says Swaminathan.