Dotcoms better get transparent

Better disclosure and transparency in the businesses is what is desired by the investor community now.The need arises much more in IT companies with Dotcom companies in particular. The revenue models, business strategies, performance reports and the valuations of these Internet companies are still not understood well by the investors. The rationale behind Rs.500 crore offer for a 13 percent stake in Global E-Commerce Services by Global Tele appears a bit baffling to us. Similarly, Satyam Infoway paying Rs.500 crore for IndiaWorld triggers a thought in our minds - what makes these Internet companies with a such a small set up and turnover fetch such high valuations? How should the small investor solace himself when the nominees on the board of his company decides to offer such hefty sums for acquiring these Internet companies? Well, all this is possible only when the investor is well informed and these Internet companies report their business models, strategies, future projections, strength of human resource and technological advancements to the public as a mandate.

The Securities and Exchange Board of India(Sebi) has taken a step in the right direction by putting forward a proposal on disclosures for dotcoms infront of Y H Malegam committee. The committee, headed by ASC Chairman Mr.Y H Malegam, was to study three dotcom related issues -- gross or net revenue to be given final accounting, basis for revenue recognition (particularly things like mutual promotional tie-ups) and pre-paid/intangible assets vs period costs. The main area of thrust was recognition of revenue and whether it is to be on gross or net basis. Without any regulation or guidelines in place, as of today, the valuations of internet companies' shares depend a large extent on their revenue models and streams. The other members of the panel were J R Varma - full-time member in Sebi, Pratip Kar - Infosys Director, T V Mohandas Pai - NSE Deputy MD and, Ravi Narain and Bhavna Doshi  - The Institute of Chartered Accountants of India. The committee that was formed was in line with the group formed by the International Organization of Securities Commission (IOSCO) for dotcom companies valuations globally of which Sebi chairman D R Mehta is a member.

As was expected, the committee made clear   its guidelines. It states that the Internet companies should disclose their revenue models and should have an independently audited eyeball figures before coming for an IPO. This should then subsequently be done on a continuos basis. 

The note clearly states that the companies should provide an overview of the services and technology used by them so that the investors can be facilitated in evaluating the shares of the company with regard to a comparable business.The Sebi note also states that all internet companies must disclose their revenue models. This would include disclosures of the sources of revenues and their strategic arrangements. It means that if the Internet company generates revenues from advertisement then it must also disclose any contractual obligation in terms of minimum number of hits, page views, cross advertising, and any other such arrangement.The same implies for the expenditure made by these companies towards their advertisements expenses.

Well, that's not all. Sebi has realized that in this business only the leaders survive and timing of the business too is a crucial factor.The premise for this belief is that the companies which acquire the customer base with a unique idea have higher chances of survival than the late entrants in the same. Keeping this at the back of the mind, Sebi has asked the internet companies to provide their market position vis a vis first mover advantage. In addition, the companies are also required to provide the details of cost of acquiring the customer, revenue generated per customer, success rate in retaining these customers, the geographical reach and the concentration of the their clients.

Internet business, by nature has a global reach. So, the external factors like currency fluctuation, cross border trade relations between various countries etc can affect the business. Such risks associated with the company should also be disclosed.

With Internet being recognized as a serious business now, it is quite necessary to have such disclosure norms in place and increase the awareness amongst the investors so that they can price the scrips better and markets can attain a more mature state which ultimately would help in reducing the volatility in these scrips too.

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