What do Satyam, Ranbaxy and DLF have in common?

It is a sad fact indeed that we have not yet seen the last of scandals in Corporate India post the Satyam debacle. The recent developments with respect to realty firm DLF is testimonial to the fact. Indeed, as reported in various business dailies, stock market regulator SEBI has barred DLF and 6 of its top executives including the chairman from accessing the stock market for a period of 3 years. 

What has led SEBI to take this action is the company management's failure to disclose material information to investors when it came out with its equity offer in 2007. 

In some sense, it is hardly surprising that it should be a realty company that is facing such regulatory action. It is a fact well known that most realty companies have poor information disclosures and the entire sector in that sense treads in murky waters. 

That said, in the past few years, other sectors have faced regulatory ire as well. Take the case of pharmaceuticals. The biggest to suffer in this regard has been Ranbaxy which has bore brunt of the US regulator for its shoddy efforts at sticking to good manufacturing practices norms. 

All of this serves as a fitting example to re-iterate what we have always highlighted in our previous editions of the 5 Minute Wrapup. And that is the importance of corporate governance and management integrity of companies during the process of stock picking. Strong growth prospects and rising stock prices may be reasons enough for investors to invest in those particular companies. But none of this matters if the management quality is dubious because over a period, this is bound to adversely impact businesses and thereby erode shareholder wealth in the process. 

Now judging the management is not always an easy task and is subjective because it cannot be quantified. But the various points that give an indication of this is the kind of communication that the management has with its shareholders and investors, its disclosures, its treatment of minority shareholders, how effectively it allocates capital and whether it has a long term track record of growth and profitability. 

If any company fails on any of these counts, investors would be better off staying away from it and look for better investment opportunities elsewhere.