At UTI, Dr Sen was one of those at the forefront when the Trust began its major move of pressing for greater corporate governance in Indian companies.

At present, he is busy giving finishing touches to a broad gameplan to convert IIBI into a happening, new generation financial institution. In this interview with Sourav Majumdar of The Financial Express, Dr Sen discusses the issues facing corporates in resource raising, disclosures and corporate governance. Excerpts: Equity infusion is necessary for Indian companies if they have to upgrade technologically and expand to competitive scales of operations. They also need to borrow. But it is becoming difficult for old economy companies to raise adequate resources, unless they are triple A rated.

How do we get out of this?
Interestingly, this difficulty of raising resources for companies exists even though there is no dearth of savings. To attract these savings, companies need to ponder about how they will strategically position themselves and their debt and equity issues in the market. After 10 years, reforms are no longer in an environment where they can have an automatic claim on the national pool of savings based on traditional eligibility criteria. In today's market, they have to have a clear strategic positioning for raising resources which is different from traditional notions of creditworthiness or project viability.

But how does a company position itself in the market for raising resources?
A lot of internal analysis and introspection is necessary to position an equity issue or debt issue in the market (even if the issue is a private placement with FIs or institutional investors). First and foremost, a company has to ask itself whether it is open and transparent enough to the existing and new investors. Whether it is willing to consider the new capital providers' interest as more important than the interest of the company's survival or of the promoters or dominant shareholders has to be seen. It is not enough to say that the company needs additional capital for general corporate purposes or for working capital margin purposes.

It is imperative that the company clearly articulates why it needs the additional funds and how it will use the funds and with what impact on the debt servicing, future cash flows and equity holders' free cash flows. It is not enough to appoint a lead manager or arranger for the new issue. It is imperative that there is a clear plan and serious effort to service the new capital providers. It is necessary to be upfront and bold to declare the risks that the new capital providers have to assume.

But there are already Sebi regulations on disclosure of companies intending to raise resources from the market...

Yes, there are Sebi regulations. But companies have to go beyond the usual regulatory requirement of disclosures. Even the layman, common investor should be able to assess the risks they are assuming. It is more than obtaining a rating from credit rating agencies. It is necessary to disclose adequately to enable the potential capital provider to assess the expected risk-adjusted return and compare this with alternative investment avenues available in the market for investors.

How does a company know whether the disclosures are adequate?
There is a fairly simple technique a manager employs to do this. He puts himself in the shoes of the investor and asks a series of questions. For example, do the disclosures lay bare all the threats to and weaknesses of the company? Whether these have been properly taken into account in the pricing of the instrument? Again, attracting capital is not a one-time exercise; companies have to time and again go to the bankers, lenders and investors. Instruments issued by the company will be traded in the market.

Investors and creditors should have a continuous flow of information about the company so that they understand the volatility in prices, if any. Is the company ready to disclose all such information? Is it really internally organised to do so? A manager should, therefore, ask whether the company is committed and effectively organised to ensure continuous dissemination of information? All these have a bearing on the investors' assessment of continuous credibility of expected future cash flows of a company.

Why should investors believe the information disclosed by the company?
They may or may not believe. But they must have a chance to assess whether the company's in formation is credible. It is credibility that matters the most.

How can credibility be gained?
A company has to ask itself how it can gain credibility. Unless an effective, documented and well-disseminated corporate governance process is in place, credibility does not improve. The management has to ask itself if it has really completed the transition from preaching and codifying corporate governance to practising it at all levels from the board to executive management to operating levels. If the honest answers to these questions are positive, a company which works to raise capital can position as one where capital flows naturally. If the answers are not so positive, the company's position is one of fishing in a pool of savings in the country and abroad. The acid test is whether the investor is really convinced that the instrument issued by the company meets the investors' specific needs of relative safety, liquidity and risk-adjusted return. Positioning a company and its instruments is to be determined on the basis of these principles.

How does IIBI contribute to all this?
First, by investing in those companies which have established or are trying to establish such credibility. IIBI would believe in those companies which continually keep the institution informed of the developments and do not pull out surprises. Second, IIBI itself as a resource-raiser from the market follows the above principles and is preparing the organisation to practice them.