Investors the world over invest in equity shares purely for profit. In the risk vs return graph, equity ranks somewhere at the top right-hand corner. What this means is: when investors take positions in equity shares they expect to be rewarded much more than they would be if they got into bonds or treasuries.

The yardstick for evaluating an investment's quality is standard and varies very little whether it is Wall Street or Dalal Street. Let us recount a few of them. Investors look for companies with low leverage and good freecash-flows. They want focussed companies. They want maximisation of return on capital employed (ROCE). And, importantly, they look for a high quality of management. If these four parameters are met, they would buy stocks of such companies, assuming these are liquid and the country risk is not terrible.

Let us analyse a typical company in a large Indian businesshouse from these four standpoints. First, is the free cash-flows and low gearing. Studies have shown that a large proportion of project finance in India has been traditionally done through debt. When that happens, interest and loan repayments, preempt free cash-flows even if operating margins are good.

So investors are left empty-handed. This is not the only story. A considerable portion of internal accruals is also reinvested in fixed assets, further reducing free cash-flows. Dividend payouts as a percentage of free cash-flows have been low even during years of plenty. Hence the valuation of Indian businesses based on free cash-flows shows thesecompanies to be net destroyers of wealth.

The second is focus. When it comes to focus, many Indian businesses have been traditionally as focused as the village squint. The supermarket approach was to some extent acceptable during the days of licence raj when business was not allowed to expand, so owners had to diversify. Even then the pundits would say if investors wish to diversify the risk, they could do it themselves.

To illustrate, if I want to have a mixture of iron & steel, textiles and cement in my portfolio, I could buy Tisco, Madura Coats and Gujarat Ambuja. I need not buy Grasim. Hence unrelated diversification never made sense and is absurd in the days of core competency. No Indian group has the depth of management or resources to go into mega industries like power, refining, telecom, iron and steel in addition to their core business. This lack of focus has also made investors unhappy with Indian firms.

Another aspect of desi companies, which goes very badly with investors, is the lowROCE. Very often it is found that even though operating profit margins are acceptable the ROCE is dreadful. The reason for this is not far to see. Most Indian firms have used their cash cows (flagship companies) to promote new entities. For example a profitable steel producer may promote a power company and invests a few hundred crore rupees in that company.

Obviously a return from that investment is going to take very long and even when it does, would not be fully reflected in the parent balance sheet because of lack of consolidation. This being so, the firm's ROCE falls drastically in view of large unproductive investments. Many Indian firms are littered with debris in their balance sheet of investments, which have either lost money or reduced the ROCE. Here again the retail investor has reason to be upset that profits which are meant to go to him have been invested somewhere else.

The last and arguably a more qualitative issue is management. There is a perception among investors -- both foreign anddomestic -- that Indian managements lack professionalism. It is not just lack of technological skills, brand-building etc. It's something much deeper. Indian businesses generally tend to put the family above the professional.

It is not uncommon to see scions of the family fresh from B-schools get one of the larger top-floor rooms. Senior executives, battle scarred over decades are given inferior positions. This sends extremely negative signals to all investors. I remember a foreign investor who sold all the shares that he had in a company after being at the receiving end of a lecture from one of these kids. Lack of professionalism is a very serious issue and a B-school-trained young man and a scion of the family does not represent professional management in any part of the world.

Wherever Indian businesses have come out of the rut and shown free cash-flows, focus acceptable ROCE and professional management, their shares have been well recognised. The current boom in the information technology sector is atypical example. It is essential for desi companies to focus the searchlight inward and take steps to achieve this level if they wish to get a better PE discounting in the next millennium.

The author owns a private investment banking firm in Delhi and is a former country head of Citibank's merchant banking division.