Some Shareholders are More Equal

First Published in the Economic Times 29 August, 1999

The entry of multinational companies into India has made domestic players understandably nervous. And for many, since their survival is at stake, it does not matter what means are used to keep the predators out. Indeed, a major factor influencing policymakers has always been the lobby power of large Indian industrial groups - even though the License Raj is supposedly a thing of the past.

The latest in the line of protectionist actions is the rule requiring MNCs to get a 'No Objection Certificate' from existing Indian joint venture partners before they can set up new subsidiaries. This has led to some strange situations like the recent Honda case. Even though their equity partnership with Kinetic was broken, they were restrained from setting up a new subsidiary. Now after much behind the scenes action, Honda has finally been given permission, provided the models manufactured by the 100% subsidiary are not the same as the erstwhile joint venture.

The argument put forward by industry associations is that existing companies would be affected by a stoppage of technological inputs. This in turn would lead to sickness, thereby affecting shareholders, Indian promoters as well as financial institutions with exposure to these companies.

I have no problems with this argument, but I don't understand how a restriction on specific models is going to change things. Ultimately, all 2-wheelers compete for the same customers. For instance, motorcycles made by Hero Honda have affected the sales of scooters. At the same time, MNCs who already have a presence, or those who are entering anew will not face any restrictions.

The bigger problem is the lack of consistency and transparency. When decisions like this are left to human discretion there is always scope for lobbies and persuasion. More specifically, it gives Indian partners of JV companies a strong bargaining handle, and they will use this to extract a price from their collaborators. Essentially, we are providing promoters with a means to enrich themselves, while ordinary shareholders have no such powers.

This brings me to the real issue. I understand that free license to MNCs to set up 100% subsidiaries will hurt many Indian companies. However, why is this solicitude being shown only to promoters (already fattened by the license Raj) and not to ordinary shareholders.

When Smithkline Beecham set up a 100% subsidiary, were shareholders consulted? The same is true for Monsanto, Rhone Poulenc, and many more multinationals. Obviously, this will hurt the interests of thousands of small shareholders like you and me. But then, we don't have industry associations lobbying for us!

Indeed, the entire policy on FDI is riddled with inconsistency. On the one hand, certain projects are arbitrarily canned on the grounds of "swadeshi" or some other excuse that is popular at the moment. And at the same time, other investments are granted permission, even if rules have to be bent. Recently, the Foreign Investment Promotion Board (FIPB) approved a move to exempt 100% subsidiaries from the provision to dilute their stake after three years if they could prove they were bringing in proprietary or patented technology.

This makes a mockery of any laws we might have concerning FDI, and all claims of protecting the rights of existing Indian companies and shareholders ring hollow. The only conclusion one can draw is that in each case, the rules are bent to suit the strongest lobby - be it a foreign investor or Indian promoter.

The best possible solution would be to ensure that every foreign company must divest a certain proportion (say 24%) to the public. This would allow them to retain control and protect their intellectual property while at the same time, ensuring that the profits and eventual wealth creation are shared by as many Indians as possible. In addition, there would be numerous other benefits including growth of our financial markets, increased transparency and better governance.

Ultimately, the primary objective of increased foreign investment should be to create wealth - not just for the MNCs, but for Indians and India. However, in our desperation to increase foreign exchange inflows, we tend to bend over backwards to please prospective investors. It is time we realised that our country offers one of the most attractive long-term investment destinations - and indeed, is likely to be among the biggest markets in the next millenium. This should be enough of an incentive for most multinationals. In fact, if they are delaying their investment plans, it is more than likely that the reasons are bureaucratic and other types of interference. Also, by now, most of them know that if they bargain hard enough and promise enough dollars, this government or the next will eventually succumb.

Actually, predictability of policy is likely to attract far more investment than the current see-saw approach. But then who said that policy decisions in our country are based on logic - it's only money and political power that count. The License Raj is dead. Long live the License Raj!