MNCs need to share wealth

S. Vaidya Nathan

A VALID point regarding the sharing of wealth by multi-national corporations (MNCs) has been made by the chairman, Unit of Trust of India, recently.

In his statements at a seminar on the ``capital market scenario'', the UTI chairman dealt with a range of issues including the economy, the state of the market and the outlook for stocks, and has, in the process, struck a bullish note. On most points, there is room for alternative opinions more closely linked to reality.

But the issue about MNCs highlighted is something that merits quick consideration by the policy-makers. The need for MNCs to have a listed face and share some of the wealth creation has been articulated before, in particular by Mr. T. N. Ninan in a weekly column in Business Standard. Clearly, there is need for the government to take a look at this issue in detail.

The sum and substance of what the UTI chairman had to say was: ``India needs to encourage multinational companies to offer their share of prosperity to the domestic investors. We need to encourage such a practice among MNCs which intend to stay in the country for a fair amount of time as it will provide the necessary trigger for the stock markets.''

The whole issue should not, however, be seen as one that is needed to provide a trigger to the stock market. But on various counts, this aspect does add up to a one that rests on sound footing.

The lure of Indian markets: Over the last 10 years, a large number of MNCs from all domains and across various industry segments have made their presence in India. Some of them have been successful while some others have failed. And there are quite a few that are here for the long haul willing to take losses even for close to 10 years. Pepsi is as good an example as any.

Barring a few which required joint venture partners, the rest have gone in for wholly-owned subsidiaries. As a consequence, the benefits of participating in the Indian markets flows to the global parent almost entirely. The contribution of companies of this genre are likely to only grow in size in isolation as well as in relation to the broad economy.

With time, what this would mean is an increasing proportion of economic activity would be carried out by unlisted companies and this could have adverse implications for investment opportunities in the Indian markets. To a large extent, there is a strong case for such companies to share a part of the wealth creation from their businesses with Indian investors. But this does not in any way suggest the need to go back to the obscure ideas and anti-MNC policies pursued a few decades ago. What is needed is a straight forward and simple framework which would provide Indian investors with an opportunity to share in the activities of the economy.

Need for straight policy: Most MNCs that matter in various sectors are already here through fully-owned entities. Then, there are listed companies (especially in the pharmaceutical sector) that have set up 100 per cent subsidiaries and route valuable new businesses through them.

There are differential limits or amount ceilings for stakes in various sectors. The pattern of shareholding by various MNCs that have entered show considerable divergence. There is a case for making a simple and straight rule that would require MNCs to offer a minimum of 10 or 15 per cent of the equity to Indian investors and get even the companies that are already in to take this route. It would be a fair price for the MNCs to pay to participate in the opportunities in India.

The selling point: This indeed has to be the selling point for such a proposal. The prospects offered by the Indian markets are so vast and this is evident from the long list of MNCs that have touched down the shores. Many of them are here to stay.

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The only thing that may happen is that they could become part of the consolidation process at the global level and identities could change. But for this move to find takers, the government policy on the entire gamut of MNC investments needs to be made simple and transparent with no ad hoc changes and no discretion vested anywhere. Only in such a framework would the requirement of listing by MNCs be an acceptable one.

Such a move would add depth to the Indian markets in terms of quality stocks. At present, this universe is a small one and may also shrink as more churning takes place in the economically sensitive sectors.

It is also not uncommon for MNCs to be listed outside of the parent's domicile in other countries. Some of Coca-Cola's bottling units and its unit in Japan are listed. Much the same is true for companies such as DaimlerChrysler which are listed in Europe as well as the US.

Leaving the MNCs to operate as closely-held outfits may also encourage the trend to takeover existing listed outfits and make them closely-held (a la SRF Finance), have 100 per cent subsidiaries for the more lucrative business and lift stakes in listed companies as Sandvik Asia and Fuller tried to do.

There must also be an assurance that there would be no changes on the equity to be offered to the public. This is area where a fairly permanent policy can be put in place. If all MNCs operating in India are required to have a listed face, patent investors would have chance to in more quality options in the economy on the same lines as likes of Hindustan Lever, Cadbury and Nestle, to name a few.