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India gets tough with
multinationals
By Indrajit Basu
A few months back the Indian government forced
the soft drink multinational Coca Cola to divest its
stake in its Indian subsidiary, Hindustan Coca-Cola
Beverages. Then, two weeks ago, the government joined
hands with China to demand from the World Trade
Organization legal enforcement of a code of conduct for
multinational corporations (MNCs). And just last week,
India's parliament rushed forward a new competition law
called the Competition Bill of India 2001, after having
kept it on the side-burner for a year and a half.
Besides regulating competitive forces in the country's
industry and business spaces, the bill seeks to "prevent
MNCs from abusing the Indian market and indulging in
unfair trade practices".
"MNCs will be
prohibited by law against unfair trade practices," said
India's Finance Minister Jaswant Singh while introducing
the bill in parliament. He added that "the law will be
stretched back to the country of their [the MNCs' ]
origin ... they can't gobble up industry ... they can't
create cartels".
About seven years ago, when
Jaswant Singh had taken the controversial decision to
provide guarantees to the erstwhile power giant Enron
Corporation for its Dabhol Power project in India, his
political opposition said that the government was being
submissive to MNCs. No more.
Having come under
renewed attack for being soft, Singh and the ruling
Bharatiya Janata Party (BJP), which is a fervent
believer in foreign direct investments as a panacea for
India's economic woes, is now clearly getting tough with
MNCs. "The government is trying to send out signals that
foreign players must not exploit their global clout to
seek concessions and policy changes," said Rakesh Joshi,
an analyst of the Indian economy.
The
government's recent responses have been shaped by a slew
of factors, say sources in the Finance Ministry, one of
those factors being the recent trend of many MNCs to
hold onto 100 percent of the stock in their Indian
subsidiaries. By doing this they are in effect going
back on divestment promises made at the time of
obtaining entry permission. "The Coke India episode,"
said a finance ministry official "was the first instance
of denying permission for a waiver on entry-level
commitments." Global oil giant Shell Oil was next to be
denied a waiver on the requirement of 26 percent
divestment as an entry-level condition. And, according
to ministry officials, 20 other foreign companies are
going to be told soon to divest their stake in their
Indian subsidiaries.
Officials add that the new
mood is in sync with a Securities and Exchange Board of
India committee recommendation that says profitable MNCs
and banks - which are still closely held, should dilute
their equity to boost the sagging primary market in the
country.
Finance Minister Singh is not the only
one who is getting tough. So are the country's federal
bank, the Reserve Bank of India (RBI), and the Telecom
Regulatory Authority of India. Reportedly RBI, along
with the country's department of company and economic
affairs, is currently investigating cases where foreign
venture funds sought entry through a special route - the
automatic approval route - without being qualified for
it.
Telecom is the other sector where foreign
companies have been found disrespecting Indian rules or
regulatory rulings. For instance, India's telecom policy
mandates a 49 percent cap on foreign equity investments
in telecom. Yet Honk Kong-based Hutchison Telecom
violated this ruling when it acquired control of
cellular phone services in key cities from an Indian
operator.
Indian cellular operators also
complain that cellular operators with foreign
investments have also been successful in extracting
special permissions and policy decisions - such as
relaxation in the use of technology for
wireless-in-local-loop (WiLL) operations - in their
favor.
Interestingly, stock market analysts and
the government believe that MNCs should be forced to
divest stakes even if some of them, like Coke and Shell,
are incurring losses. "Most foreign companies should be
aware that shares are bought for capital appreciation
rather than dividends," said Prithvi Haldea, a primary
market analyst. Haldea believes that initial public
offerings (IPOs) from companies like Coke or Shell would
be lapped up in India solely on the back of their brand
names, even if some of them carry huge loses on their
books.
A section of the finance ministry feels
that deferral of IPOs may have nothing to do with bad
primacy market conditions prevalent in the country,
which is one of the reasons given by MNCs seeking a
deferral. Many suspect that the real reason could be
aversion to letting their activities come under public
scrutiny, which a listing in Indian stock markets would
bring, and which, in turn, could expose their important
strategies to corporate rivals.
"MNCs, many of
which perhaps enjoy a wider consumer base in India than
their home countrries, should not balk at sharing their
wealth and creating shareholders in the host countries,"
said a finance ministry official.
Officials
claim that India's policy of treating MNCs strictly also
has the tacit approval of the US administration. They
cite US ambassador to India Robert Blackwill's recent
lectures at various forums, where he has been stressing
the sanctity of contracts, the stability of Indian
policies, and the importance of active independent
regulators (like SEBI and the Telecom regulatory
authority) as prerequisites for improving India's rating
as an FDI destination.
(©2002 Asia Times Online
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