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MNCs delist in India on revelation
fears
By Indrajit Basu
KOLKATA - They came, they saw and they made
money. And when they realized that their perception
among investors was not what it used to be, they started
slipping out of the limelight by delisting the shares of
their Indian subsidiaries.
Quietly, without much
fanfare, scores of multinational companies in which the
parental holding is 60 percent and above, are seeking to
delist from Indian stock exchanges, in the process
raising a not-so-quiet storm over their exit. While a
concerned industry lobby, the Federation of Indian
Chambers of Commerce and Industry (FICCI), is trying to
ascertain the reasons behind the exodus of
multinationals, the ruling Bharatiya Janata Party (BJP)
believes that MNCs have blatantly disregarded Indian
laws and the interests of minority investors by
delisting from India.
"MNCs [in India] show
scant respect for Indian laws," said P N Vijay, a
Delhi-based investment banker and conveyor of the BJP's
central economic cell. "We should deal firmly with
multinationals that try to act funny with us."
A
number of MNCs have converted their public listed Indian
companies into wholly-owned subsidiaries by acquiring
the shares of retail and institutional investors through
the open offer or buyback route over the past few years.
According to the Securities Exchange Board of India -
the country's capital market regulating authority -
nearly 75 percent of the MNCs still operating and listed
on the exchanges are eager to opt out as they are no
longer under the compulsions that forced them to get
listed in the first place. Moreover, over 50 MNCs have
delisted their subsidiaries from Indian stock exchanges
over the past three years, out which as many as 35 made
open offers for delisting in the 12 months ending in
January.
There was muted opposition from
investor interest groups initially, but the issue is
getting hot now, forcing industry lobbies like the FICCI
to commission a scrutiny of this trend. "FICCI is
concerned about recent trends of foreign companies
getting delisted and acquiring 100 percent equity," the
FICCI's secretary general Amit Mitra said recently. "We
are studying this matter for both its pros and cons."
MNCs say that what has prompted a fear of
remaining listed is the constant scrutiny to which these
companies are regularly subjected by Indian listing laws
of dissemination of information in a transparent manner.
These laws, like any other country, mandate that a
listed company provide all information to its investors,
and that this then becomes available to anyone within
the public domain. Investors can question the decisions
of MNCs at annual shareholder meetings, as can
stakeholders such as financial institutions and big
creditors. In contrast, a privately-held, or delisted
company, can easily escape such public scrutiny.
"It is a matter of complete control of the
company. If a company is 100 percent owned, its balance
sheet remains unavailable to public knowledge, and so do
their strategies," says analyst John Band of Zoom
Cortex, an advisor to MNCs
According to the
Indian daily, Business standard, "Promoters are now
seeking voluntary delisting from regional stock
exchanges to save on listing costs. Regional bourses are
becoming redundant because of technological
disadvantages. Almost 99.9 percent of trading volumes
are recorded on the two major exchanges, the Bombay
Stock Exchange [BSE] and the National Stock Exchange
[NSE]. With most regional exchanges reporting minuscule
volumes, promoters prefer to pay listing fees to only
the two most liquid exchanges instead of paying annual
charges to all of them."
But skeptics like P N
Vijay feel that MNCs operating in India are desperate to
hide. "They want to conceal. The reason is, during the
recent difficult times that the Indian economy has
faced, many companies had to take controversial
decisions that general investors may not now like," said
Vijay. For instance, a company may need to sack people,
or introduce new products where there's a risk of
failure, or may take a strategic decision to incur
losses to grab a higher market share.
A MNC that
repeatedly come under the hawks' eye is Coca-Cola and
its business strategies in India in the past few years.
The Indian subsidiary has an accumulated loss of over
$300 million, owing to its obsession with acquiring
market share. It has only recently started claiming that
it is earning operating profits. Coke India has been
fighting a mandatory listing for the past two years,
mainly on the ground its bottom line, smeared in red,
will make it impossible for the company to attract fair
valuations when it goes public. More importantly, it has
been negotiating with its bottlers on sensitive issues
like proposed investments to modernize bottling units,
pricing mechanisms and enforcing its processes and
systems on them, and fears that a public listing at this
stage will bare its strategies to its competitors, (read
Pepsi). Coke India has managed to get a reprieve,
though, from the government, which has now agreed to
allow it to divest its parent's stake to just a handful
of Indian investors that have a stake in the company.
Similarly, another MNC, drug company, Reckitt
Benckiser, underwent a drastic change in its structure
after a global merger and acquisitions deal.
Subsequently, all strategies were tweaked, especially in
developing markets. To cite just one instance, in August
2001, it tinkered with pricing and the formula of one of
its largest-selling over-the-counter drugs in India,
Disprin. It tried to extend the Disprin brand into the
cardio-vascular segment to earn more revenue, and hence
higher profits. But that turned out to be a
controversial decision. The move was strongly opposed by
analysts, investors and even within the medical
profession.
Those against MNCs delisting argue
that while some of their fears may be real, the true
question is the spirit behind delisting (or the
opposition to dilution). "The same fears work in the
global environment, but one rarely does one hear of MNCs
delisting from exchanges in their respective home
countries. So, why do it in India?" queried Champalal
Dalal, a disgruntled investor who has been investing in
stocks for over five decades and has substantial
investments in MNC stocks.
"The reasons are
simple," he says. "In India, delisting is easy, small
investors have little say in the decision and cannot
oppose it, and the market regulator is weak and lacks
teeth. Imagine the way its Securities and Exchange
Commission and US investors will react to any delisting
move. They will make sure that a company undergoes
intensive scrutiny before such a decision is cleared. In
contrast, no one really cares in India."
Others
feel that while the reason for MNCs to delist could be
justified, it is a fact that they have given minority
investors a bad deal. "These MNCs raised money from
small investors when they came to India," says Prithvi
Haldea, managing director PRIME Database, a research
outfit that maps stock markets trends. "They grew big on
these very investors' money. Most of these companies
have a large capital base and a large investor base. But
the buy-back prices being offered to small investors are
unfair since the offers [to acquire from the market] are
made on a six-month average price. A formula could have
been evolved based on say a two to three year price
average, along with the peak price."
Rattled by
this trend, the Securities and Exchange Board of India
has already got cracking. Recently it issued guidelines
that stipulate that companies and company founders who
wish to delist from stock exchanges must offer an exit
route to remaining shareholders through the
book-building route - meaning a price at which the
maximum number of shares have been offered. If the price
is acceptable to the acquirer, the acquirer will have to
accept all offers up to and including the final price,
but may not have to accept higher-priced offers.
However, there is at least one section of Indian
industry that feels that MNCs should be allowed to exit
freely to adhere to the country's spirit of
liberalization. "It is natural as regulatory reforms
take place. Given that sectoral caps on foreign direct
investments have been removed from most of the Indian
industry sectors, it is not surprising that delistings
are taking place," said CII director general Tarun Das.
(Copyright 2003 Asia Times Online Co, Ltd. All
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