Broadcasting the wrong message

Tech Talk

Last fortnight, Star India Pvt Ltd, the wholly owned subsidiary of News Corp, made restructuring moves in its fold that laugh at recent changes in media law unveiled by the Indian government.

Star India, arguably one of Rupert Murdoch's more successful investments the world over, said on June 21 that it would float a new company, Media Content & Communications Pvt Ltd, that would broadcast the Star News channel.

Media Content & Communications has famous owners: Kumar Mangalam Birla, scion of the $6-billion Aditya Birla group, and Hemendra Kothari, chairman of DSP-Merrill Lynch, will each own 25 per cent.

Four other resident Indians "� Jeetendra, the former matinee idol; Suhel Seth, the advertising agency CEO; Vir Sanghvi, the newspaper editor; and Raian Karanjiwala, a New Delhi-based corporate lawyer "� have together bought 24 per cent in the company. There are reports that a TV actress is also a part owner along with the four, but that has not been confirmed.

The terms of the deal were not revealed, but it is learnt that Media Content & Communications is capitalised at Rs 100,000 (all of $2,150) with an authorised capital of Rs 4-5 crore.

Star India will own 26 per cent in the news broadcaster and retain management control. Star News, until now, was a channel operated by the Indian News Corp. unit.

The reason for the Star News restructuring, for those who came in late, is India's new 'uplinking policy' for news channels announced on March 26.

Uplinking involves television broadcasters beaming a television feed up to a satellite that bounces the signal back to cable network dishes or television antennas on earth.

It is an integral and critical leg of a television broadcast operation that enables live coverage of news events.

The business implication of the policy was that if any news broadcaster wanted to uplink and operate in India "� there were 47 local language and English news channels at last count "� it would have to cap foreign equity at 26 per cent.

Two channels, Star India and CNBC India, bore the immediate brunt of the change in rules.

CNBC India "� earlier a 51:49 joint venture between CNBC Asia and India's Television Eighteen Ltd (TV 18) "� is also restructuring its equity with the Singapore parent (the Asian service of Dow Jones Inc. and General Electric Co's NBC Television) reducing its equity to 26 per cent.

The Star News restructuring is reminiscent of complex ownership structures promoters employed in the mid and late-1990s to beat the 49 per cent foreign equity ceiling in telecom services.

Example: Hutchison Telecom bought out completely Max India in Hutchison-Max Telecom, the Mumbai cellular operator, and vested its 51 per cent Indian equity in a new company floated with a Kotak Mahindra group firm.

This new company had an equity base of Rs 5 crore "� 51 per cent held by the Kotak group and 49 per cent by the Hong Kong parent.

To meet the multi-million equity requirement in a capital intensive business like cellular telecom, Hutchison pumped in funds in the form of preference shares.

Almost all Indian telecom promoters are in violation of the spirit of the 49 per cent foreign equity cap. Exploiting a loophole in the Indian Companies Act, 1956, they floated 'holding companies' owning their 51 per cent in the operating company and, then, sold equity in such 'controlling vehicles' to strategic and financial investors.

In the process, their equity exposure to the business was reduced to 26.01 per cent and, in some cases, even 13.26 per cent when they floated yet another 'holding company'. Foreign investors, often, wrested management control.

The same route will be followed soon in insurance, where foreign ownership is set at a maximum 26 per cent but very few Indian partners have the financial depth to write cheques for their 74 per cent of equity.

The government is making noises that the foreign equity in insurance will be raised to 49 per cent, but even that will not be enough to have adequate capital to ensure capitalisation and solvency norms.

The trouble really lies in the hare-brained efforts of the government to control ownership in different industries without plugging loopholes in the parent legislation.

If New Delhi really believes that some sectors "� telecom, insurance and, now, media "� are "strategic" and foreign ownership in them ought to be restricted, it should enact changes in the Companies Act.

Until it does so, the government and its leaders risk being seen as short-term rent-seekers.

Josey Puliyenthuruthel works at content company perZuade. His views are personal and may not be endorsed by his employer, the company's investors, customers or vendors. Comments may be sent to josey@perzuade.com