It's the control, stupid

BS OPINION

Till now, the government's approach to foreign investment in sectors where this is restricted, has been driven by mindless adherence to the fulfiling of certain numbers. So, if foreign ownership of a television channel was to be restricted to 26 per cent, that's all the government looked at.

In the event, Star was able to come up with a fiction that allowed Rupert Murdoch to continue to control its Indian operations with just 26 per cent holding, by parcelling out chunks of shares in his Indian operations to merchant bankers and other investors who were clearly not interested in running the show.

With Kumar Mangalam Birla, one of the investors in Star's India set up, opting out and selling his 25 per cent holding to an investment banker, and with the additional disclosures on share capital size, the identity of directors and the manner of funding investments and shareholding, even the fig leaf of dilution has been removed.

Another recent example of this mindless application of the law, of course, is the case of Coca-Cola. When the company came into India, one of the conditions laid down was that Coke would divest part of its equity to the Indian public within a certain time frame.

For a long time, Coke managed to convince the authorities that the stock markets were not responsive enough for a float, then it got the government to agree to allow it to make a private offering to its bottlers instead.

And now, the biggest travesty, the government has allowed Coke to offer non-voting shares "" with restrictions on downstream sale and purchase of the shares! If the end result is legal fiction, then why not simply allow Coke to retain 100 per cent shareholding, since its dilution in the way that has been done serves no purpose at all?

The government must focus on the real issue while framing laws, which is not the percentages held by various promoters, but who controls the venture.

Fera with its 40 per cent limit on foreign shareholding did not result in dilution of control because of a wide dispersal of Indian shareholding; all it managed to do was discourage international companies from taking their Indian operations seriously.

More recent examples show that artificial shareholding limits that are devoid of business logic achieve little. When the original telecom policy was framed, foreign investment in the sector was restricted to 26 per cent "" it has now been raised.

But, given the thousands of crores of rupees required to develop a half-decent telecom infrastructure, it was obvious that only two or three Indian promoters had the money.

In the event, many entrepreneurs had no option but to quietly sell their equity to foreign partners, and the foreign shareholding limit was easily side-stepped by corporate pyramiding or the use of fron

ting investment bankers; all the while, the overseas investors controlled the show.

Since equally huge investments are required in the insurance sector, and the foreign equity holding has once again been fixed at 26 per cent, it is certain that similar deals will be made here as well, and indeed one or two already have.

The government needs to get real about foreign investment. If it wants Indian control of a company or sector, then it should focus on that as the issue. If not (and in competitive markets this can often be a non-issue), the shareholding restrictions serve little purpose.