There is growing concern among domestic industrialists over the financial clout of multinational companies (MNCs) that enable them to cross-subsidise, and thus sustain, continuing losses for several years in their Indian subsidiaries.
Faced with representations from several members on the issue, the Confederation of Indian Industry has initiated a study to assess the ability of MNCs to offset their Indian losses with overseas profits.
The CII members have expressed apprehension over the impact of intra-firm trade undertaken by transnational corporations between their various subsidiary companies across different countries.
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Such financial and economic transactions help these global giants to cross-subsidise their Indian operations for a long term by earning profits from other business centres within their global network.
Accounting practices in developed markets allow multinational companies to consolidate their balance sheets in such a fashion that the losses of a subsidiary company (in which the MNC parent has over 50 per cent stake) can be offset against the profits of another overseas subsidiary, thus allowing the company to show overall profits in its financial performance.
Faced with the inability to match the deep-pockets of MNCs and sustain losses over a very long period, several Indian companies have expressed their fears of being out-gunned in the domestic market in an increasingly globalised economy.
The CII study is expected to be ready in three months and will be subsequently taken up for discussion by a task committee to be set up for the purpose.
The latest study undertaken by the CII in response to the fears of its members is seen as another step in a series of moves taken by the domestic industry that is under an increasing onslaught of global competition.
It comes close on the heels of the recommendation in the Thapar Committee report submitted by Assocham, another apex industry chamber, to the finance ministry which suggests a cap on foreign direct investment in different sectors of the economy, including a 40 per cent ceiling on the foreign stake in the consumer goods sector. The report, which has raised a storm within the chamber, will be taken up for discussion on February 5 and 6 in Assochams management committee meeting.
This reflects the persistent demand from a section of domestic industry for a cap on foreign direct investment in different sectors of the economy, an issue which first came into the spotlight last year because of a well-timed paper on the role of MNCs released by the CII in March 1996.
The controversial CII paper, which was subsequently discussed and debated at length in the chambers high-level National Council meeting on March 22 last year, had also recommended regulated access to foreign companies into different sectors.
However, the stand on equity slabs for FDIs in different sectors created such a furore among its MNC members as well as in other fora like the American Business Council that the chamber was forced to dilute its stand on the issue.