MNCs adversely impact minority shareholders in many ways — transfer pricing, royalty payments and related charges, merge domestic listed subsidiaries with the wholly owned unlisted subsidiaries of the parent entity with the sole aim to increase the holding of the parent in the listed Indian subsidiaries.
Transfer pricing is way up on this list because it is not always easy to put a number or the value of widgets imported or equipment exported. It is easy to import raw materials and intermediate goods from the parent and overpay or to export finished good at lower prices. It is hard to put a number on the value of software services exported, particularly by a subsidiary, arm length pricing notwithstanding. Just a small tweak in the formula is all that is needed to move profits from the listed Indian entity to its parent.
Firms often bring in engineers and other so-called specialists, paying top dollars for these services, unmindful that these services are available locally and at far lower cost. And this is true not just for cement or paints, but also for services like advertising.
MNCs have significantly stepped up royalty and related payments from their Indian subsidiaries in the past five years, after regulations were freed. Maruti Suzuki, Nestle India and Hindustan Unilever, in the aggregate paying Rs 713 crore in 2007-08, are now paying Rs 2,409 crore. This is a jump of 240 per cent. On the other hand, net sales and EBITDA have grown only 80 and 40 per cent, respectively. MNCs such as Whirpool and Asahi India Glass do not pay dividends to Indian shareholders. These, however, paid Rs 410 crore in 2011-12 as royalty and related payments to their foreign sponsors.
Then there have been instances where MNCs have merged or restructured assets between their wholly owned subsidiaries and the Indian listed company. These restructurings of businesses have been done at valuations that are clearly unfavourable to minority shareholders. In a much commented case earlier this year, Akzo Nobel NV, the Dutch paints company, merged three of its wholly owned subsidiaries with Akzo Nobel India, thereby increasing promoter shareholding from 56 per cent to 66 per cent. The market reacted negatively to the announcement and Akzo’s shares tanked 10 per cent. It was only after a buy-back was announced that the shares recovered lost ground.
Global mergers drive strategy, rather than what is good for Indian business. You only have to look at ICI’s history in India to see how.
Why do MNCs do so? More often than not, India is the only country outside the home market where they have a listed entity. So the board and senior management are seldom quite sure how to deal with this. The focus is always on compliance with regulations in the home market, with the Indian subsidiary getting short shrift. More important is that senior management in Indian companies is invariably brought in or appointed by the parent company. Their future career paths in the group and incentives are controlled by the parent company. Keeping them on the right side — easier when you transfer profits to the parent, is possibly more important than the local entities market cap. There have been instances where the parent MNCs have asked local CEOs in no unclear terms that they do not have to bother about local investors but should focus on their foreign shareholders. The conflict of global profit at the cost of local profit very much tilted in the favour of the parent company.
The Indian listed subsidiaries, or associates of MNCs, rarely show concern for local investors and often compromise on standards.
Anil Singhvi
Founder director, Institutional Investors Advisory Services India (IIAS)
