1970's: Most MNCs came to the Indian equity market as ‘unwilling guests’ following a government rule that made it mandatory for Indian arms of the MNCs to list on local stock exchanges.
A rule in 1973 directed foreign companies to sell majority holdings to locals.
What that meant for the parent MNC's was sharing equity, ownership and profits made from business done in India.
While some MNC's like Coca Cola and IBM exited Indian shores, unhappy with the regulation; Others like Nestle and Colgate chose to list (making millionaires out of investors who bought shares back then)
1991: In an effort to revive the industries and the economy, the government began to open various sectors and invited MNC's to India, what was until then a more or less closed economy.
In what was to follow, a lot more multi national companies entered Indian subcontinent mostly by way of fully owned (100%) subsidiaries and some through partnerships.
To name a few: Nike, Coke, Adidas, Puma, Vodaphone, Nestle, McDonalds, Dominoes, Pizza Hut, Toyota, Mercedes benz, Renault, Volkswagen, BMW, Sony, LG, Samsung, Microsoft, Apple, Google, Motorola, Nokia, Citibank, Bank of America, Wells Fargo, RBS, AIG, Shell and numerous others in the pipeline as you read...the list is HUGE
However, the MNC's that chose to enter India between 1973 and 1991 had to part with their stake in the Indian arms by having to list shares locally. They sure had the early mover advantage compared to those that entered post 1991, but it still looks unfair in some sense.
With an end motive of globalizing, expanding business and making more profits, there was a natural conflict of Interest between the MNC parents and the minority shareholders in the listed Indian arms. It wasn't long before most of these MNC's had their minds working on how to address this and get a larger share (rather full share) in the business done through their arms in India.
In the scope of the law, most public listed MNC's have done one or more of the following:
1. Royalties
Fair enough, MNC kids paid Royalties on Sales for technology, RnD, brand value to the MNC's parents. Since Royalties are paid on net sales and paid as expense (before tax), this was a good way for parent companies to take home some money. However, since the regulations capped Royalty payments at 5% on domestic sales and 8% on exports, this strategy alone did not solve the problem for high IP / high margin products.
2. Buy backs, Open offers and Delisting from exchanges
A lot of MNC's did buy backs, made open offers to increase stake in the Indian arms (Many were even successful in delisting which meant converting into a private ltd (100% sub) just like ones that started post 1991)
A lot of MNC's looking for delisting, in fact suppress financial performance to keep the stock price low, so as to make a cheaper open offer.
It isn't a coincidence that the profits of Reckitt Benckiser jumped 12 times from 21 crores to over 252 crores in just 4 years of delisting since 2002The delisting of Cadbury India was attempted at 500/- per share back in 2003. After an appeal for fair pricing of shares by some retail investors, the company was forced to revise the price to 1340/- (EnY has now recommended 1742/- a share)
Don't confuse this with an exit from Indian markets: For almost all of the MNC's, globalizing business and expanding to India and other countries is beyond question. In fact, several of these Indian listed subs already contribute significantly to the overall business and profitability of the parent company.
3. Dividend Payouts
This is a very popular method of taking home profits. Depending on needs for fresh investments and taxation laws, several companies paid out heavy dividends (high dividend payout ratio), hence taking back profits home. However, dividend had to be shared between all shareholders. (So in principal it did not change anything)
4. Importing parts or products from parent MNC company
A lot of companies chose to source the products or parts from the parents companies, as only a limited part of the sales of products manufactured in India could be taken back as royalty and profits had to be shared with the local share holders. (This was particularly true for high IP or high margin products)
How about listing parallel 100% subsidiaries for doing selected businesses (sounds unfair?)
June 2009: The government made it mandatory for all listed companies to have atleast 25% float in 3 years.
…so these MNC kids that were stuck in a limbo had to decide fast whether to make open offers and delist fast or to give up and dilute stake to 75%
What more… Investors started taking stock prices for these listed MNC kids up.. up.. up.. speculating open offers and a host of delisting's to happen. (some of the names include Gillette, Foseco, BOC India, OFSS, Honeywell Automation, BlueDart Express, Novartis, 3M India, Thomas Cook and several more)
While delisting may bring immediate gains, Investors will lose a big opportunity of being able to share prosperity in the long term. Moreover, with the ever increasing role of MNC's in Indian economy, a large portion of Indian Business is out of reach for the domestic investors.2010: The RBI removed the upper cap on the royalties paid by companies to their parents companies. (Earlier the royalty payments for import of technology was capped at 5% for domestic sales and 8% for exports, while the royalty for using trademark/brand name was capped at 1% of domestic sales and 2% of exports)
Does this mean that these companies can now pass all their potential profits to their MNC's parents as royalties, pre tax.
Looks scary and off course unfair for the retail investor. [Yet another way of milking the investors :) ]
Last week, Maruti announced lower than expected profits for the quarter on account of higher "royalty payments" to the parent company. So was the case with the quarterly results of Hindustan Unilever. So the bad news for the retail investors has already started to reflect.
Are Royalties Justified ?
Off course! I don't disagree with the fact that the original inventor deserves a royalty/pie in the sales. (think of it as sharing the cost for RnD, technology and brand value/marketing)
Did you know, even Tata Sons charges brand name royalty to several Tata group companies.
(Sounds fair, as long as it is a common pool of money from group companies, which will be spent on group advertisements)
In fact, I believe the Royalties paid to various parent MNC's offshore should be counted as Imports (of technology, RnD and Brand Value), if not already so.
My ask from the government is for the protection of the minority shareholders. To ensure that these companies don't do the obvious (increase royalties, suppress performance and then do an open offer) One way this could be taken care of is by making an open offer at say 20% premium to the stock price before increase of royalties, so that the minority shareholders get a chance to exit at a fair price.
There is a certain good that comes out of the removal of upper limit on royalty payments: (more so, in context of listed MNC's)
- Incentive to manufacture/export products from India.
- High IP products can now be sold/manufactured/exported from India.
In fact, India can be seen becoming the manufacturing and export hub for several of these MNC companies.
Coming back to listed MNC kids in India:
The pain that I face as an Investor though, is the complexity in predicting profits and valuations for these listed subs in India... amid these unknowns, changing policies, conflict of interest and in absence of a definite "beneficiary" of the company's growth and profits... it just adds to the component of "speculation" in making Investment decisions...
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