By Nantoo Banerjee
Sounds odd, but India Inc. is on sale, literally. Come-and-grab-it is the message of the proposed set of guidelines lately unveiled by the Securities and Exchange Board of India (SEBI). Suffice it to say, the new business or corporate takeover policy is not a handiwork of SEBI alone. Several connected government departments and the Reserve Bank of India (RBI) are believed to have actively contributed to the thought. The idea is to make it easy for foreign investors to take over good listed and widely-held Indian companies. Although this has not been said in so many words, but the targeted companies make it loud and clear. The policy is expected to lead a spate of FDI-led M&A deals.
Not many healthy Indian companies go for acquiring healthy domestic public companies, outside their group entities, through the normal market bidding process. Cash rich Indian companies mostly go for sick or sickly domestic companies having operational synergies for vertical or horizontal business integration or overseas acquisitions. Such corporate acquisitions normally proceed detailed negotiations with banks for loan restructuring and additional working capital facilities for running those companies sought to be taken over. Recent domestic examples include Mahindra (M&M) takeover of Satyam Computers and Jindal Steel’s (JSW) acquisition of Ispat India’s steel plant at Maharashtra.
Several new features of the SEBI’s proposed takeover code make the policy a suspect of its purpose and target. Firstly, under the proposed guidelines, a business entity will be able to buy up to 25 per cent in another company without triggering the mandatory open offer. The present limit for such buying is 15 percent. Next, the acquirer has the option to buy a further 26 per cent in the company through an open offer (20 per cent, as per the existing policy) to fully take over its management. The new policy scraps the non-compete fee. The requirement of a total buy-out of minority shareholders, mandated in developed markets to protect the interest of small stockholders, has been left out to make takeovers further easy. It ignores the concerns of small minority shareholders. Minority shareholders will continue to be shortchanged during takeovers. Most large family managed stock exchange-listed Indian companies, where promoters’ share is below 50 per cent, will become vulnerable to acquisition by outsiders or overseas predators.
The country is starved of Dollars. The foreign direct investment inflow (FDI) in corporate equities has dropped alarmingly in the last two years. On the other hand, India’s foreign debt has been swelling to well over the RBI’s foreign exchange (forex) reserves, first time in several years. The high inflation rate is eating into the vitals of the economy. Consequently, high interest rates on both borrowings and deposits are making corporate equities less attractive. On top of these, the Supreme Court scanner on Indian black money held abroad and their laundering centres, led by Mauritius, has scared away many foreign fund managers, who specialize in channelising these monies. Stock prices are naturally down. Time may just be ripe for overseas corporate raiders to pick up some good Indian companies having weak domestic holding patterns. It appears that the proposed takeover code is almost tailor-made to facilitate and spur such activities.
According to the latest RBI reports, tax-havens account for the biggest sources of FDI funds to India, almost 62 per cent of the annual inflow. Of them, Mauritius alone accounts for 42 per cent. Not surprisingly, an economically-beleaguered island such as Cyprus is also a major source of FDI, routing about four per cent of fund flow into the country. In comparison, the giant USA’s contribution of FDI to India is just around seven per cent, less than even tiny Asian neighbor Singapore (nine per cent). Other prominent contributors of FDI to India are: the UK (five per cent), the Netherlands (four per cent), Japan (four per cent), Germany (two per cent), France (two per cent) and the United Arab Emirates (one per cent).
The FDI fund flow in new grass-root projects is dwindling. Honestly speaking, unlike in China, it was never very encouraging in so far as key areas of economy are concerned. Foreign investors have been mostly interested in making easy money in low technology areas and in projects or business acquisitions in soft areas such as soft drinks, fast foods, hi-fashion consumer products, financial and non-financial services. The sector-wise share of FDI investment has been the highest in the services area (21 per cent), followed by computer software and hardware (eight per cent), controversial telecommunications service industry (eight per cent), Housing and real estate (seven per cent), roadways, highways and other constructions (seven per cent), automobile (five per cent), power (five per cent), Metallurgical (three per cent) chemicals other than fertilizers (two per cent) and petroleum and natural gas (two per cent). The rest 32 per cent are in sundry areas, all below two per cent each.
The FDI inflow, which started with a bang in 2001-02 showing a 52 per cent growth over the previous year, reached its peak in 2006-07 as it clocked a 146 per cent rise over 2005-06. The growth rate fell sharply to 53 per cent in 2007-08 and, thereafter, to nine per cent in 2008-09 and finally in the negative in the last two years. In 2010-11, the FDI inflow dropped by as much as 25 per cent over 2009-10. During the first two months of the current year, the flow of foreign capital in the primary market nosedived by 38 per cent. Simultaneously, the current volatile Indian secondary (stock) market has ensured steady outflow of hot money and uncertainty over FII inflows (non-FDI). RBI records show a combined FDI in Indian equity along with reinvested earnings and other capital between the years 2000 and February, 2011, at USD 193.74 billion.
Obviously, the SEBI has little choice but to offer new baits under which foreign investors are lured into acquisitions of existing profit-making Indian companies no matter even if they kill efficient Indian enterprise. Drugs and pharmaceutical firms, companies in entertainment business, power generating outfits, financial services firms, primary metals, cement and ceramic firms, chemicals, textile, processed foods and retail firms could be easy foreign takeover targets after the new takeover guidelines come into effect. More foreign takeover of Indian companies will no doubt improve the RBI’s forex reserves in the short run. But, then, does anyone in the government truly care what impact such a policy would bear upon the Indian enterprise and Indian pride on the country’s long term economic interest? It may not be wrong to believe that the country is no longer interested in protecting the interest of domestic enterprises and those hardworking and innovative entrepreneurs behind them.
The dollar scare is probably haunting the Union Government more than the 2G spectrum allocation scam. International borrowing is not a preferred option for the debt-ridden government, which spends about 50 per cent of its annual budget on debt servicing. An FDI inflow of USD35-40 billion per year is considered to be a crying need of the government. This explains the proposed changes in the corporate takeover code. Whether it will help achieve the desired objective is not easy to forecast under the current business and political environment. (IPA Service)