Mncs Pump In $700m To Shore Up Indian Arms

Multinational corporations (MNCs) pumped in up to $700 million during 2002 as voluntary revenue grants to bail out their loss-making Indian arms.

Automobile major Fiat brought in close to $300 million in the form of grants last year. Personal care major Gillette pumped in $20 million for financial restructuring.

White goods manufacturer AB Electrolux has also decided to pump Rs 50 crore into its loss-making Indian subsidiary Electrolux Kelvinator Ltd in the form of a one-time, voluntary, discretionary revenue grant.

The Indian subsidiaries of several multinational companies have been making severe losses, and infusion of money through grants is a way of cleaning up their balance sheets.

A voluntary capital grant is not made towards capital contribution by the parent and does not carry interest. It is discretionary and is not a part of the equity or debt component that has been invested in a company already.

Government sources said several proposals for voluntary grants as also preference share issues were coming through the automatic route (vetting by the Reserve Bank of India) since the capital infusion did not alter the equity structure of the companies.

As per existing foreign direct investment rules, cases where the shareholding pattern is being altered needs to be cleared by the Foreign Investment Promotion Board (FIPB) even if the sector is in the automatic route.

India, however, does not consider revenue grants as part of FDI inflows. But there is a move to include these in the inflow figures from the current year.

Foreign firms are finding the voluntary capital grant route a means to support their ailing Indian subsidiaries. Through this, the subsidiaries are saved from the interest burden, while the money is used to retire debt or to suffice working capital requirements.

It also protects them from stringent disclosure norms applicable to companies raising money from the Indian public or banks.

Voluntary grants help the subsidiaries from getting over-capitalised, keeping in view the fact that there could be a public float or a divestment in the future. Beverage major Coca-Cola has had to reduce its capital by around Rs 2,900 crore to close to Rs 400 crore after it was asked by the government to divest 49 per cent stake to resident shareholders.

The company said it did not expect investors to show interest in the divestment process since it had huge accumulated losses.

Coca-Cola, however, reduced its equity capital base by setting off losses worth Rs 2,000 crore and by converting money lying in the advance share capital into preference shares.