T N Ninan: Ownership issues

WEEKEND RUMINATIONS

Should it worry us if 30 per cent of publicly quoted Indian companies are now owned by foreigners""as this newspaper reported earlier this week? My answer would be: No, but watch further developments. There is no cause for worry because the foreign capital is being used for Indian development, and for furthering the prosperity of Indians, so it should be welcomed. After all, the jobs are being created here, taxes are being paid here, and value is being added here in a variety of ways (development of institutionalised capabilities, strong organisations and the like). What typically goes out on account of foreign ownership (if you assume there is no covert transfer pricing) is a part of the dividend paid out of profits""which in relation to the size of a company's total operations is usually very small. To be sure, there is asset price inflation when a company prospers, but no one can take those assets away. If the foreign investor sells those assets, he will only get the price that someone else (foreigner or Indian) chooses to pay for it.

In macro-economic terms, too, the numbers are not significant. For instance, the total foreign shareholding in Indian companies is about $150 billion. That is large when compared to India's foreign debt (which is slightly smaller), but not large if seen in the perspective of a total balance sheet of India's assets and liabilities. Unfortunately, no one in India works out such a balance sheet (some other countries do, like Britain), but it is worth bearing in mind that the value of India's 300-million strong cattle population is probably equal to that part of the foreign investment (about $40 billion) that is linked to corporate control. Which is why the issue is not the absolute quantum of money or ownership, but political control and regulatory autonomy.

The issue of control was posed pithily by Rahul Bajaj some years ago, when he asked whether people would be comfortable if eight out of the 10 largest Indian companies were owned by foreigners. Hemendra Kothari cashing out by selling to Merrill Lynch is part of a trend, and in places like the automobile or the advertising business, the bulk of the companies are now in foreign hands. In the case of telecom, to take another example, foreign ownership accounts for close to half the market. And surveys uniformly show that the most powerful brands in India are predominantly foreign-owned.

Nevertheless, as long as markets are competitive, there is nothing to fret about. Anyone would wish for powerful Indian brands and successful Indian companies, but this is best left to competitive forces. Official policies designed to develop "national champions" haven't always worked. Besides, Hindustan Lever's dominance of the consumer softs market for decades has meant nothing in terms of loss of national autonomy; besides which, home-grown challengers keep popping up and taking chunks of the market. As for automobiles, Maruti may soon sell more cars than its majority shareholder, Suzuki""which surely means that the balance of influence swings India's way even if the ownership is predominantly Japanese.

If we are talking of control, about half of the foreign holding in listed Indian companies (about $80 billion) is by portfolio investors who have no interest in control. About half of the rest is again accounted for by other categories, including non-resident Indians and ADRs/GDRs, which are de-linked from control. The foreign ownership that is linked to control is just 8 per cent out of the 30 per cent. This is only counting the listed companies; many large foreign companies are not listed (Coke and Pepsi, GE and Intel). But then, Indian companies have begun to buy companies in other countries, so this is not a one-way street.

In conclusion, even if there is nothing to worry about today, one should watch further developments because India gets less than 10 per cent of the total capital flows to the emerging markets, and these in turn are less than 10 per cent of global capital flows. If the international flows should keep growing rapidly, the issue would be whether we have a corporate sector that is large enough to handle those flows.