The story of Indian business?

There are flaws in the economy that is evolving to one in which private interests play a larger role

Any foreign businessperson seeking investment opportunities in India is unlikely to be encouraged by the reports that appeared above the fold of Business Standard’s front page on August 22. The lead was all about the Ruias of Essar completing a 98 per cent stake sale of their oil company to Russian giant Rosneft to pay off the enormous debts the group has racked up. The second lead reported the possible closure of 169 outlets in the north and east by McDonald’s after it terminated a troubled, two-decade-old franchise agreement with a local realtor. The third was a follow-up to the turmoil at Infosys, following the exit of its CEO as a result of fierce differences with its iconic co-founder. 

All three stories are striking because they represent a sobering reminder of the challenges inherent in doing business in India — elements that cannot be captured in a Doing Business index. Yet less than two decades ago, these companies symbolised the soaring hopes embedded in economic liberalisation. 

Nobody embodied the brave new world of Indian business better than the Ruia family, which made high-profile forays into capital-intensive infrastructure from the early nineties — steel, power, ports, telecom (briefly) and oil. A glittering 19-floor building came up in Mumbai’s Mahalakshmi area, with a rooftop helipad that represented, in those days of seemingly innocent hope, the soaring potential of a country newly opened for business. 

The difference between sky-high ambition and strategic overreach is a fine one, but it is fair to say that the Essar group crossed it early thanks to the relatively easy access to capital and poor risk-assessment capabilities of an inexperienced Indian banking system. Till the Rosneft deal took over about $5 billion of Essar’s debt liabilities, the group starred among India’s most indebted, a major contributor to the bad loans that burden the Indian banking sector. Along the way, Essar Steel became the first Indian company to default on a $250-million international debt obligation – that was back in 1999 – and the group has faced three corporate debt restructuring and two overseas bankruptcy filings. Even after the sale to Rosneft, banks will have to find ways to recover debts from the steel and power businesses (the former is now under insolvency proceedings).

If the Essar-Rosneft deal symbolised corporate hubris of a sort, the McDonald’s controversy highlights the risks inherent in entering new markets. McDonald’s story is a familiar one: A storied US consumer giant looking to cash in on an expanding Indian middle class market, signs a franchise agreement with an influential local Indian businessman. Everything looks set for a golden future: When the Golden Arches opened its first eatery in Delhi’s Vasant Vihar in 1996, the queue stretched for miles around the block. 

Eighteen years later, the 50:50 joint venture was in trouble, with disagreements between the US corporation and Vikram Bakshi, the managing director and 50 per cent franchise owner. Allegations of “misconduct” flew as McDonald’s terminated the Mr Bakshi’s term, and the issue went to the Company Law Board and the London Court of International Arbitration before McDonald’s decided to terminate the franchise agreement altogether. 

And finally to l’affaire Infosys, highly feted symbol of India’s global IT prowess, a gold standard for corporate governance and so on and so forth. In the early noughties, its stock had this magical ability to transform humble drivers and maids into millionaires. On Monday, in the space of a day, the stock price plunged almost 6 per cent after the company’s first professional CEO resigned in high dudgeon over accusations of governance failures levelled by N R Narayana Murthy, the man who represented India’s new breed of ethical billionaires not so long ago, in a battle that has pretty much polarised corporate India.

The somewhat sordid details of the issue at hand – whether there were shenanigans involved in the purchase of an Israeli company – can be debated ad nauseum but a foreign reader may be pardoned for enquiring about the role of the board, comprising stalwarts from the world of business, in all of this. Should it not have played a more proactive and definitive part of stemming a crisis that has undeniably wrought lasting damage on the company?

These three companies are a few examples of inept risk assessment, poor relationship management and weak governance structures that characterise key weaknesses in the Indian business environment. They could be the standard flaws of an economy that is evolving from a state-dominated one to one in which private interests play a larger role. But they urgently need to be addressed if Indian business is to rise to the next level.