| MNCs operating out of emerging markets dilute their governance standards | |
NEXPERT VIEW N
MNCs adversely impact minority shareholders in many ways — transfer pricing, royalty payments and related charges, merge domestic listed subsidiaries with the wholly owned unlisted subsidiaries of the parent entity with the sole aim to increase the holding of the parent in the listed Indian subsidiaries. Transfer pricing is way up on this list because it is not always easy to put a number or the value of widgets imported or equipment exported. It is easy to import raw materials and intermediate goods from the parent and overpay or to export finished good at lower prices. It is hard to put a number on the value of software services exported, particularly by a subsidiary, arm length pricing notwithstanding. Just asmall tweak in the formula is all that is needed to move profits from the listed Indian entity to its parent. Firms often bring in engineers and other so- called specialists, paying top dollars for these services, unmindful that these services are available locally and at far lower cost. And this is true not just for cement or paints, but also for services like advertising. MNCs have significantly stepped up royalty and related payments from their Indian subsidiaries in the past five years, after regulations were freed. Maruti Suzuki, Nestle India and Hindustan Unilever, in the aggregate paying ₹ 713 crore in 2007- 08, are now paying ₹ 2,409 crore. This is a jump of 240 per cent. On the other hand, net sales and EBITDA have grown only 80 and 40 per cent, respectively. MNCs such as Whirpool and Asahi India Glass do not pay dividends to Indian shareholders. These, however, paid ₹ 410 crore in 2011- 12 as royalty and related payments to their foreign sponsors. Then there have been instances where MNCs have merged or restructured assets between their wholly owned subsidiaries and the Indian listed company. These restructurings of businesses have been done at valuations that are clearly unfavourable to minority shareholders. In a much commented case earlier this year, Akzo Nobel NV, the Dutch paints company, merged three of its wholly owned subsidiaries with Akzo Nobel India, thereby increasing promoter shareholding from 56 per cent to 66 per cent. The market reacted negatively to the announcement and Akzo's shares tanked 10 per cent. It was only after a buy- back was announced that the shares recovered lost ground. Global mergers drive strategy, rather than what is good for Indian business. You only have to look at ICI's history in India to see how. Why do MNCs do so? More often than not, India is the only country outside the home market where they have a listed entity. So the board and senior management are seldom quite sure how to deal with this. The focus is always on compliance with regulations in the home market, with the Indian subsidiary getting short shrift. More important is that senior management in Indian companies is invariably brought in or appointed by the parent company. Their future career paths in the group and incentives are controlled by the parent company. Keeping them on the right side — easier when you transfer profits to the parent, is possibly more important than the local entities market cap. There have been instances where the parent MNCs have asked local CEOs in no unclear terms that they do not have to bother about local investors but should focus on their foreign shareholders. The conflict of global profit at the cost of local profit very much tilted in the favour of the parent company. The Indian listed subsidiaries, or associates of MNCs, rarely show concern for local investors and often compromise on standards. ANIL SINGHVI Founder director, Institutional Investors Advisory Services India ( IIAS) MNCs have stepped up royalty and related payments from their Indian subsidiaries in the past five years | | Corporations pay a heavy price for secrecy and opaqueness in operations | |
There are quite a number of corporations in India and abroad that have excelled in incorporating the values of good governance. It is equally true that there are many companies across the world, which have " trust deficit" in complying with the norms of governance.
And yet, there is an awareness to permeate good business practices in the global space. Sarbanes- Oxley Act 2002 of the US was a direct response to corporate and accounting scams, which created consternation in the western world. The financial meltdown that triggered in 2008 reiterated further tuning up of the corporate governance system to protect the interest of the stakeholders including ordinary investors. One of the positive byeproducts of these systemic failures is the focused attention that corporate governance is being assigned across geographies. Specialized organizations have sprung up to undertake research on the abstract conundrums of the corporate governance. That has resonated in India as well. The new Companies Bill, is designed to bring about farreaching changes in the corporate space. There is a philosophical underpinning to corporate governance. Corporate laws and standards vary from country to country. Historically, we have a maze of country specific laws that govern corporations. Legally conducted transactions in one country may fall into the realm of illegality in another. At a time corporations are going global, it is necessary that we develop global standards for governance. That will serve twin objectives. One, it would lead to integration of best business practices into host country's legal framework and, two, it plugs the loopholes for manipulation and mismanagement. For instance, Sarbanes- Oxley Act can be a role model for developing countries to evolve a framework for plugging the loopholes in the corporate laws. Similarly, the ecosystem developed by Malaysia and Indonesia for healthy dialogue with the stakeholders while implementing infrastructure project s can be effectively put to use in other emerging economies, where many projects are on hold on account of the resistance by the affected parties. It is heartening that the policy apparatus in India is attempting to evolve a system for making stakeholders permanent beneficiaries in case of their displacement while implementing aproject. Good governance is good business. That helps corporations to minimise wastes, enhances its brand image and to emerge as a respected corporate citizen. The new land acquisition law proposed in India would be able to deal with the issue of land acquisition for large mining, steel, infrastructure and other projects, which would pave the way for implementation of various projects which are currently stuck due to non- availability of land. Coming to the issue whether MNC's dilute corporate governance standards in emerging economies, some perspectives have to be flag marked. First, there is diversity in corporate and tax laws in adeveloping and developed economy. Second, business practices vary from one country to the other. Third, the regulatory systems in the respective economies are at different stages of evolution. Fourthly, the degree of political will that the country commands to address the vexatious issues emanating from corporate governance vary from each other. While our effort should be to evolve a set of best business practices that can be universally applicable, it is historically proved that corporations, which operate in secrecy and opaqueness, pay heavy price and become extinct sooner or later. It is immaterial whether they belong to the first world or emerging world. There is diversity in corporate and tax laws in adeveloping and developed economy SHOURYA MANDAL President, Indo- American Chamber of Commerce | | | | | RBI proposes tighter NBFC norms | |
BS REPORTER
Mumbai, 12 December The Reserve Bank of India has proposed tighter norms for non- banking financial companies (NBFCs) on capital requirements, risk weights, provisioning norms and asset classification. The central bank has proposed that stake transfer of NBFCs of more than 25 per cent will need RBI's prior approval. In addition, NBFCs with an asset size of ₹ 1,000 crore or more will require RBI's approval for appointment of a chief executive officer. The central bank has released the revised draft guidelines with regard to NBFC regulations, based on the recommendations of the Usha Thorat committee, set up to review the existing regulatory and supervisory framework of such entities. For all captive NBFCs, those primarily engaged in financing aparent company's products, the tier- I capital requirement is proposed to be raised to 12 per cent from the present 7.5 per cent. NBFCs involved in financing to sensitive sectors such as stock markets, real estate and commodities, will also have to maintain 12 per cent tier- I capital. For all other NBFCs, the tier- I capital requirement is proposed to be raised to 10 per cent from 7.5 per cent. The overall capital adequacy requirement is proposed to be retained at 15 per cent. It is proposed that risk weight for NBFCs not sponsored by banks should be 125 per cent for commercial real estate exposure and 150 per cent for capital market exposure. RBI also says asset classification norms for NBFCs should be in line with those of banks, though in a phased manner. At present, while banks classify an asset as non- performing if repayment is due for 90 days, it is 180 days for NBFCs. From April 1, 2014, it is proposed, NBFCs will classify an account as an NPA if payment is overdue for 120 days and follow the 90- day norm a year later. "Further, it is proposed to raise the provisioning for standard assets from 0.25 per cent to 0.40 per cent of the outstanding amount from March 31, 2014, for all NBFCs," said RBI. The banking regulator has said all deposit- taking NBFCs should be rated by a credit rating agency and unrated entities will not be allowed to accept public deposits. RBI has proposed that stake transfer of NBFCs of more than 25 per cent will need RBI's prior approval | | Sending money from kirana store via SMS | |
SOMASROY CHAKRABORTY
Kolkata, 12 December Remitting money from the kirana store in the neighbourhood or allowing cash withdrawal from your bank account through a text message has become possible, with private sector lenders starting to offer these services. YES Bank is partnering retail stores to allow customers in remitting money through these shops. " Curiosity killed the cat. In our case, curiosity gave us a new business strategy," Anand Bajaj, executive vice- president and chief innovation officer at YES Bank, told Business Standard. On his way to work each morning, Bajaj noticed long queues outside bank branches. He found migrant workers were waiting for hours for the bank to open, to send money to their families in villages. Sometimes, they had to skip work and lose a days wag, e as it took several hours before they reached the counter. " We wanted to get into this business immediately. My gut feel was, people want convenience. But someone told me it was not possible unless we have 10,000 branches," said Bajaj. The bank decided to follow the model adopted by telecom operators. " I had seen such queues outside public phone booths when not many people were using mobile phones. But, now, almost everyone uses a mobile phone and even kirana stores offer recharge coupons. Just like telecom players shared tower infrastructure to expand their reach, we decided to share other banks branch infrastructure," said Bajaj. The bank helps kirana shop owners to get internet access in their system and offers them a credit limit of ₹ 50,000- 100,000. The shopkeeper takes the money from the customer and debits his limit and the cash gets transferred to the receivers account. YES Bank charges one per cent to the customer for sending the money and the retailer gets 80 per cent of that fee as his commission. In November, through this model, ₹ 610 crore was remitted, involving 1.3 million transactions, 350,000 customers and 16,438 branches. The bank currently has 12,000 approved shops, of which around 7,000 are already active. Another private sector lender, Federal Bank, has launched a pilot project to allow its customers to authorise others to withdraw cash from their account through a text message. For instance, a person in Mumbai wants to send cash to his kin or friend in Delhi. The receiver has to go to a Federal Bank ATM and type the senders mobile number and the amount of money he wants to withdraw. | | LS likely to pass banking Bill today | |
BS REPORTER
New Delhi, 12 December Finance Minister P Chidambaram, a day after meeting opposition parties, today expressed hope that the Banking Laws (Amendment) Bill, 2011, would be passed this week. And, said there was no need to refer it back to Parliament's standing committee on finance, as is being demanded by the Bharatiya Janata Party ( BJP) and other opposition groupings. The expectation is that the Bill would come up and be passed tomorrow, unless the proceedings are obstructed on other grounds. Senior BJP sources said the party supported the Bill in principle. But the party wants it rereferred to the standing committee to scrutinise changes added to the draft since its earlier examination. Hence, it would not help the government pass it. The party might walk out during voting. The BJP has listed Anurag Thakur as its speaker on the issue in the Lok Sabha tomorrow. Chidambaram said the government had added only one clause to the original Bill - pertaining to banks' entry into commodity futures trading. " I met both leaders of Opposition (Sushma Swaraj and Arun Jaitley) yesterday and I explained to them that nothing new has been done ( to the Bill). One new section has been introduced, based on a report of the standing committee ( of Parliament) on food and consumer affairs. They wanted a provision to be introduced," he told reporters. The Bill was taken up for consideration in the Lok Sabha on Monday, but could not be discussed, as Chidambaram proposed to introduce the provisions that were not part of the original Bill. BJP leader Yashwant Sinha said the clauses were not part of the Bill considered by the standing committee on finance, which he heads. Sinha said the procedure did not allow the government to make changes to the legislation without referring it back to the committee. Chidambaram, however, said he had used Rule 80 of Parliament's procedures and there was no need to send the Bill back to the panel. " Just as the standing committee on finance made a recommendation, that committee ( on food and consumer affairs) made a recommendation on one matter… When I explained this to the two leaders of Opposition, they understood what I have said. They said they will discuss with their party," he added. The Forward Contracts (Regulation) Act, 1952, allows all entities to participate in commodity futures trading. Banks can trade in shares, bonds and currencies but Section 8 of the Banking Regulation Act prohibits them from trading in goods. The finance ministry now wants to allow banks to trade in commodity futures but the original Bill did not have any such a provision. Chidambaram also expressed hope that the Opposition would co- operate in getting five key economic reform Bills passed in the ongoing session of Parliament. He said BJP leaders understood the urgency for enacting theses and that he might meet them again on the issue. Besides the Banking Laws (Amendment) Bill, the Insurance Laws ( Amendment) Bill, Microfinance Institutions (Development and Regulation) Bill and Pension Fund Regulatory and Development Authority Bill are also pending. The Money Laundering (Amendment) Bill, 2011, and the Enforcement of Security Interest and Recovery of Debts Laws ( Amendment) Bill, 2011, have already been passed in the Lok Sabha this session. " I have got two ( Bills) passed in the Lok Sabha. One has gone to the Rajya Sabha. There are three more," said Chidambaram. Adding: " I told them, let me pass the banking Bill and I would come back to you over the weekend and discuss the insurance Bill." Despite BJP demand to refer it back to House panel, Chidambaram insists it is not needed Finance Minister P Chidambaram with Australian Deputy Prime Minister Wayne Swan during a meeting, in New Delhi on Wednesday PHOTO: PTI | | 'Mild version' of IPO safety net possible | |
BS REPORTER
Mumbai, 12 December Market regulator Securities and Exchange Board of India ( Sebi) might introduce a diluted version of the ' safety net' framework it had laid out in a discussion paper earlier this year. Sebi Chairman U K Sinha today hinted it might take a middle path on implementation of this framework, following mixed feedback from industry players on the discussion paper titled ' Mandatory Safety Net Mechanism', floated in September. Under the mechanism, companies issuing initial public offerings ( IPOs) have to compensate investors if their share prices see a sharp drop in the first few months after listing. "It might be a mild solution. Somebody who wants to protect the small investor all the time, will be disappointed. Somebody who feels that there should be no safety net, will also be disappointed," said the Sebi chief, on the sidelines of the CII Capital Market Summit here. Sinha, however, did not elaborate on what might come in the ' mild version' and also when the Sebi board was likely to take up this issue. While some market players wondered how there could be a safety net for equities, a risk asset, others feel it is necessary to instill confidence in the minds of investors in the light of the poor performance of a majority of IPOs in the past couple of years. According to a Business Standard analysis, 25 per cent of IPOs between 2008 and October 2012 would have had to refund money to investors, if the framework laid out in the discussion paper was applied to these companies. According to the Sebi paper on safety net, if a volumeweighted average market price of a newly- listed stock for three months from the date of listing depreciates by more than 20 per cent from its issue price, or if the fall in the stock price is 20 per cent more than the fall in the broader market, then the company will have to refund money to investors. "The whole idea behind the safety net is that we want to put some pressure in the minds of promoters and advisors on pricing," said Sinha. The Sebi chief also raised concern over growing instances of rivalry in corporate India. He said companies were setting up separate offices to look at their competitors. "What depth are we going into? You can harm your competitor and your competitor can harm you and then in the end, India will be harmed," he said. " If somebody is doing something wrong, there are systems to take care of it. There are advisory firms as well who are doing a very good job." Turn to TSI, Page 3 > Securities and Exchange Board of India Chairman U K Sinha at the Confederation of Indian Industry's Fourth Capital Markets Summit in Mumbai on Wednesday. PHOTO: KAMLESH PEDNEKAR | | | | | | | | | |
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