By T N Ninan
It is beginning to look as though the stock market regulator has achieved unintended results in its attempt to increase the minimum public shareholding required for a firm to stay listed on a stock exchange. Several international firms, of the likes of Cadbury and Carrier, Alfa-Laval and Atlas Copco, which had public shareholdings of less than 25 per cent, have chosen to de-list and go private, rather than dilute their shareholding further in order to meet the 25 per cent norm. Many more firms may de-list in the coming months, at a time when the relatively late entrants to the Indian market like Pepsi and Coke, Hyundai and Samsung, are already substantial players in the Indian economy and have no Indian shareholding.
Adding to their ranks is surely the opposite of what the Securities and Exchange Board of India (Sebi) intended as the outcome of its 25 per cent rule. It is worth recalling that the Indian stock market came to life 40 years ago when a new law forced international companies to list on Indian stock exchanges. If companies take the opposite step now, it is bad news for a market that can do with more good scrips and greater market depth.
Meanwhile, Indian shareholders are losing out on another count, as one international firm after another has jacked up the royalty that it extracts from its Indian subsidiary. This (along with the related issue of transfer pricing) is a corporate governance issue, because the Indian firm that decides to pay a higher royalty is invariably controlled by the overseas entity that is charging the royalty in the first place. Such decisions should therefore be subjected to independent vetting, and proper justification, which is what independent directors should be ensuring. But so far there is only one instance of independent directors asserting themselves and blocking a royalty hike. If royalties account for as much as five per cent of sales (as they do in some cases) when profit on sales may be no more than 10 or 15 per cent, it means that a substantial chunk of profits is pre-empted by the international shareholder, without tax being paid in India and without it being available for distribution to Indian shareholders.
The remedy for these problems is not heavy-handed government intervention. It is a good thing that investment rules have been made more liberal, and that companies have been given greater freedom to operate. For obvious reasons, it is not advisable to turn away from such reforms. It is also a fact that many international companies find burdensome the additional requirements in terms of compliance rules for listed companies, especially when they do not need to raise capital here; so they would prefer to go private rather than stay listed. Taking away such flexibility is not advisable, once again because India needs foreign investment and cannot afford to see a repeat of what happened in 1978, when Coke and IBM pulled out of the country rather than dilute shareholding. Yet a non-transparent set of international companies that pre-empt surpluses by transferring money overseas on one head or another is not something that the country can watch as a helpless spectator.
The solution might come from playing with tax rates. Listed companies could be given a benefit on the applicable rate of tax on profits; alternatively, unlisted companies could be subjected to a surcharge on the normal rate of corporation tax. Similarly, remittances under the heads of royalty, head office expenses and the like, which are more than a stipulated share of profits or turnover, could attract a foreign remittance tax. If businesses do not like these ideas, they could be asked to come up with alternative solutions.