MNCs - WOLF IN SHEEP'S CLOTHING

By Ruma Dubey

When we talk about MNCs, what always comes to mind are companies that are cash rich, high dividend paying, a foreign parent company with a majority/high shareholding and more importantly, the quotient of corporate governance is very high. Somehow, till date their conduct has always been so good that we just do not associate any kind of unethical business with MNCs. Their above-the-board dealing, the transparency has always been applauded. We always assume that because the parent company based in a developed country is used to very high moral standards of governing that it is just not there in its DNA to cheat or indulge in hanky-panky business.

But over the past few months, experiences with some MNCs have made us question whether these MNCs, when they come to India, dilute their governance codes to suit the locale palate – when in Rome do as the Roman’s do kind of thing?

Take the case of high royalties. Be it any sector, if there is a foreign parent, the Indian company does end up paying a hefty royalty – right from HUl, P&G, ACC, Suzuki, Holcim, ABB, Areva T&D, Cummins, Siemens and even Voltas, Castrol and Thermax. In five years, royalty payments have grown 31% yearly, much faster than rise in revenue and profit

Then there is the usual trick – merging the listed Indian subsidiary with the wholly owned unlisted subsidiary of the parent company with the main aim of increasing stake of the parent company in the Indian company, but in an underhanded way. The current boiling conundrum of Maruti and Suzuki’s plan for the Gujarat plan, as the mutual funds have pointed out, reeks of a roundabout way of the Japanese parent to increase its earnings but at the cost of the Indian company, which could ultimately remain as just a shell company.

Then there is also transfer pricing – a practice used by multinational companies around the world to reduce their tax burden by paying for services across borders between their different units. And this is a hot topic with India Inc, with major legal spats with MNCs as it comes to light that they have used this route to cut down on tax payments to India. These MNCs, majority of them, systematically shift their profits to low tax jurisdictions, like MNCs in India who pay huge royalty to its parent in the Cayman Islands and this reduces its profits and consequently the tax which it pays to the Indian Govt. Importing raw materials at a high cost from the parent and then exporting goods at lower prices is also a very often used tactic to benefit the parent company.

And not all MNCs pay high dividends; Asahi India Glass has not paid a single paisa as dividend since 2007 though the payment of royalty has gone up. And Whirlpool – till date it has never paid dividend while taking away hefty royalty.  This is an increasing trend – MNCs which were recognized for high dividends, are today paying much lesser than the royalties which they earn here. Till FY10, if dividend payment exceeded royalties received, this trend has now reversed – when in FY13, a report put out by Business Standard stated that 71 MNCs earned a combined Rs.4,838 crore from their Indian subsidiaries in the form of royalty and technical fees while total dividend income was Rs 4,529 crore.

There is also the latest trend of delisting. Astrazeneca Pharma which on 1^st March’14 spurted to a new high after the company had announced delisting. The company then announced on 5^th March that it had decided to defer the delisting plan and seek more details on it from the parent company. Now yesterday it has issued a statement that its Board will be meeting on 15^th March to once again consider the delisting proposal. This entire delisting process of Astra is just not right, screaming major corporate governance violation. The company had previously tried to delist the stock in 2010, and it had fixed a floor price of R576.10 and set a maximum acceptable price of R1,152 but shareholders did not vote in favour of the resolution through postal ballot. One had lost hopes of this stock delisting after the promoters in March 2013 decided to trim the promoters stake from 89.99% to 75%, keeping in line with SEBI’s stipulation of bringing down promoters stake to 75%. And now once again, it made a decision to delist and it has again been deferred. This is just not right as its parent had earlier sold its 15.5% stake to a cluster of 6 FIIs, all P-Note holders and now that it has announced delisting, in all likelihood, it will buy 15% from these ‘custodian’ kind of FIIs but at a premium. This means the FIIs will gain but at the cost of minority shareholders, like always.  This is becoming a modus operandi for delisting MNCs – Fresenius Kabi had parked its shares with FIIs after which they decided on the indicative price, which was the discovered price for delisting.

Well, one can go on and on about the MNCs and their ‘virtuous’ stories but what we need to know now is that they too are no different from Indian companies. We need to change our mindset of looking at the MNCs with rosy tinted glasses; we need to don clear glasses and scrutinize every move which these MNCs make.