Is India's war against multinational corporations justified?

The realisation has struck people that multinationals have been doing all those things that Indian businessmen have long been accused of doing, says Bhupesh Bhandari.

Every few years, India explodes against multinational corporations. It was first seen in the 1960s in the pharmaceutical sector.

Thanks to the regime of product patents India inherited, home-grown companies like Cipla found their attempts to make medicines blocked by multinationals. All that Indian companies could make was old off-patent medicines.

There was no profit in it. Many others were happy to become agents for overseas drug makers. The local industry lobbied the government for change.

The Patent Act of 1970 said India would respect only process patents. Indians were now free to make any medicine in the world as long as they adopted a new process. For the next 35 years, after which product patents were reintroduced, multinationals remained fringe players in the Indian market.

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Then, during Janata Party rule in the 1970s, many multinationals were asked to list on the Indian stock market; those that resisted, such as Coca-Cola and IBM, were left with no option but to pack their bags and leave.

But that was hardly widespread opposition — it was more a one-man jihad by George Fernandes against multinationals.

The next instance was in the early 1990s. Once the economy was liberalised, a group of Indian businessmen got together to seek protection from the government. They feared they wouldn’t be able to survive the multinational onslaught. Import duties, they lamented, were being brought down way too fast.

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They were the Bombay Club. On November 10, 1993, eight industrialists – Lala Bharat Ram, Lalit Mohan Thapar, Hari Shankar Singhania, M V Arunachalam, B K Modi, C K Birla, Rahul Bajaj and Jamshyd Godrej – handed over a note to this effect to Manmohan Singh, then finance minister.

The government took the Bombay Club very seriously. So, in the mid-1990s, a few years into the new economic order, the government allowed Indian companies to raise preference shares of up to 25 per cent of their issued capital.

Since such shares do not carry any voting power, this was a good way for Indian businessmen to raise money without giving up control.

And when businessmen complained that they were being dumped by their multinational partners, the government made it mandatory for multinationals to get a “no-objection certificate” from their local partners before they could go solo.

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There was some abuse of this provision – old technical collaborations were dusted out by many businessmen because this was easy rental income – but it was a potent weapon in Indian hands. (The provision has been diluted in recent years.)

The third build-up is happening now. Unlike in the past, this one appears broad-based. Things for multinationals have been going badly for a while, but Indians rarely blamed them for the trouble.

When income tax notices were sent out against Vodafone and others, there was no outcry to nail the foreigners. In fact, the finance ministry was accused of spoiling the country’s investment climate.

When a multinational subsidiary brought disrepute to the entire Indian pharmaceutical industry, we said the problems go back to the time the business was owned and run by Indian promoters.

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One multinational admitted that its executives had bribed their way through in India, while another agreed it had falsified data to seek clearances for its car.

We didn’t castigate them: these were, after all, the perils of the Indian ecosystem — you can’t do business here without paying a bribe. Isn’t India amongst the toughest places to do business in?

Look, they at least agreed to the mistake; most Indian businessmen wouldn’t even do that.

But when the shenanigans of multinationals began to pinch the people, the sentiment turned decisively against them.

Of the instances mentioned above, only the pharmaceutical company is listed on the stock market. So the outcry was muted. Recent cases relate to listed ones (there are about a hundred such companies) where the multinational promoter is perceived to have shortchanged the Indian minority shareholders.

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This is what seems to have broken the camel’s back. When Maruti Suzuki said its new factory in Gujarat would now be housed in a fully owned Suzuki subsidiary, the minority shareholders raised a stink — this would turn Maruti into a trading company.

After intense pressure, it has been decided to seek the verdict of Maruti’s small shareholders on the matter. There have also been instances of multinationals transferring profitable divisions of their listed Indian subsidiaries to themselves at ridiculously low valuation.

The other big issue is the payment of royalties to the overseas parent. Ever since the government liberalised the royalty rules in 2010, there has been a sharp increase in payouts to foreign collaborators.

Various studies have shown that the increase in royalty payout has been significantly higher than the growth in revenue and profit. Companies may have paid no dividends but were found to have paid hefty royalties to their parent abroad.

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And, in one case, the Indian company had to fork out royalties to its Japanese promoter, though it had reported a loss for the year. Higher royalties are iniquitous to other shareholders.

Thus, the multinationals were seen as enriching themselves at the cost of local shareholders. Naturally, there is a demand that the government ought to rethink the royalty payout rules.

Meanwhile, the Companies Act, 2013, has said that all related-party transactions between an Indian company and its overseas parent need the concurrence of at least 75 per cent of minority shareholders.

The realisation has struck people that multinationals have been doing all those things that Indian businessmen have long been accused of doing. When it comes to business, there is no difference between desi and foreign.