Free Press Journal

Don’t stop at ‘Make in India’, restore ‘List in India’, says Umesh Kudalkar

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Make in India as a concept is taking off, though with many stops and starts. But beyond Make in India, there is a need to capture more benefits of Indian economy. The question is how to encash those economic growth potential. Umesh Kudalkar, CFA, founder and ex-CEO of SICOM Ventures and former fund manager of an AIM (London) listed energy fund, has some ideas on how Indian economy and shareholders can get the benefit of equity participation. Excerpts of a conversation with Pankaj Joshi.

Why would you want reintroduction of the earlier policy to list subsidiaries of multinational companies (MNC) operating in India?

The extension of ‘Make in India’ to ‘List in India’ is a logical view. There are strong precedents and logical arguments for this thought. Time when Janata party-led government was in power (1977-79), it had issued a FERA-based diktat wherein MNCs would need to list their Indian subsidiaries and dilute their own holding to 40 per cent. In that period, we saw listing and public offerings by Indian arms of Colgate, Hindustan Lever, Nestle, Bosch and many others.


These businesses have grown in India and have shared their rewards with the Indian shareholders. For instance, Colgate India listed at a market cap of Rs 4.90 crore and today is worth Rs 27,000 crore. Effectively, a shareholder investing Rs 10,000 and keeping it for four decades would have seen wealth creation to the tune of Rs 5.50 crore, and that does not include dividend receipts. This wealth creation would not have happened without the diktat. Hence, maybe the PM’s office could look at that modification in their slogan.

Today, retail investors are pumping in more than Rs 5,000 crore in mutual fund SIP schemes. As a result fund managers have driven valuations to scary levels. By listing MNC subsidiaries, there would be increase in breadth and depth of capital markets, which would absorb this money flow while helping bring valuations to reasonable levels. As to why it needs to be reintroduced, we must appreciate that this controversial decision was ahead of its time, and is in line with today’s thinking.

A recent Bloomberg report said that Australia would block any attempt to move BHP Billiton’s (world’s largest mining company) main stock listing to the UK. If BHP implemented this proposal, it may commit a criminal offence and could be subject to civil penalties. Please note the choice of words ‘criminal offence’ indicating that stock market listing is an issue of national pride and sentiment. We were on the ball in 1978. Listing means distribution of accrued operating benefits to the same nation from where the benefits have accrued.

Today MNCs like Mercedes-Benz, Toyota, Amazon, Samsung and many pharma majors operate in India without any listing. Perhaps, packaging the earlier diktat in guilt, some MNCs have taken actions that may not qualify as best corporate governance practices. The pendulum has swung in the other direction and something needs to be done to restore equilibrium.

Do you think the rationale and roadmap is well-defined?

It is acknowledged that India has one of the best capital market system in the world— be it from structural or safeguard viewpoints. Therefore, there is no need for a blanket law. One can make exclusions for certain industry sectors; even define threshold sales limits above which listing would be compulsory. Most objections to listing proposal can be addressed by rational debate based on facts and data.

There has to be some method to redress cases of unnecessary shareholder activism which can act as a deterrent to MNC subsidiaries listing. By limiting their impact, the government can send out a strong signal to MNCs that it welcomes the listing thought and action.

The primary objective of such debate is that the government take steps to prevent parallel formation of private India subsidiaries to prevent dilution of value. Maruti Suzuki India and its Gujarat subsidiary is a recent example of such value dilution away from the listed company and its shareholders, only to benefit the owner group. Maruti Suzuki and ABB paid more than 45 per cent of their pre-tax profits as royalty to the parents. The principle of royalty is not disputed, but the scale needs a reasonable basis.

Consider the domestic retail and institutional shareholder viewpoint. Just on moral grounds, as an Indian citizen, I deserve to get a share in the wealth that is getting created because of me, else I am just like a helpless farmer who loses his land during industrialisation.

Indian consumer pays for MNC products and there this transactional relationship ends. Most Indians use Facebook and WhatsApp, and definitely part of Facebook’s US Market capitalisation is attributable to several million Indians using it. It would therefore be just and fair if Indian mutual funds are potentially able to earn handsome returns by participating in the growth of Facebook India by buying its India listed stock.

Consider another example— are you aware that Indian consumers paid more than Rs 90,000 crore for Samsung products during 2015 and 2016. Just to put this figure in perspective, this amount is greater than the Budget 2017 education outlay of around Rs 80,000 crore.

How would it benefit MNCs?

Firstly, listing improves loyalty— a shareholder is a much more willing customer. This is what we call a rising net promoter score for the company, where shareholders also behave like promoters, in the interests of the company. A shareholder thinking would be to buy brands of portfolio companies, and that purchase would contribute to the profits and, by the scale of the P/E multiple, to the market cap, and thereby to the shareholder wealth. You may be aware that the legendary Warren Buffett, in his Berkshire Hathaway annual report always encourages shareholders to buy goods and services of investee companies.

A listing is a kind of social responsibility avowal on a larger scale, which creates goodwill for the MNC and strengthens Indian market access. Another not-so-obvious benefit for MNCs is from the development of SME listing platforms on both leading stock exchanges. This would enable the local vendors of their subsidiaries to list and access capital for growth plans, thereby indirectly creating comfort for the subsidiaries too. Perhaps a token investment in such vendor businesses could be contemplated, which would enhance attractiveness of the stock offering.