Stones And Glass-houses

Amidst all the allegations, no one seems to have bothered to look at our own corporate backyard. Says the managing director of a leading finance company: "In its targeted bid to create controversy, the CII has conveniently overlooked the affairs of its own industries. Almost every single allegation against TNCs holds as good, if not worse, against many Indian firms." Indeed, foreigners are not the only devils in "pulling the rug from under the national feet; in indigenous ways, domestic firms do the same," says a CII member. "The charges against TNCs may be valid, but the CII should also bring out a white paper on similar domestic activities."

The first charge against TNCs—that they tend to look for quick profits, ignoring the long-term—sticks only too well to Indian players, many of whom strip the assets of their companies to that end. Take Shaw Wallace. One of the most cash-rich companies under foreign management, this liquor giant is today debt-ridden. Says Debashis Basu, director of Kensource Research: "In the past decade or  so, the Chhabria brothers have stripped their firm of almost Rs 1,400 crore. How a liquor company can be cash-strapped is difficult to understand." The Bhagats, promoters of the once-leading textile firm Nirlon, too are reported to have stripped that company of all its assets. Family feuds are known to be responsible for draining profitable companies; long-term objectives being jettisoned for immediate needs. Orson-Nihon is another Chhabria company whose marrow has been sucked out. It has now been referred to the Board for Industrial and Financial Restructuring.

TNCs have been accused of dumping obsolete technology in India. But when Indian firms go shopping in technology bazaars abroad, they very often return with obsolete stuff. When Essar bought its steel plant from Germany, it was a second-hand, soon-to-be-scrapped plant. That the plant has turned out to be very profitable is another matter. The sponge iron steel plant import-ed by Essar Gujarat too was second-hand. So were most of the steel plants brought into India by the Jindals and Lloyds—they all had to be refurbished and reconditioned to operate here. The Reliance PTA plant import in the early '80s was also not state-of-the-art. Not that obsolete technology is by definition unprofitable. Bajaj Auto has built a giant on outdated fundamentals. It's only of late that it has commissioned Orbital Engineering, UK, for developing new technology. But the question cropped up now and again—like when the Modis were buying a second-hand viscose plant from Courtaulds, UK.

In industries where the marketplace brooks no wrinkles, the domestic industry can't afford to lag behind. The computer industry is a case in point: only absolutely state-of-the-art technology is imported, for domestic players are forced to keep at par with international developments. But when Klockner Windsor sold its top-of-the-line injection-moulding machines to the US-based Cincinnati Milacron, the lower end was bought over by Dilip Piramal. "It was a question of affordability," rationalises Piramal.

A stock allegation is that TNCs appoint expatriate managers with little understanding of India. But Real Value's vacuumiser had no expatriate managers, and failed completely to read the market. Volfruit, Noble Soya and other food brands launched under Indian CEOs are classic failures. Bata India was in the pink of health under expatriate managers. Under Indian CEOs, the company started bleeding. "Bata Worldwide guys may well be thinking Indians don't know how to manage a company," says Basu.

A more serious charge against TNCs is that they seek to float 100 per cent owned subsidiaries whose profits are straightaway repatriated out of India, despite running joint ventures with Indian partners. Here also, many Indian firms seem to be equally culpa-ble, at least in spirit. Says Shitin Desai, vice-chairman and managing director of DSP Financial Consultants: "There are any number of public Indian companies which have private or partnership concerns in similar products or in value-added products and services." When former CII president Dhruv Sawhney headed a taskforce to look into difficulties in foreign collaborations, his experience was revelatory: "Strangely enough, most complaints came from small and medium members, not the big boys."

These smaller firms are apparently merrily milking their public companies through privately-owned units. The modus operandi is the same. One company from the group goes public, while a horde of companies owned 100 per cent by the promoters add value to the public company's products and sell at higher profits. Says an FII equity analyst: "Pharmaceutical groups, specifically, tend to keep the company making formulations strictly family-owned while the bulk drugs and intermediary units go public. Legally there's nothing wrong, but profit realisation is much higher in formulations than in bulk drugs or intermediaries."

Examples abound. Besides big names like Lupin, Torrent, Wock-hardt and Cadilla, several smaller groups are doing exactly the same. Says Basu: "A prime example is the United Phosphorus group, which is into chemicals, dyes and intermediates. The promoters own many closely held companies which too make pesticides and chemicals. Each of these add value to the intermediaries made by other group companies and either export or sell domestically at a much higher realisation. One such company, Search Chem, recently went public." Ace Laboratories is a public limited company manufacturing bulk drugs, while a host of companies fully owned by the promoters are in formulations and exports.

In fact, a fairly common way to earn profits from privately held companies, indulged in by big and small players alike, is trading and exports. The public counterpart makes goods and sells them locally. The exports, which yield higher profits, are routed through a private company. Take Hindustan Ferro Alloys, which went public to allow for a modernisation drive and help set up a tea packaging unit at Calcutta. Promoters R.K. and A.K. Dalmia also own a partnership concern at Calcutta—LMJ International, a government-recognised export house handling tea, coffee and jute goods. And of course, the partnership concern is highly profitable. Thus, the publicly owned JCT is in textiles, filament yarn and steel, while JCT Fibres, West European Exporting and Kishanchand Spinning Mills do trading and exports. Conversely,Marico Industries, the marketing arm of the Mariwala group, is publicly held, while manufacturing companies Like Bombay Oil and Kanmoor Foods are owned fully by the Mariwalas.

To be sure, the law has nothing against such entrepreneurship. It's not that all public companies make losses while private ones prosper. Says a foreign equity analyst: "In principle, it's the same thing. If TNCs can be accused of setting up 100 per cent subsidiaries to route the bulk of its trade at the cost of their joint ventures, Indian companies do much the same." The difference is obvious: TNCs repatriate all profits out of India and the profits earned by Indian groups stay in the system. However, a TNC has to invest a lot of forex in infrastructure to grab a chunk of a market where domestic players have an edge. "Ultimately," says Basu, "the outgo is same if not less than the inflow. The point is, those who live in glass-houses shouldn't throw stones."