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S Vaidya Nathan

THE exodus of multinational companies from the stock market is well and truly on. Reckitt Benckiser is the latest to move towards delisting. The process started with the smaller MNCs, especially in the engineering sector.

However, in the last three months, bigger names are starting to head for the exit door of stock exchanges. Cadbury was the first and made a voluntary open offer at Rs 500 per share. Now, Reckitt Benkiser wants to buy back the equity it does not hold at Rs 250 per share.

Buying out non-promoter holdings should be easy for the global parent companies; barring Hindustan Lever. And they are likely to take advantage of this over the next year or two. Pharma MNCs may also be candidates.

The companies appear to be taking advantage of the low level of stock prices, which are, in many cases, half or lesser, compared to the highs these stocks saw over the last five years.

Of course, there is nothing wrong about the voluntary open offers and buyback mechanisms used. Only an already shallow market is shrinking further. This is not in the interest of the investors or capital market development.

The market capitalisation of the top 50 MNCs aggregates to around Rs 75,000 crore. This is around 14 per cent of the total market capitalisation.

The numbers of other companies are even smaller, at around 3-4 per cent of the total market cap, except for Hindustan Lever with a market capitalisation of around Rs 52,000 crore. In this context, it may appear insignificant if these companies are allowed to delist.

This issue must be seen in the light of the fact that MNCs are dominating many segments of the industry — a trend that is likely to grow. Effectively, this means the stock market would increasingly represent a declining proportion in the overall economy.

What is also of concern is that some MNCs that were to come out with IPOs seem to be having second thoughts now, after the rush to de-list. Whether a listed presence is any advantage is subject to considerable doubt.

However, from a macro perspective, there is clearly a need to address this issue as investors must have an opportunity to participate in the wealth creation and businesses of the MNCs in India. It may be argued that with greater freedom on capital movement, the investors can buy the global parent's stocks in the overseas market. But even mutual funds — that can do so — have refrained so far. Anyway, the amounts permitted are small.

In any case, the MNC arms in India tend to trade at a better valuation than their global parents, especially in consumer goods and healthcare. This is understandable as the growth rates in the Indian market are bound to be higher than in the mature markets of the US, Japan, South Korea or the European Union.

The Government's macro policy should, thus, consider a stipulation of 10-15 per cent public offering by MNCs. Then, it is unlikely that Reckitt, Cadbury, Carrier Aircon, Siemens would turn away from the Indian market.

Such a stipulation could go against the free capital movement that may become part of the likely WTO requirements. At least an effort must be made to overcome this obstacle. The possibility of the global parent required to offer tracking stocks of Indian operations to investors, even as they have 100 per cent of the equity, also needs to be examined.

This would be a win-win situation — the MNCs can have 100 per cent stake in their Indian arms and, yet, help Indian investors participate in the wealth creation. The requirement of a mandatory delisting should also be removed in these cases so that shareholders can choose an open offer or buyback, without this threat influencing their decision.

There is also a need to examine the quality of pricing in these offers, which have been detrimental to investors. The prices paid do not factor in the big change as a result of ownership levels moving from 51 per cent to 100 per cent, making the companies no longer accountable to shareholders.

Shareholders have been taken for a ride and the sooner the Government/SEBI does something, the better.

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