Games multinationals play

In India, we like to put multinational companies on a pedestal. Starry-eyed youngsters dream of landing jobs in them and their marital prospects improve if they do. The government rolls out the red carpet for MNCs, seeing them as purveyors of foreign direct investment. And in the stock market, even midget-sized multinationals enjoy premium valuations for their pedigree and governance.

But every so often, a multinational company reminds us just where its priorities lie — in maximising profits for its parent — and that’s when everyone gets a rude jolt.

The latest MNC to deliver a bolt from the blue to its investors is the 56 per cent Suzuki Motor Corporation-owned Maruti Suzuki. While unveiling its numbers earlier this week, the company quietly revealed that its Board had received ‘an attractive proposal’ from its parent for implementing its new car project in Gujarat through a fully-owned arm of Suzuki Motor Corporation.

The new company would put up the plant and supply cars to the listed Maruti Suzuki at cost of production plus ‘adequate cash for capital expenditure’. Maruti would undertake marketing of these cars, and earn appropriate profits.

The company argued that Maruti would ‘financially benefit’ from this arrangement by earning interest on its surplus cash and investing it in a bigger marketing network, product promotion and research. The inherent risks of manufacturing (read labour problems) would also be off its books.

Nice as all this sounds, this generous arrangement didn’t go down well with investors, who promptly marked down the stock by about 8 per cent the same day. This reaction isn’t surprising, as this deal creates several uncertainties for Maruti shareholders.

For one, it is easy to say that the wholly owned firm will supply goods to Maruti on a cost-plus basis. But given that the subsidiary will not be listed and will not make any public disclosures, how are investors to know if the sales are indeed at an ‘arms-length’ price?

After all, if you were a businessman who held a 100 per cent stake in one firm and a 56 per cent stake in another, to which one would you devote the best of your resources and brands? The answer is quite obvious.

The second worry is, once this plant comes up, how will the production be divided between the Gujarat plant and other Maruti-owned facilities? Here it is critical to understand that companies in the business of trading rarely enjoy the same multiples in the market as full-fledged manufacturing firms. Finally, if Suzuki Motors’ future investments are all routed to the new subsidiary, where does that leave Maruti?

But even if Suzuki’s motives in this case are entirely altruistic, it is hard to give it the benefit of doubt. It is difficult to ignore the blatant conflict of interest in such arrangements. Imagine if the promoter of a listed firm were to source all the products for the company from his second cousin. Would you believe that the deal was purely commercial?

Yet, the kind of related party deal being proposed for Maruti is not exactly unusual for MNCs operating in India. Consider the case of Procter & Gamble USA, which owns two Indian arms- the listed P&G Hygiene and Healthcare and the fully owned P&G Home Products.

While the listed company has just two brands – Vicks and Whisper - under its fold, it is the unlisted firm which houses Olay, Tide, Ariel and the rest. Not only do the two firms effectively compete in the FMCG space, they also engage in opaque inter-firm transactions, by way of purchase and sale of products and sharing of expenses.

Let’s restructure

But involving listed firms in opaque deals is just one of the ways in which multinationals complicate life for other investors.

Frequent bouts of restructuring among various group arms, is their modus operandi too. Take the Holcim-Ambuja deal announced last year. Now, given that Holcim owned two cement firms - Ambuja Cements and ACC - in India the simplest way for it to reap ‘synergies’ from this business, one would have thought, would have been to merge the two companies.

Yet, what Holcim actually did was to propose a deal in which the cash-rich Ambuja Cements would pay parent Holcim ₹3,500 crore in cash and allot it ₹10,000 crore worth of shares, to buy out its stake in ACC.

While this deal emptied Ambuja Cements’ cash coffers, it also transformed it into a holding company for ACC, thus meriting a discount in the market.

As for Holcim, it received some cool cash and got to retain control of its Indian arms, without shelling out any hard currency!

Then there is the trend of global parents demanding ever-growing royalty payments as their pound of flesh from listed Indian arms, irrespective of their business prospects. Whether for licensing of technology, brands or research inputs, royalties paid by the listed firms to their parents have in fact de-risked the latter’s income streams from the current downturn, even as Indian investors have borne the brunt of it.

Numbers show that that the fifty listed multinational firms saw their combined royalty payouts gallop at 30 per cent per annum over the last three years, while the profits of these firms grew only at 11 per cent.

As royalty payouts accrue only to the parent and reduce the company’s profits, the largesse on royalty has clearly come at the cost of dividends to Indian shareholders.

So maybe if you’re a jobseeker, multinational companies can still occupy a pride of place at the top of your wish-list. But for policymakers looking to attract foreign capital or investors looking for quality stocks, it’s quite another story.

They definitely need to rethink their devotion to MNCs.