A free run for MNCs

The caretaker government headed by Atal Behari Vajpayee has without a public debate taken a decision of national import, which will be in the interest of multinational corporations.

ON April 21, the core committee of the Secretaries in the Foreign Investment Promotion Board (FIPB) comprising, among others, Ajit Kumar, Union Industries Secretary, and Vijay Kelkar, Finance Secretary, approved a proposal to review its own December 1998 notification which stipulated that any multinational corporation (MNC) that is involved in a joint venture operation in India would need its Indian partner's consent before the MNC could set up a 100 per cent/controlling subsidiary in India. This is see n as another decision of national import that is being taken without a public debate by a caretaker government.

What was the provocation for the move? Reportedly, it is the concern of the government for the consumer who needs to have access to the latest technology and the fear of foreign investment getting stanched if MNCs are not allowed a free hand. It is also reported that the government is concerned about the emergence of monopolies in certain sectors and therefore would like to encourage competition from MNCs. The initiative appears to have come from the Prime Minister's Office (PMO). The proposal was promp tly taken up by Minister for Industry Sikander Bakht and articulated by Ajit Kumar at the meeting of the Committee of Secretaries. Although Commerce Secretary P.P. Prabhu, who was present at the meeting, is learnt to have expressed his dissent the govern ment is determined to go ahead with the move. The notification is expected soon.

Currently any MNC operating in India through a local joint venture can set up a wholly owned subsidiary or a joint venture with a controlling stake for itself only if a no-objection certificate is obtained from its Indian joint venture partner. The FIPB, which receives applications from MNCs intending to set up wholly owned subsidiaries, was required to ensure that an Indian joint venture partner has no objection to a proposal before clearing the proposal. This precaution was necessitated by the need to ensure the health of the original joint venture which could be relegated to the status of a stepchild once a wholly owned competitive subsidiary is born.

This could happen because in the new dispensation, regardless of the terms of contract of the joint venture, the overseas partner could set up a unit to manufacture the same products made by a joint venture. The proposed change envisages that the new sub sidiary can manufacture products falling within the same harmonic classification. Asks Venu Srinivasan, Chief Executive Officer (CEO) of TVS-Suzuki: "If the local joint venture is making 100 cc bikes, the new subsidiary could make 102 cc bikes and call t hem a different product line. Where would it leave the Indian joint venture company?"

IN the case of most of the joint venture agreements, the overseas partner brings in the technology while the local partner's contribution is in the form of providing the marketing skills and network. But since the MNC will have acquired knowledge of the Indian market through its joint venture operations, it can dispense with the expertise the Indian partner has hitherto provided. At the same time, it can choke transfer of technology to the joint venture. Gradually, the joint venture is bound to lose its business to the subsidiary, which will offer products with up-to-date technology.

Along with its business, the joint venture is also likely to lose personnel. Large-scale migration of skilled workmen and managers from the joint venture to the subsidiary is a distinct possibility. MNCs often offer higher salaries to try and attract the best manpower. MNCs are represented on the board of the local joint venture and as such will have access to the business decisions of the joint venture which can be used to shape the strategy of their own subsidiaries. The export business of the joint v enture could now shift to the subsidiary, since the expatriate directors would have veto rights on business decisions made by the board of the joint venture. It will not be long before the subsidiary begins to thrive at the expense of the joint venture.

Currently, there are some 1,260 joint ventures in India which include such names as Maruti Udyog Limited, Hero-Honda, TVS-Suzuki and Modi-Xerox. Together, they account for a total investment of Rs.1,80,000 crores and a turnover of Rs.3,85,000 crores. The y span the entire spectrum of industries that include petrochemicals, automotives, electronics, telecommunications, heavy machinery and so on. About 500 of these are non-MoU joint ventures.

All the agreements, whether in the form of MoU or not, are said to be non-exclusive, which means that the overseas partner will now be free to set up a subsidiary/controlling joint venture and produce competing products. The Commerce Ministry is said to be of the view that in the case of non-exclusive agreements, MNCs should be allowed to set up a subsidiary after a cooling off period of six months even if the local partner declines to give its consent for the arrangement. The joint ventures employ lakh s of people and these jobs could be in jeopardy if the ventures go sick. Besides, financial institutions and banks which put their money in the joint ventures will be the losers, along with the Indian shareholders.

Venu Srinivasan told Frontline that industry has not been consulted about the government taking the decision. The Federation of Indian Chambers of Commerce and Industry (FICCI) has conveyed its concern to the government through a detailed letter, while other industry associations are yet to voice their protest. Indian industrialists who rushed into joint ventures with foreign partners in the wake of liberalisation are now waking up to the reality of the manipulative methods of MNCs, which no long er need them now that they have learnt the tricks of doing business in India.