“We should not allow the mere provision of
foreign money to destabilise Indian industry”
YEZDI H MALEGAM, managing partner, S B Billimoria and Company, is a warm, genial person, together with being an astute and noted lawyer. Author of the Malegam Committee Report on disclosures in offer documents, his recommendations have revolutionised the Indian stock markets.
Another field in which his expertise is less known but equally invaluable is the area of mergers and acquisitions. He was connected with the first major corporate merger of the country, when consumer goods giant Hindustan Lever Limited of the transnational Unilever Group and the Tata Oil Mills Company decided to join hands.
In an interview with PALLAVI AGARWAL, Malegam provides insight on how mergers and acquisitions are set to change Indian industry, as they are doing to our counterparts in the West. Excerpts:
Which are the different forms of corporate mergers and which are the most popular?
There are three different types of mergers -- horizontal, vertical and conglomerate mergers. In a vertical merger, we have a backward or forward integration taking place when units are merged, the motivation of the company being a desire to increase its core competencies.
In a horizontal merger, the company taking over the other unit is in essence trying to increase its market size. A conglomerate merger on the other hand is an attempt by a diversified company to shed units set up in an unrelated area of activity and in which it has no expertise.
In the West, 80 per cent of the mergers are horizontal mergers and I see the same trend taking place in India.
There have been worldwide mergers of several corporate giants especially in pharmaceuticals and banking. What kind of trickle-down effect will it have on India?
If two multinationals merge abroad, then their local entities or Indian companies controlled by the parent companies will also have to merge. It is the logical thing to happen. In that sense, the mergers in India have been triggered off by the mergers of the parent or foreign companies.
What about the mergers and acquisitions scenario in India?
In India we are going to see a lot more of acquisitions than mergers of Indian units, as a fair amount of foreign investment is coming in the country. I see that in the next two years, the rate of acquisitions by both the multinational and Indian companies will accelerate.
Given a choice between a greenfield project and an existing unit, an MNC will prefer to acquire an existing unit.
This is especially so in sectors like the consumer goods sector where companies rapidly want a market share. Any newcomer will have to invest substantially in advertising, in campaigning for the products, in building up a marketing base and creating a market for itself.
By buying the domestic rival, they are not only buying the existing market share of the company but also buying away the competition that the rival product would have posed for them. The most notable example of this kind of merger being the takeover of Parle Products by Coca-Cola.
Again in the manufacturing sector, MNCs will find it cheaper to buy than to build, if you take into consideration the delays involved . Besides, money has an opportunity cost. The long gestation period involved in projects like this would mean that it would make more commercial sense to buy an existing, working unit than invest from scratch.
What about the acquisition process being triggered off by Indian companies?
Indian industry, which has been operating in an era of licensing and MRTP regulations, has resulted in a large proliferation of industries with small capacities, not always the most competent.
So obviously there will be a movement where the bigger units will buy off the smaller units and consolidate their positions.
Again, several diversified companies have made forays into areas in which they did not have expertise and which they would like to expand further. With today’s emphasis on developing core competencies, these conglomerates will shed some of their units.
So you will have say a textile company selling off a cement unit and vice-versa.
Third, Indian companies have not been able to keep pace with the technology of the West and may decide to enter into a joint venture with the foreign firm to avail of technology which is closely held by the foreign firm. In many an instance, the Indian firm, realising it cannot meet technological competition from the foreign counterpart, may decide to sell off on its own. In this instance, the acquisition has been triggered off by the Indian organisation.
Which are the industries where you foresee hyperactivity in the M&A area?
As I have mentioned earlier, the areas where I feel a lot of mergers and acquisitions will take place are in branded items like consumer goods, and in the manufacturing sector where technology becomes outdated very fast. The industries prone to mergers and acquisitions in particular being auto ancillaries, telecommunications and electronics.
Do you think the country is prepared for an acquisition spree by MNCs, in light of the recent demand by the Confederation of Indian Industry to restrict foreign equity holding?
I think the CII uproar has to be seen in the right perspective. It has been prompted by the emergence of cases where in existing joint ventures with MNCs, the Indian partners have been elbowed out due to various reasons.
First, it has happened in cases where foreigners who have come in by voluntarily accepting 40 per cent equity now try and pressurise the Indian management for a greater stake, and then say the Indian partners are not needed.
Second, in existing joint ventures where the foreign partner has a 51 per cent equity stake and now wants to set up a 100 per cent subsidiary, preferring to do business through the 100 per cent subsidiary.
Personally, I feel that in existing joint ventures, 100 per cent subsidiaries should not be allowed to compete with the joint ventures. They should not be allowed to be set up in the same field as the joint venture company.
After all, if say Tata Steel were to set up a new subsidiary, it would be logical for the shareholders of the company to be provided shareholding in the subsidiary by way of rights shares. So when an MNC tries to set up a new subsidiary, it should be logical for the Indian partner to want to have some stake in the subsidiary.
So ultimately the issue boils down to how honest the intentions of the MNCs are while setting up the 100 per cent subsidiary, which as you will agree is not the easiest thing for anyone to know or decide.
There have been news reports that foreign institution investors
want the government to raise the threshold limit of their equity holding in Indian companies, as many have reached the ceiling in certain scrips. Do you think the government should raise the limit?
We should not allow the mere provision of foreign money to destabilise Indian industry. I personally think that even the present limits of a total of 24 per cent equity holding by FIIs is high. If the ceiling is raised it can be very easy for two FIIs to act in concert with each other and threaten the management.
How do you see India in 2000 AD. Do you subscribe to the fear that an MNC invasion will buy the country in the future?
I personally don’t think so. MNCs will dominate certain segments but will not totally. Besides, with the kind of infrastructural bottlenecks we have in the country, and the financial restraints they have, they will not even invest considerably in all the sectors. So this fear of an MNC invasion is totally unfounded.
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