Outbound M&A from India this year has been the cause of great excitement and jingoism in India. Tata Steel has just bid for a company five times its size in Corus.
While the bid is competitive the fact that it is possible is testament to the power of global capital. Capital is no constraint for the well-performing companies and entrepreneurs with good ideas.
Private Equity funds search for these companies as much as these companies court them. In fact, any well-performing company can access capital subject only to the conditions its national regulators prescribe. To my mind the free movement of capital is one of the most palpable benefits of globalisation.
Governments, however, are nervous of international capital. They worry it is volatile. They care that national companies will be taken over by foreigners. They are sensitive about the loss of domestic control in strategic sectors. They are concerned about the lack of equal and reciprocal international market access.
These are genuine issues that require serious discussion but I find most current discussions around this theme whether in India or Europe are stuck in the past. If we review our own policy framework on ownership of domestic companies and foreign capital, I find the policy littered with prescriptions (about its size, its form (FDI, FII) and its maximum share) often contradictory and without a clear and transparent logic.
In this article I want to explore the nuances and implications of international capital and its interplay with the responsibilities of national governance.
What makes a company Indian and what purpose does such "Indianness" serve for India? Much of the current Indian regulations use the nationality of the shareholders as a good proxy for the nationality of a company.
Different regulators in different sectors stipulate different levels of maximum foreign share ownership. This is true of insurance, banking, retail, among others. If ownership were simply to be a function of the nationality of equity holding, then many Indian icons would not qualify for Indian status.
Take ICICI Bank. It is owned 46.6 per cent by FIIs, and another 26.8 per cent by ADR shareholders. Only the rest is with Indians and of that about 15 per cent is with Indian FIs (including MFs) together as a group. Yet the CEO, the Board, the bulk of its employees are Indian. The company is incorporated in India and its lead regulators are all Indian. Most Indians speak with pride about the success of ICICI Bank.
Citibank similarly has an extremely dissipated share ownership held by over 2,000 financial institutions, holding about a 66 per cent share with no individual institution having more than 5 per cent. Many of these financial institutions are multinational and dispersed. The largest individual owner of Citi, though, is a Saudi Shaikh. Yet most, including the Americans, see Citi as an American bank. Is this because of its share ownership? Or is it because of its incorporation?
To my mind to use share capital to determine the nationality of a company is of limited value. What nationality does capital have? When indeed does capital have nationality? To my mind the form of capital has to be distinguished in relation to its objective function.
I feel comfortable with international capital that has greed and returns as its objective function. I worry more about state-owned capital because understanding the objective function of a state is more complicated. So, diversified FIIs are easy to understand and manage. A state-owned private equity fund is more difficult to read.
Greed capital, despite the natural antagonism many policy makers have to it, is quite a levelling force. It moves quickly to any country where it can obtain a good return at an acceptable level of risk. It tends to vote with its feet when the risks, returns or regulations reach an unacceptable level for it or when another location becomes more attractive.
This does not change whether it is Indian or American greed capital. Its objective function is well-defined and thus any intelligent polity can use it in its own interest.
State-owned capital is more problematic. They can pursue strategic objectives for the state and live with losses while doing so. Thus a Temasek or a Chinese state-owned company's objective function is less easy to define.
Yes, it is imperative for policy makers and governments to discuss foreign ownership. After all, each nation state is responsible to its citizens. The citizens vote them into power on the basis of certain election promises the leaders make.
The leaders then need to try and translate these promises into policy outcomes. But they cannot achieve this by poorly-thought-out regulation on ownership.
To my mind the needs of the nation state can be better served by ensuring strength in the regulatory apparatus so that it can influence and obtain national priorities. National priorities should be to address areas of market failures (say financial inclusion) or the provision of public goods (retail credit bureau).
A sovereign and strong state like India should worry less about the nationality of foreign capital and more about the basis on which such capital operates in India.
For example, with foreign capital I think three issues are important-reciprocity, we should get the same access that we offer; state capital, letting state-owned companies buy majority stake in national icons; and strategic sector like defence must be in consonance with our foreign policy objectives.
Thereafter, all we should ensure is that players operating in India play by the same rules and operate under the ambit of our rules and regulators. I believe a good start in this would be to focus on getting foreign entrants to incorporate locally. They should then fall fully under the rubric of our local regulation.
Share ownership should not matter; companies of all nationalities would follow their commercial interest within the bounds set by the regulator. Non-compliance with the regulation should invite penalties and expulsion where necessary. India as a nation state has the power to impose its writ on companies that want to operate in its market.
Such a policy would allow us the benefits of globalisation within the ambit of our national policy. The thing with "greed" capital is that it goes where the opportunity is and it moves in herd-like waves, we don't know where the next wave will take it and should take advantage of the current gust in our favour.
The author is managing director, Boston Consulting Group, India. The views here are personal.
