The Hindu Business Line : MNCs: Not above flouting rules

As many as 18 blue-chip MNCs have allegedly violated the foreign exchange regulations and paid salaries and perks abroad to their employees working in India without obtaining RBI approval.

THE controversy surrounding the apparent reluctance of Coca-Cola to fulfil the entry condition to divest part of its stake in its bottling subsidiary to domestic shareholders serves to highlight the larger issue of the MNCs' adherence to rules and regulations in India.

The record of some foreign companies in respecting rules, honouring agreements, protecting the environment and paying all due taxes is less than exemplary. The Centre must, nevertheless, respect the sanctity of contracts and maintain stable policies.

Foreign companies are beginning to act more and more like some of their infamous Indian counterparts: Agree to conditions at the time of entry or gaining a licence and then demand waiver or change of conditions, flout rules, evade duties and taxes, make false claims, and pay bribes to win contracts.

Seeking waivers

While granting approval for foreign direct investment, the Foreign Investment Promotion Board usually lays down several conditions that a foreign investor must comply with. In select cases, while granting approval for 100 per cent foreign-owned subsidiaries, the FIPB has required that the foreign firm divest part of the foreign equity stake to domestic shareholders within a period of five years. More than 21 companies have been granted FDI approval by the FIPB on the condition that they will divest part of their equity to Indian shareholders within five years.

Among these are a host of companies in the petroleum sector — Esso, BG (the UK), Shell (the UK-the Netherlands ), Caltex and Elf Gas ( France ) — and the FMCG companies such as LG (Korea), PepsiCo, Coca-Cola and Sodexho.

The Finance Minister recently clarified that these conditions are not being abandoned: They remain and cannot be altered. However, the record of the MNCs in fulfilling this commitment is dismal. In March 2003, Coca-Cola became the first and only MNC to divest, albeit reluctantly, to Indian shareholders to comply with this commitment through a private placement.

But not before Coca-Cola tried every trick in the book to wriggle out of this commitment. Coca-Cola, which was granted permission to buy out its franchise bottlers in 1997, had committed to divest 49 per cent of its equity stake in its bottling subsidiary, Hindustan Coca-Cola Beverages, to domestic shareholders within five years.

In December 2000, Coca-Cola wrote to the government seeking deferment of the condition. Among the reasons cited by the company for the waiver or deferment of the condition were: The moribund state of the capital market; Coca-Cola's mounting losses that had led to an erosion of net worth and a write-off of $ 400 million; and, what appeared to be a clincher, others had not fulfilled similar conditions.

The Government, which is prone to taking decisions only on the eve of a deadline, felt that it was too early to seek waiver as more than 18 months remained for the deadline. In October 2001, Coca-Cola wrote to the Government again and this time sought a complete waiver. Its lobbyists came up with several specious arguments designed to appeal to gullible bureaucrats: The divestment would lead to sizeable outflow of foreign exchange; and the government now allows up to 100 per cent foreign equity in similar activities.

The company applied for a third time in April 2002. For once, the Government stood firm and refused to change the conditions to suit one company. Instead, Coca-Cola was given time till February 28, 2003 to complete the divestment. A day before the new deadline elapsed, Coca-Cola announced that it had completed the divestment by selling 39 per cent to a clutch of investors through a private placement and 10 per cent in favour of employees trusts.

It got the government to withdraw the condition that the holding company's voting rights be restricted to 51 per cent. In fairness to Coca-Cola, it should be mentioned that the original condition imposed on it did not explicitly state that a private placement would not be acceptable or that issue of non-voting shares is not permitted.

Coca-Cola is by no means the only foreign company to seek a waiver of entry conditions. Others are less known and not so high profile and have, therefore, not created as much controversy. Sodexho Pass Services, a contract food services company of France, had sought waiver of the conditions on the grounds that it was unable to find an Indian partner.

Sodexho was allowed to set up a wholly-owned subsidiary in 1997 on the condition that it would divest 26 per cent stake to resident Indian shareholders. The request for waiver was rejected and the company, seeing that the government did not capitulate to Coca-Cola, has decided to comply by selling stake to employees who are Indian residents.

In November last year, Shell sought a waiver of the mandatory divestment clause to sell 26 per cent equity stake in Shell India to domestic shareholders. Shell too put forward the now familiar argument of a changed FDI policy: The Government has now allowed 100 per cent foreign shareholding in trading of chemicals and petrochemicals.

Earlier, Cussons India, manufacturer of personal care products, had applied to the FIPB to waive the divestment clause. The company cited the prevailing recessionary conditions, falling demand, and the losses it had accumulated for seeking the waiver.

Flouting rules

As many as 18 blue-chip MNCs have allegedly violated the foreign exchange regulations and paid salaries and perks abroad to their employees working in India without obtaining RBI approval.

Not surprisingly, the list includes a host of Korean, Japanese and Scandinavian companies. Among the companies which have been sent notices are Ericsson, Samsung, Sony, Nokia, Mitsubishi, Japan Airlines, Hyundai Motor, LG Electronics, Fuji Bank, among others.

In their competitive frenzy to gain the consumers attention by painting every available space with their logos and colours, Pepsi and Coca-Cola were fined by the court for allowing their logos to be painted on rocks in Himachal Pradesh.

MNCs are not above flouting rules, then seeking post facto approvals. TCW/ICICI Investments Partners (Mauritius), which already held a stake in Ajanta Pharma, made investments in Medicorp Technologies under the automatic route without getting a no-objection certificate from Ajanta as rules clearly required. In defence, the company contended that the rules applied to foreign companies and not foreign venture funds.

Similarly, the US-based InterContinental Hotels acquired a 12.5 per cent stake in the Mumbai-based GL Hotels without seeking approval from the FIPB. The company has since expressed regret.

Foreign firms also appear to have flouted the spirit of rules and regulations. The current policy clearly states that foreign equity investment in telecom operating companies and holding companies must be capped at 49 per cent and management control must remain with the Indian partners.

Nevertheless, the Hong Kong-based Hutchison Whampoa, has managed to gain effective management and financial control of the company Hutchsion Max that operates the GSM mobile cellular licence in Mumbai.

It did so by buying out its Indian partner, Max Telecom Ventures' stake through an ingenious financial arrangement, engineered with the help of Kotak Mahindra Finance, that involved creation of a joint venture holding company and issuance of non-convertible preference shares that are outside the 49 per cent foreign equity cap to financial partner.

Evasion of duties and taxes

Surveys by the I-T Department revealed that as many as 73 foreign companies had defaulted on TDS payments in 1998-99 and the amount to be realised from them exceeded Rs 500 crore.

A foreign company, for example, had paid thousands of dollars as school fees for its employees' children studying in international schools in Delhi but had not shown the payments as part of salary nor had it deducted tax at source. In February 2000, the Delhi High Court was informed by the I-T department that it had imposed penalties on 25 of them and initiated proceedings against another 16. Among the high profile defaulters were Bank of Tokyo, Sanwa Bank, Fuji Bank , Lufthansa, LG and Samsung .

In some cases, foreign companies have been accused of evading duties but the charges are unproven. Sony India, a wholly-owned subsidiary of Sony Corporation, was accused by the Revenue Department of Customs duty evasion by deliberately mis-declaring imports of CKD kits as components of television sets and slapped a demand for Rs 73 crore for imports during the period 1995-97. However, the Government's claim against Sony was not accepted by CEGAT (Central Excise and Gold Appellate Tribunal) and the claim of the Revenue Department was quashed.

Payment of bribes

Foreign companies are not above paying even bribes to further their business interests in India. American companies sanctimoniously claim that they do not pay bribes as they are subject to the Foreign Corrupt Practices Act (FCPA); yet Xerox Corporation informed the US Securities Exchange Commission that Xerox ModiCorp, its 68 per cent subsidiary and once touted as a model Indo-US joint venture, made "improper payments" till 2000 to push sales to government departments. The company reportedly paid $600,000-700,000 through an ingenious system of making payments to non-existent and bogus firms for fictitious services rendered.

If the buccaneering Enron spent millions of dollars for the so-called `education' of Indian decision-makers, other reputed power companies did not lag behind. According to reports in the British press, Rolls-Royce allegedly made secret payoffs to secure the engineering, procurement and construction (EPC) bid for setting up the 208 MW combined cycle gas-based power project promoted by Spectrum Power Generation at Kakinada.

This was one of the eight so-called "fast track power projects" identified by the Narasimha Rao-led Congress Government. The payments were allegedly made to a firm floated in the Virgin Islands by one of the main promoters of the project. Not surprisingly, the project is currently locked in a raging dispute between the rival set of promoters, each intent on ousting the other. If such transgressions are to end, the Government must send out a clear signal that it will not submit to lobby pressures to selectively waive existing rules. Also, the rules must be clear, unambiguous and uniformly applicable.

(P. Balakrishna is a consultant and freelance writer. Sidharth is a student of management at IIM, Calcutta.)

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