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Shut and open case

The conditions laid down by India in its liberalisation rules smack of the same nationalistic fervour that the European controllers of Arcelor are being accused of practising against Lakshmi Mittal.

india Updated: Mar 07, 2006 01:01 IST

The opposition to Mittal Steel’s takeover bid of European steel giant Arcelor has interesting lessons for... Practically every European industrialist and politician was against Lakshmi Mittal’s bid to expand his business. The opposition, in fact, has sought to camouflage its racial-tinged hostility to the move by suggesting that the EU would be concerned if there were any violations of competition rules or if the takeover were to create a monopolistic situation. Mittal Steel made a $ 22.3 billion bid for Luxembourg-based Arcelor — the takeover would create a steel company with an output three times larger than its three nearest rivals combined, and would account for 10 per cent of global steel production. For India, such a venture, if successful, would be a matter of great pride — a message to Europeans, especially France, Luxembourg and Spain (the three main controllers of Arcelor), that an Indian passport-holder was about to make corporate history. But, if one goes by the observations of French President Jacques Chirac, the issue can become messy, sparking off a new trend of global protectionism.

While clarifying that it was not a Franco-Indian bilateral dispute, President Chirac said there was nothing that was absolutely against a non-European taking over a European company. But that Mittal’s bid had seemed hostile and contrary to practice. Hence the concern. Chirac elaborated that it was natural that Europeans should care about the security of their jobs under foreign (Indian) management. The fears, he felt, were entirely legitimate. But just days earlier, Minister of Commerce and Industry Kamal Nath had referred to the takeover of India’s leading cement companies by Swiss cement major Holcim and France’s own cement giant Lafarge. Neither of these investments was for greenfield purposes. The corporates simply took over Indian companies to increase their global reach — which is precisely what Lakshmi Mittal intends to do. It may be mentioned here that the steel industry suffers more from the peaks and troughs of a business cycle, than does perhaps cement. Indians didn’t suffer the same sense of fear at the acquisitions.

Switching attention to the scenario in India, in November 2005, the government issued Press Note No: 5 (2005 series) that raised the telecom sector’s FDI ceiling from 49 per cent to 74 per cent. While FDI upto 49 per cent was to be on the automatic route, permission of the Foreign Investment Promotion Board (FIPB) would be required if the FDI limit was sought to be raised to 74 per cent by the concerned telecom company. While approving the investment proposals, FIPB would take note that investment did not come from unfriendly countries.

Some important conditions stipulated in the press note were that the majority of directors on the board (chairman, managing director and CEO included along with chief technical officer and chief financial officer) shall be resident Indian citizens. For this purpose, the licensor or the telecommunications department would be empowered to notify key positions to be held by resident Indian citizens.

Strangely though, the press note did not clarify if the ‘only Indian citizen’ clause also applied to fully- owned Indian telecom company (in which the FDI component was 49 per cent) or minority as against the threshold-majority mark of 51 per cent and more. In the absence of this, the so-called liberalising of telecom FDI rule had actually the opposite effect and hence, little import.

Additionally, a company that wants a licence in this sector would also need to ensure that at least one of the company promoters had experience in the telecom services sector and that such a promoter held at least 10 per cent equity in the telecom licensee company. But till 1994, only DoT and MTNL had monopoly over telecom services in India. When private Indian telecom companies entered telecom business, they had to depend on foreign collaborators, notwithstanding the poaching they were compelled to do on public sector telcos.

A major requirement of the press note is that the concerned telecom company would acknowledge compliance with the licence agreement in its Memorandum of Association. But ideally, shouldn’t such matters be left to shareholders instead of encouraging government interference?

The ‘Big Brother Clause’ that insists on nationality (only Indian) as a parameter for the appointment of top management is self-defeating. Such persons work ultimately under the supervision of guidance and control of the board of directors, who, in turn, are controlled by the company’s shareholders. Thus, in organisations where the majority shareholding is in Indian hands/companies, management control also vests in the same Indian hands. How can we call this liberalisation when it is actually the reverse and is restrictive?

Why should we feel stung by Europe’s opposition to Mittal’s bid to take over Arcelor when we don’t even allow individuals of foreign nationality to hold the posts of CEO, CTO or CFO in an Indian telecom company?

Like telecom, civil aviation is yet another area where the Indian government has imposed the ‘security veil’. It is perfectly in order to insist on a majority resident-Indian board in private airline companies. But then, why do we allow private airlines in India to fill top management positions in a high security sector like airline business with

foreigners, if need be? Even Air-India has appointed expats/foreign nationals as pilots to fly the flag carrier’s Jumbos, A 320s and Boeing 737-800s respectively. The issue is a multi-layered one and the government needs to look at this holistically.