It's a Quit India Movement of a different sort. On March 13, Reckitt Benckiser Plc-makers of Dettol and many other consumer products-decided to bid goodbye to the Indian stock markets. The company made an offer to buy shares of its Indian subsidiary from shareholders, which will eventually lead to its delisting from stock exchanges. Last week it was Cadbury Schweppes Plc mopping up shares owned by Indian investors. In the past three years, 31 companies have announced plans to move out of the Indian stock market (see table) and do business as wholly-owned subsidiaries of their parent.

With each passing year, the number of foreign companies seeking delisting is rising and according to Prithvi Haldea, managing director of Prime Database, a primary market tracker, another 90 foreign companies are planning to delist. "It is sad. More and more multinational companies (MNCs) would like to have their own show. No listing, no joint ventures," says Tarun Das, director-general of the Confederation of Indian Industry (CII), which had six years ago questioned the approach adopted by MNCs for doing business in India.

Money Matters

FUNDAMENTALS/SMALL SAVINGS Loss of Interest

The rush to delist has raised several disturbing questions. What effect will this sudden exit of some MNCs have on India's rather shallow stock markets? How will corporate India react? And where do investors stand? But first some numbers. In 1999, six foreign promoters made open offers to shareholders of their Indian subsidiaries to enable them to hike their stake beyond 90 per cent, following which they would be delisted. This number rose to eight in 2000 and almost doubled to 14 in 2001. More importantly, the money MNCs forked out for buying these shares was Rs 153.38 crore in 1999. This went up to Rs 362.99 crore in 2000, rose to Rs 1,133.82 crore in 2001 and has rocketed to Rs 1,302.46 crore in the first three months of this year.

So why are MNCs spending so much to get delisted? Well, many of these companies never wanted to get listed in the first place. In the 1970s, the government forced foreign companies to dilute their shareholding and go public if they wanted to continue doing business in the country. Consequently, a large number of foreign companies were listed on Indian stock exchanges not because they needed Indian capital, but because they were forced into doing so. These companies want to put the clock back now that they are allowed to do so.

Typically, MNCs prefer to keep subsidiaries closely held. This allows them to pump in more proprietary technology and invest heavily in their brands as well as research and development. "The aim is to integrate the Indian arm into the parent so that technology and brands can flow freely," says A. Balakrishna, head of corporate finance, HSBC Securities. Since the companies are not listed, the promoters neither have to comply with stock market disclosure norms nor are accountable to shareholders for the investments they make.

Making their task simpler is the fact that the stock market has been depressed for almost a year. Shares of several companies are being quoted at 52-week low prices. In many cases this is despite a good financial performance. Since the open offer to shareholders must be equal to, or more than, the six-month average share price, this is a good opportunity for foreign promoters to buy out the remaining shareholders in their subsidiaries at a relatively low cost. Some foreign companies have offered to add a small premium to the ruling price, though in reality the offer price is much lower than the true worth of the stock.

If the delisting plans materialise, whatever little depth the Indian stock markets have will be further reduced. The top 50 stocks account for more than 90 per cent of the trading volumes on Indian stock exchanges. However, most of the MNC stocks in the delisting queue have not been very liquid counters, so the fears may be slightly misplaced.

"Companies get listed for capital. If a company does not need Indian capital, why should it get listed?" SHITIN DESAI, Vice-Chairman, DSP Merrill Lynch

Yet, the move has made the market nervous. "The capital market is shrinking and is really the loser in the larger sense," says Shanti Ekambaram, CEO, Kotak Mahindra Capital Company.

Delisting is not the only way MNCs are opting to stay out of the Indian stock markets. Many foreign companies that had been allowed to invest in India in the 1990s on the promise that they would eventually dilute their equity through public issues are reneging on their commitment. For instance, soft-drink giant Coca-Cola Inc is seeking exemption from a public issue. Korean car manufacturer Hyundai though is not averse to going public as per its agreement next year. But here again the logic is, now that the Government has allowed new entrants to own 100 per cent shareholding in most sectors, there is no reason why it should force the early birds to dilute their shareholding.

It is not clear how many companies have violated their agreements. The Securities and Exchange Board of India (SEBI) too has no clue, though its two high-profile committees-one headed by former Reserve Bank of India deputy governor S.S. Tarapore and the other by Telecom Regulatory Authority of India Chairman M.S. Verma-have urged the Government to ensure that MNCs fulfil their promise of going public.

"It is sad that more and more multinational companies desire to have their own show." TARUN DAS, Director-General, CII

"If foreign companies continue to avoid the Indian capital markets, the next phase of industrial growth in India may take place outside the capital markets," says Haldea. What bothers him more though is the fact that a number of large companies operating in India will be out of the ambit of any detailed scrutiny.

That has a direct bearing on the issue of corporate governance. Foreign companies have often led the way for Indian companies in adopting global corporate governance practices. This peer pressure may cease after the companies get off the stock markets.

Some analysts believe that the current six-month average price format should be changed to ensure that investors get a fair value for their shares from the company seeking delisting. Though right now investors are not complaining because they are getting a good price for their holdings compared to the market price, but that is because the market has been depressed.

While everybody is concerned at the delisting trend no one is pressing for stalling it through a fiat. "Instead of preventing delisting by MNCs, we need to introspect on why it is happening," argues Das. He would like the regulatory system to be more stable and harassment-free which would make listing easier and desirable to all companies-Indian or foreign. "The bigger issue is to develop the Indian capital market. As long as it remains small, who would want to get listed here?" asks Vallabh Bhansali, director, Enam Financial Consultants.

Some also see a silver lining in the flight of MNCs from the capital market. For instance, Shitin Desai, vice-chairman, DSP Merrill Lynch, sees a positive sign in this trend. "The very fact that these companies are putting in so much money to buy out Indian shareholders shows that they are serious about doing business in India," he says. "The MNCs' preference for wholly-owned subsidiaries is an international trend. It is a very normal thing," argues P. Krishnamurthy, vice-chairman of JM Morgan Stanley.

There is only one snag: it is clear that these short-term gains are compromising the long-term stability and development of the Indian capital markets.