NEWS
INTERVIEW
SPECIALS
CHAT
ARCHIVES

Business Commentary/ Mahesh Nair

The Maran doctrine benefits the promoter, forgets the consumer

A couple of months ago I had the privilege of spending a little more than half an hour with India's Industry Minister Murasoli Maran. During our conversation in the car, I asked him what he thought of Indian promoters and foreign competition. He looked out of the window, paused, turned back and said, "They need protection and encouragement. You know our model of growth should not be the West. Instead we must look East. See how the Japanese and Koreans protected their domestic industry and then allowed them to take on foreign competition.''

I asked him whether this was why he was not willing to let BAT plc put up a wholly-owned subsidiary in India to launch its global brands. Maran replied, "Let them first get a No Objection Certificate from their Indian partner ITC. Otherwise, you see, who knows this new venture may be bad for ITC."

The Maran doctrine -- get a No-Objection Certificate from your partner -- seems to be well-meaning but who does it seek to help? The promoter? The company? The shareholder? Or the consumer? Let's apply it to some recent developments that have shaken up corporate India.

Suzuki Motors of Japan believes that for Maruti Udyog Ltd to be ahead of competition, it is absolutely essential that the Rs 150 billion expansion plan be in operation as soon as possible. To raise the money, it wants MUL to borrow from the public instead of taking loans from financial institutions. The Japanese company knows that this would mean both the partners, that is, the Government of India and Suzuki itself, will have to dilute their equity a little bit.

The Government of India, however, does not want dilute its equity. MUL, after all, is a cash cow. It believes that raising money through debt can take care of Maruti's financial requirements for growth.

Now raising money from markets -- be it through a public issue or private placement -- is a much more healthier manner of running a business than say taking a loan. By taking the former route, the performance of the company is directly related to the performance of shares and investor confidence. If Maruti does good, the price of its shares will go up. If the shares go up, the value of MUL will go up. If the value of MUL goes up, it can raise more money to fund its future plans. Conversely, if investors feel that MUL is no longer a good company, then the price of shares will crash and so will Maruti. Most of the times it is investors who keep a company on its toes.

By taking the latter route -- raising money through debt -- the promoters of MUL will be answerable only to banks and financial institutions. Tomorrow if MUL does not do well what will happen? Either the banks will have to write off their loan or Maruti will have to convince them to lend again.

Now let's apply the Maran doctrine. Suzuki goes to the Foreign Investment Promotion Board (which incidentally is also headed by Maran) and says that it wants to increase its stake or float a wholly-owned subsidiary. Maran replies that since Suzuki does not have a No-Objection Certificate from its partner, the Government of India, he cannot allow this.

A helpless Suzuki Motors goes back. And waits till Maruti begins to bleed so that it can pull out. Or till sense prevails over its joint venture partner.

Who gains from this? In the short term nobody is hurt. But in the long term, say, two years from now when competition is racing down Maruti's street, will any of the current players gain?

Lets's take another example and apply the Maran doctrine. Atul Choksey and his father decide to sell of the family's shares (9.5 per cent of the total equity) in Asian Paints. Choksey Sr, who is on his deathbed, wants this money to be distributed it amongst the other family members, and to help Atul Choksey invest more in his own business. Choksey Sr dies. Atul decides to follow papa's advice and sell his shares. He goes to his promoter-partners at Asian Paints and asks for a price. The promoters reply that they don't have the money to buy it.

Choksey calls in his pal Uday Kotak to find him a buyer. Kotak brings in ICI plc who offers Choksey the price he wants. Choksey sells. The other promoters cry foul saying Choksey has sold off to a competitor. ICI plc goes to the FIPB. Maran says he won't allow the shares to be sold unless the three remaining promoters of Asian Paints give a No-Objection Certificate. He also terms ICI's involvement as "somewhat hostile".

Who gains from this? Atul Choksey, the man who is reputed to have played a big role in making Asian Paints the market leader, has got his money. He is now branded as a corporate traitor. Incidentally, the other promoters, have now asked for his services as an advisor!

The promoters troika of Ashwin Dani, Ashwin Choksi, and Abhay Vakil have now the onus of running the company themselves. But can they do it? The shareholder's fortunes will depend on these promoters.

ICI plc has gold in its hands, but then its not certified. Though they have said they are interested only in a 'strategic alliance' with Asian Paints, the 9.5 per cent which they have acquired from Atul Choksey makes them technically only 0.5 per cent short for a takeover bid. In the likelihood that they take over Asian Paints, will it be bad for Asian Paints and its shareholders?

Good intentions alone do not make good action. The only problem with the Maran doctrine is that what is good for Indian promoters is not necessarily good for Indian shareholders and consumers

Mahesh Nair