Why Bombay's Blue Chips Are Down

Local investors suspect multinationals give them a raw deal

Anyone who follows the Bombay Stock Exchange will have noticed the pattern. Blue-chip multinational stocks are getting hammered. From January through September, the exchange's index of nontechnology securities, which is dominated by locally traded subsidiaries of big multinationals, has dived 18%. Sure, tech stocks are getting hit, too, but the blue-chip companies boast the famous brands, aggressive marketing, and solid growth prospects that are supposed to keep them buoyant.

So why are Indian investors deserting them? Because, they say, such multinationals as Procter & Gamble, Gillette, Pfizer, and SmithKline Beecham are playing an elaborate shell game, with the aim of repatriating profits and bypassing local shareholders. In recent years, foreign companies have been buying best-selling brands from their locally listed subsidiaries and moving them to entities that are 100%-owned by the far-off parent.

A cynical ploy? The multinationals say that it is just part of their strategy of global consolidation and not intended to hurt local investors. But those investors complain that the listed subsidiaries are left with lesser brands and limited growth prospects. "Most multinationals treat Indian shareholders differently from shareholders in their home countries," says Manish Chokhani of Enam Asset Management in Bombay. "It's unfair."

SUSPICION. What Western corporations are doing is perfectly legal under the economic reforms launched by New Delhi. Previously, foreign companies could own just 40% of their Indian operations. Today, they may hold 100%. So they have set up wholly owned, unlisted subsidiaries, or increased their stakes in existing affiliates, to gain total operating control. Chokhani and others maintain the purchases by the Western companies--long an object of suspicion among Indian nationalists--are a blunt lesson in what happens when a newly liberalized economy allows international capitalists to set the agenda.

Critics say that companies with new 100%-owned subsidiaries are paying below-market prices for the brands once held by the listed affiliates. For example, P&G paid just $4 million to buy Ariel detergent, when sales were $33 million a year. Local analysts reckon Ariel could have fetched $30 million or more on the open market.

The multinationals deny any wrongdoing and insist they have no choice. Before the reforms, they say, their Indian affiliates, although profitable, had begun to resemble inefficient local companies. Then liberalization brought in Western companies that began doing business in India unburdened by the old rules. Taking brands inside unlisted entities lets companies compete better and gives them more control.

At first, some local investors endorsed the strategy. P&G says its shareholders cheered when Ariel detergent was moved to the 100% subsidiary in the mid-'90s. The brand had been losing money and had dragged the Indian subsidiary into the red. But investors were less sanguine when P&G began introducing a slew of new products through the unlisted company. Now, the listed subsidiary has only three brands left: Vicks decongestant, Whisper, a feminine hygiene product, and Old Spice aftershave. And while profits at the listed subsidiary were up 32% last year, sales grew just 2%. The stock peaked at $32 in July of 1999 and recently stood at about $12.

DEFENSIBLE. Investors also have punished SmithKline Beecham for switching around brands. In 1996, the listed company sold its popular antacid, Eno Salts, to a new 100% owned entity called SmithKline Beecham Asia for about $1 million. Analysts reckon that the brand should have fetched at least 10 times that. Simon Scarff, managing director of the listed firm Smithkline Beecham Consumer Healthcare, notes that the shareholders approved the deal. "We're extremely good at what we're doing," he comments. Perhaps, but the stock price in SmithKline's locally listed subsidiary is down 27% since January.

However defensible the actions of the multinationals, critics argue that they have a responsibility to their Indian shareholders, and should buy back the securities of their listed companies. Either that, they say, or the likes of P&G and SmithKline Beecham should follow the example of Hindustan Lever Ltd., the Indian subsidiary of Dutch-Anglo giant Unilever Group. The Indian public, which holds 49% of its shares, is bullish on the company because all brands are sold through the listed entity, and Lever has grown into a $3 billion enterprise. "India prospers, Lever prospers," says Lever Chairman Manvinder Singh Banga. If only, say Indian investors, the other multinationals thought that way.

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