What is an Indian company?

The recent rise of a raw brand of economic nationalism has spawned a flurry of highly polemical questions, which are now doing the rounds in political and policy making circles. Such questions pertain to whether an Indian company can be allowed to be acquired by a foreign enterprise or whether foreign direct investment (FDI) norms should be tightened in areas where Indian companies are being acquired by foreign companies. The argument, which no doubt has emerged from the Hindutva agenda of the Bharatiya Janata Party, is that the government should support Indian companies and prevent foreign entities from gobbling them up.

A few weeks ago, the chief of Rashtriya Swayamsevak Sangh

(RSS), Mohan Bhagwat, had opined that Indian skies should not be allowed to be ruled by foreign airlines and had questioned the need for allowing a foreign airline to own Air India. It is a different matter that what the RSS chief demanded was by and large what the government had decreed while deciding on the privatisation of Air India. It also showed that though the Narendra Modi government had professed its commitment to liberalisation, deregulation and economic reforms, it still remained subservient to the broad policy diktats of the RSS.

A cap of 49 per cent on a foreign airline’s equity in Air India essentially meant that a foreign airline would not have a majority on its own in the privatised airline. Nevertheless, Mr Bhagwat’s statements did raise fundamental questions about the logic or relevance of a political ideology based on a fuzzy and irrational economic understanding of how companies should function in a competitive market, bringing out the best in terms of their efficiency, quality of output and wider consumer choices.

Another unseemly controversy has erupted over the global retail giant Walmart’s bid to acquire 75 per cent equity in online retail major, Flipkart. Questions are being raised over how an Indian online retail company after valiantly facing competition from Amazon is now being taken over by a US company. Why aren’t the FDI rules restrictive enough to prevent such acquisition of Indian companies and when could India boast of a truly Indian retail giant? If China could have an Alibaba, why shouldn’t India create a policy environment that encouraged an Indian Alibaba?

That is not all. Soon, India may be witness to another debate over why an Indian health care company, Fortis, should be allowed to be acquired by IHH Healthcare, a Malaysian health care giant. Another bid for Fortis has come from an Indian hospital chain, the Manipal Group, but this bid has the financial backing of TPG, a US investment company. Given the current political environment dictating the kind of economic nationalism that can do more harm than good to the Indian economy, it is likely that soon there will be a demand from interested parties to impose curbs on FDI in the health care industry.

To put it mildly, the current tenor of the debate is bizarre. Driven as it is by a mistaken notion of national good, it also defies economic logic. The myth that is supposedly providing sustenance to such campaigns needs to be busted, if some sense in India’s economic policy debates has to be restored. That myth pertains to the definition of an Indian company. Does a company with majority foreign ownership necessarily become a foreign company? And must ownership alone should be the criterion for determining whether a company is foreign or Indian?

For instance, is HDFC Bank, the second largest private sector bank in the country, an Indian company? Its majority shareholding is owned by foreign institutional investors, according to the Bombay Stock Exchange.

What about IndiGo, India’s largest airline? Almost 37 per cent of its equity is held by the airline’s foreign promoters including non-resident Indians and another 13 per cent is held by foreign institutional investors. Should it be treated as an Indian airline?

And if you look at the shareholding pattern of Flipkart, it would be difficult to describe it as an Indian company from an ownership perspective, even though the general perception is that it is an Indian company. Flipkart is not yet listed on Indian stock exchanges and its foreign shareholders include SoftBank (21 per cent), Tiger Global (21 per cent), Naspers (13 per cent), eBay (six per cent) and Tencent (six per cent). Indeed, Flipkart’s only Indian ownership link is in the shareholding of Sachin Bansal and Binny Bansal with each of them holding only about five per cent equity.

It is time that such confused thinking over the definition of an Indian company was set at rest. From a regulation point of view, any company that is registered in India is an Indian company. It becomes more of an Indian company when it operates largely in the Indian market employing Indians as its workforce and using raw materials and components procured in India. Ownership does matter, but only up to a point. Can anyone argue convincingly that Maruti Suzuki Limited is not an Indian company? In terms of ownership, it is, of course, a Japanese company. But in what way is it less Indian than, say, Mahindra and Mahindra or Tata Motors?

Yes, the government could still retain FDI limits on a few strategic sectors from an economic security and geopolitical perspective. But there is little logic in today’s world to continue to maintain different levels of FDI limits for different sectors as long as these are not falling under strategic areas from the perspective of economic security and geopolitics.

So, why should anyone worry about Walmart acquiring Flipkart on grounds of ownership? Why should Walmart be accused of using a preferential FDI route available for online retail and entering the Indian market by acquiring Flipkart? Similarly, why shouldn’t HDFC Bank, Flipkart or IndiGo be treated as Indian companies for all practical purposes even though their majority ownership is not held by Indians or Indian entities?

India’s economic policy debates should not be allowed to be held captive by narrow lobbying based on whether a company is owned by Indians or foreigners. Instead, the criterion should be whether the companies operate in Indian markets, use raw materials from India or whether they employ workers in India. That is how India’s economic interests will be served more gainfully, and not by remaining obsessed with only ownership issues.