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  • Jul 11, 2024
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MULTINATIONAL CORPORATIONS’ SELLDOWNS: BALANCING CAUTION AND OPPORTUNITY IN INDIA’S VALUATION PREMIUM

Syllabus:

  • GS-3- MNCs , economic slowdown , Persistent issues and inherent solutions

Focus :

  • The article examines the trend of multinational corporations selling stakes in their Indian subsidiaries to capitalize on high valuations. It discusses the implications of this trend for India’s capital markets, potential concerns, and the broader economic impact.
Source - ORF  

Introduction

  • Overview of the historical trend of MNCs increasing stakes in Indian operations.
  • Recent shift in trend with MNCs monetizing their stakes.
  • Notable examples: Whirlpool, Timken, ZF, and Hyundai Motors.

Significance of MNC Selldowns

Maturation of Indian Capital Markets

  • India’s market capitalization surpassing $5 trillion.
  • Increasing weight of India in MSCI Emerging Market Index.
  • Comparison of trading volumes with Hong Kong.
  • Increased receptivity to new listings in Indian markets.

Valuation Arbitrage

  • MNCs leveraging India’s valuation premium.
  • Examples of significant capital raised through IPOs and stake sales.
  • Use of funds raised: deleveraging global balance sheets, investments in new areas like electric vehicles.

Implications for Indian Capital Markets

Positive Impacts

  • Strengthened startup ecosystem with more exits via capital markets.
  • Indian markets as a favorable place for listing diverse business models.
  • Potential for large IPOs to absorb increasing equity flows, preventing market bubbles.
  • Opportunities for Indian companies to leverage high valuations for strategic global acquisitions.

Potential Concerns

  • Insider selling analogy: MNCs selling stakes could signal overvaluation.
  • Questions about long-term prospects: MNCs historically increased stakes, now selling.
  • Risk of capital misallocation if the IPO quality is not maintained.
  • Need for regulatory vigilance to ensure the genuineness of the supply.
Types of Companies in India :

Maharatna Companies

1.     Eligibility Criteria:

o    Maharatna status is granted to Central Public Sector Enterprises (CPSEs) that have an annual net profit of over ₹5,000 crore, net worth of ₹15,000 crore, and turnover of ₹25,000 crore for three consecutive years.

2.     Financial Autonomy:

o    Maharatna companies enjoy greater financial autonomy compared to other categories. They can invest up to ₹5,000 crore in a single project without requiring government approval.

3.     Global Ambitions:

o    Maharatna companies are expected to compete on a global scale. They have the liberty to form joint ventures, set up subsidiaries, and enter into technology collaborations abroad.

4.     Examples:

o    Some notable Maharatna companies include Indian Oil Corporation (IOC), Steel Authority of India Limited (SAIL), and Bharat Heavy Electricals Limited (BHEL).

5.     Governance:

o    These companies have a higher degree of professional management and governance practices, often attracting top talent and maintaining transparency in operations.

Miniratna Companies

1.     Categories:

o    Miniratna companies are divided into two categories: Miniratna Category I and Miniratna Category II. Category I requires a profit for the past three years or a net worth of ₹30 crore, while Category II requires positive net worth and profit in the last three years.

2.     Financial Powers:

o    Miniratna Category I companies can invest up to ₹500 crore or an amount equal to their net worth, whichever is lower, without government approval. Category II companies can invest up to ₹300 crore or 50% of their net worth, whichever is lower.

3.     Operational Flexibility:

o    These companies have more operational and financial freedom compared to non-ratna companies, allowing them to make faster business decisions.

4.     Examples:

o    Examples of Miniratna companies include Airports Authority of India (AAI), Rail Vikas Nigam Limited (RVNL), and Bharat Sanchar Nigam Limited (BSNL).

5.     Promotion to Higher Status:

o    Miniratna companies that consistently perform well can be considered for elevation to Navratna status, provided they meet the required criteria.

Navratna Companies

1.  Eligibility Criteria:

o    Navratna status is awarded to CPSEs that score at least 60 out of 100 based on parameters such as net profit, net worth, total manpower cost, total cost of production, cost of services, PBDIT (Profit Before Depreciation, Interest, and Taxes), capital employed, etc.

2.  Financial Autonomy:

o    Navratna companies can invest up to ₹1,000 crore or 15% of their net worth on a single project without government approval, with a ceiling of ₹5,000 crore for all projects.

3.  Strategic Importance:

o    Navratna companies hold strategic importance for the economy due to their significant market presence and contribution to various sectors, such as energy, telecommunications, and infrastructure.

4.  Examples:

o    Examples of Navratna companies include Oil India Limited (OIL), National Aluminium Company Limited (NALCO), and Hindustan Aeronautics Limited (HAL).

5.  Board Composition:

o    These companies have professional and experienced boards with non-official directors and functional directors, ensuring better governance and strategic decision-making.

Strategic Considerations for Indian Companies

  • Leveraging high valuation multiples for overseas listings and acquisitions.
  • Ensuring that strategic moves align with long-term growth prospects and do not merely capitalize on current market conditions.

Regulatory Perspective

  • Importance of a robust regulatory framework to maintain market integrity.
  • Balancing the inflow of capital with the quality of listed entities.
  • Preventing potential market bubbles through careful monitoring of IPOs and secondary sales.

Broader Economic Impact

Boosting Economic Activity

  • Increased capital availability for business expansion.
  • Enhanced global competitiveness of Indian companies through strategic acquisitions.

Potential Risks

  • Overreliance on equity markets for capital, leading to volatility.
  • Impact on retail investors if market corrections occur.

Conclusion

  • A balanced view on MNC selldowns: recognizing opportunities while being cautious of potential risks.
  • Importance of strategic regulatory measures to maintain market stability and investor confidence.

Source:Livemint

Associated article

https://universalinstitutions.com/indias-economy-offers-global-hope/

Mains Practice Question :

GS-3

“Analyze the recent trend of multinational corporations selling stakes in their Indian subsidiaries. Discuss the implications of this trend for India’s capital markets, potential risks, and the broader economic impact. How should Indian regulators and investors respond to this phenomenon.”(250 Words)