07 Jun 10 What is an Indian company?

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In recent weeks, we have been treated to a debate about how one defines an Indian company. The debate was sparked by a statement from the Department of Industrial Policy and Promotion (DIPP), which said that ICICI Bank and HDFC Bank are “foreign-owned and Indian-controlled banks”. This would have been humorous, if this were just academic or theoretical. Unfortunately, this definition could well impact several companies, and millions of consumers.


Based merely on shareholding, both these companies are majority owned by foreigners – and hence, not Indian. By this definition, neither is Infosys!


This is like one of those “letter of the law” versus “spirit of the law” issues. Technically, these companies may be foreign (based on ownership). However, in terms of management control as well as emotionally, these are Indian companies. And very much so!


In fact, today’s shareholding pattern is a consequence of their success! The reasons are not far to seek:

  • High standards of corporate governance

  • Consistent long-term out-performance

  • They are board managed “institutions”, with clear separation between the board and management


The last point is probably the most significant, and drives performance and governance. Very few Indian companies have successfully made the transition from family management (and ownership) to “truly” board managed companies. Management theory and historical data suggest that such companies have the greatest chances of longevity.


In my opinion, the companies we’re talking about (ICICI Bank, HDFC and Infosys) are truly Indian corporate icons… shining examples of what Indian companies can become! If only they’d shed the ownership paranoia. Consider also that most major Tata companies have greater institutional shareholding than family.


If such companies attract FII investors in droves, is that a bad thing?

Or is it a vindication of the fact that such Indian companies have enormous investor appeal?


Should we be proud of these companies?

Or should we mire them in regulatory red-tape and theoretical formulas?

Would love to hear your views.

Arun Jethmalani

Arun is one of the founders of ValueNotes. Apart from trying to build a high-quality research business, he has spent the last 27 years researching, analyzing, and dissecting companies and industries. He has worked with clients of all shapes and sizes, from all parts of the world – in providing them insights that make a difference to their business.
Prior to ValueNotes, he was an equity analyst/advisor, and wrote extensively on investing – including a column titled “Value for Money” which ran for 10 years in the Sunday edition of the Economic Times. To this day, he remains an avid “value” investor.
He has also been published in several other publications, and is a regular speaker at events related to technology, investing, competitive intelligence, business process management, Internet, etc. See: Valuenotes Events
He has been instrumental in developing a community of research and intelligence professionals in India, and is the founder and current chairman of the SCIP (India) Chapter. Arun holds a B Tech from IIT, Bombay and an MS from Duke University, NC, USA. LinkedIn Profile

  • naru
    Posted at 23:49h, 19 September Reply

    re: “In every democracy (or indeed, any form of government), foreign governments and corporates will try to buy influence – what;s new about that?”

    the major difference resulting from this ruling is that it opened the front door and welcomed these foreign influences instead of leaving them to do back-room deals. this led to satirical pieces like this: http://awesome.good.is/features/013/images/feature013reason184.html

    there are two interrelated problems: 1. money influences elections 2. lack of transparency prevents the average man from seeing who really owns their leaders.

    americans have felt safe so far because the sources of money in their politics are american. now that may not be true any more. once the chinese decide that it is time to start buying up big chunks of america (before the dollar becomes worth a whole lot less), this is going to be a problem. they have tried a couple of times and failed due to local resistance: http://www.washingtonpost.com/wp-dyn/content/article/2005/08/02/AR2005080200404.html and http://www.washingtonpost.com/wp-dyn/content/article/2005/07/19/AR2005071902172.html. — but at some point they too will invest in the u.s. (like many of the u.s. trading partners tend to). and then this ruling will make life interesting …

  • Arun Jethmalani
    Posted at 01:14h, 19 September Reply

    Thanks for the comments.
    Your analysis is right.The act of trying to define these boundaries does actually serve to make things rather “blurry”.

    The issues in India are no different (except in shade), but often more incongruous, partly due to lack of debate, but also due to slower evolution on the curve as far as liberalism and free markets are concerned (assuming that’s the way we’d like the world to go.)

    In the instance above (banking), foreign banks cannot open new branches in India without licences and these are restricted to a handful every year, even as Indian banks have no restriction. And this is partly why this issue has come into the forefront. If the likes of HDFC Bank and ICICI Bank are suddenly classified as “foreign”, then they will not be allowed to open new branches (in other words, they will not be allowed to expand, i.e. grow). Is this how one should penalise India’s best banks?

    In retail, we don’t allow foreign majority ownership in “multi-brand” retail. “Multi-brand” in this context refers to outlets that sell products of multiple brands, read Walmart, Carrefour, etc. (Adidas, Nike and Levi’s outlets are ok, however!) At the same time, Reliance Industries and Panataloon (Big Bazaar) can do multi-brand retail with no restrictions. What happens if more than half of Reliance’s shareholding is held by foreign institutional investors. This may not happen in the near future, given Mukesh Ambani’s shareholding, but you get the point.

    You spoke about influencing elections. In every democracy (or indeed, any form of government), foreign governments and corporates will try to buy influence – what;s new about that?

    Between the fifties and the eighties, the Left Parties (and the Congress) were systematically influenced by Communists in USSR and China. In fact, evidence of direct Soviet funding of left-leaning journalists and politicians in West Bengal have been exposed (but largely ignored by the still left-centered media). In any event, all governments are paranoid (or pretend to be for the sake of votes), which is why India now has restrictions on Chinese labour, and has restricted use of Chinese telecom equipment (for security reasons).

    The difference I think between the US and India are that such political impulses in the US represent regression (from past thinking), while in India the direction is positive (given where we were in the past).

    About the font size: Thanks for the input… I now have to face up to the fact that I’m technology challenged (function of the bifocal generation) as far as all this is concerned, but will seek help/figure it out in a few days.

  • naru
    Posted at 23:11h, 18 September Reply

    this question has some interesting aspects in the american context. earlier this year (see http://www.nytimes.com/2010/01/22/us/politics/22scotus.html, the supreme court of the u.s. ruled that “that the government may not ban political spending by corporations in candidate elections.” in response, the congress is trying to enact a law that “would also stop foreign-controlled corporations from spending on American elections. The Supreme Court’s ruling seems to have left that door open, raising the possibility that foreign powers, even enemies of the U.S., operating through innocuous-sounding front groups, could have a sizable influence on U.S. elections.”

    this actually makes things rather blurry. for example, toyota motor corporation cannot spend on american elections because it is a japanese company but toyota’s sales subsidiary can.

    do you have similar issues in the indian context?

    p.s: why is the font on this comment space so small? you seem to forget that most of your readership is already deep into bifocals.

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