Deeper lessons of Bharti/MTN dual listing

Financial Express, 5 October 2009

Reliance Infocomm and Bharti have both explored the possibility of a merger with MTN, the African telecom giant that is headquartered in South Africa. There are strong synergies in such a deal. Indian telecom companies are the world leaders in offering low cost services, and these skills would yield competitive advantage when applied in Africa. And yet, it is better to go from the foundation of MTN -- with a huge subscriber base in Africa -- instead of going into the countries of Africa and starting from scratch.

While a one-sided transaction (of Bharti purchasing MTN or of MTN purchasing Bharti) is feasible, the relative sizes of the firms suggests that the best path is a merger. A new unified firm would emerge. All existing shareholders would get shares in the merged company. The trading in both India and South Africa should continue as it has for the two erstwhile companies. In other words, it makes sense for the new company -- Bharti-MTN -- to continue to obtain equity capital from the combined base of shareholders of both countries as the two components had obtained pre-merger.

This requires a concept called "dual listing" where one company is listed in two countries. This is commonplace in the world. However, it runs afoul of India's capital controls.

This example illustrates the continuing collision between the growing sophistication of the Indian economy and the existing framework of capital controls. This story has been played out in many countries across the world. As a country obtains ecconomic growth, and obtains a certain critical mass of a capable corporations and financial system, capital controls interfere with the process of economic growth. All countries that faced these problems have responded by dismantling capital controls.

The Bharti-MTN story is in the limelight today. But a deeper problem has been brewing for a long time. Indian companies like Tata Steel compete on the global market for steel. Capital and financial services are crucial for determining their competitiveness. When India runs a policy framework which interferes with the ability of Tata Motors to obtain the lowest cost equity or debt capital, or the best risk management services, this interferes with India's growth. High GDP growth requires embracing globalisation, which involves rethinking the old arrangements for capital controls, financial sector policy and monetary policy.

One dimension of India's capital controls that merits concern is the gulf between the perspective of large firms and small firms. When Bharti faces a problem with because dual listing is difficult, it has the heft to bring this to the attention of policy makers and the media. Big companies are able to pound the corridors of RBI seeking relaxations in capital controls, hire expensive lawyers to find loopholes in capital controls and find ways to get around constraints in order to get transactions done. When India is less integrated into the global financial system, this damages debt or equity investment into small companies, but it does little damage debt or equity investment into prominent firms like Tata Steel who are on the radar of the global financial system.

These factors drive a wedge between the corporate financial structure of the top 100 companies (roughly speaking, the members of Nifty and Nifty Junior) as compared with the remaining 100,000 companies in India. The top 100 companies are able to raise equity and debt capital from overseas, get their risk management done, and access international financial services from the best financial firms in the world. The remaining 100,000 firms get the brunt of the low quality financial services that the Indian financial system doles out. This is unfair and it is inefficient for the Indian economy. It eases the life of the big 100 companies who are then subject to less competitive pressure from everyone else. It results in suboptimal utilisation of resources by almost all firms, and lowers GDP growth.

There are three alternative approaches which the policy establishment can take when faced with these problems. The first consists of comprehensively taking stock of where we stand, and reforming the financial / monetary arrangements. While this is the best way to proceed, all too often, in India we take the cynical approach of thinking that comprehensive solutions are out of reach.

The second best approach is one of rapidly responding to these problems as and when they surface. When the Bharti/MTN transaction appears to be shaping up as a dual listing, MOF would rapidly swing into action and come up with all the incremental reforms (both legislative and non-legislative) required to enable dual listings. This is hard. And, there is a danger in this approach, of responding excessively to the political pressures that go along with high profile transactions, and not looking at deeper economic policy problems.

The worst possible approach that can be taken is that of sitting tight and smugly asserting that there is nothing wrong with the way India works today.

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