Over four decades ago, a little after the first big oil shock of 1973, which led to huge pressures on the balance of payments front (BoP) in the several years that followed, and with a huge import bill for petroleum, foodgrains and fertilisers, the government led by Indira Gandhi decided to bring a law primarily to regulate or conserve foreign exchange.
The Foreign Exchange Regulation Act, or FERA, of 1973 came in the backdrop of major inflationary pressures and an uncertain outlook on exports after riding a commodity boom in earlier years — and, as the government acknowledged in those years, an adverse turn on the BoP front.
What few realised, however, was that it was a situation arising out of some of the provisions of this draconian Act that led to one of the first significant flushes in the stock markets. This provision — Clause 29 of FERA — made it mandatory for foreign companies operating in India with a parent holding of over 40%, to dilute their holdings.
Questions were raised in Parliament as to why a company like Colgate, with a capital of just about Rs 1.5 lakh, could repatriate or remit dividends hundred of times more than its capital. Coca-Cola, which operated just as a branch in the country, was also targeted, as were 900-odd other multinationals. The political realisation that something had to be done to check this, and also issues relating to the building up of monopolies, was what forced a change in the law.
Initially, six months were given to the foreign firms to comply after RBI drew up guidelines or rules in consultation with the Department of Economic Affairs in the Finance Ministry.
Those were the days of the Controller of Capital Issues, whose approval was needed for the sale and pricing of every share. In the old RBI building in Mint Street, a full floor was piled up with applications of these “FERA companies”, as they came to be called. A FERA committee, which included Controller of Capital Issues A V Ganesan — who went on to become Commerce Secretary and a key figure in General Agreement on Tariffs and Trade (GATT) negotiations for India — and senior RBI and other officials, processed and approved applications.
One of the first cases to be decided was Colgate, with the panel saying that the company must dilute its stake from 100% to 40%. The exceptions were banking and airlines.
Coke and IBM refused. This was a time when the stock market was depressed, especially given the government-imposed restrictions on dividend in 1974, the crackdown on smugglers, and the huge economic challenges of 1973-74 and 1974-75 when India had to borrow from the IMF, including under a special dispensation for oil. MNCs were given two years then to comply, and by 1975-76 and afterward, the face of the capital market changed.
The issue or offering that changed investor perception was Colgate. Pricing was low — decided by the Controller of Capital Issues — and the issue was a huge success, with investors lapping it up. Seeing the post-listing gains, thousands of investors lined up to buy into share offerings of many others like Hindustan Lever, the Sterling tea companies, etc.
In hindsight, that control on pricing by the government-sponsored committee, which also had the chairman of UTI then, may have been retrograde step.
But in that socialist era, policy appears to have been driven by a desire not to let MNCs cream away excess profits, and to boost the capital markets to help local firms raise capital. At the time the policy was being implemented, Manmohan Singh was Secretary, Economic Affairs in the Ministry of Finance.
Starting from the late 70s and early 80s, homegrown companies started tapping into the Indian capital markets — Reliance Industries Ltd led by the patriarch Dhirubhai Ambani raised funds initially at par, and later TELCO, VIP Industries, Ranbaxy and Forbes followed suit.
Three or four decades later, it seems ironical that despite the growth of the Indian stock markets, India’s primary markets see few issuances by its top local firms with, interestingly, pricing being an issue with investors who have been hurt in the past. Policy intervention, anyone?