Corporate India is slowly coming to grips with the fact that an open economy demands corporate focus. It has, in recent times, seen not merely its margins shrinking as a result of competition, but whole lines of business becoming unviable. In other words, industry must restructure, and that is the second and more important strategy for Indian business. There is an enormous amount of restructuring already underway. Takeovers, mergers, changes in equity stake, sale of assets, tie-ups, break-ups -- are all taking place at an ever-increasing pace. Corporates fully realise that economies of scope and size are essential to survival, and world class capacities can only be built by concentrating on core competences. But the effort by companies and groups to restructure could come to naught, and Indian competitiveness severely hampered, unless changes are made in restrictive laws which prevent such consolidation. Redistribution of assets between group companies, for example, attracts stamp duty, and the high ratesof duty are one major factor holding back such restructuring.
Another reason is that cross-holdings between companies is one way of ensuring a controlling stake for promoters. Selling off some companies, therefore, could result in promoters' stake coming down. This problem could be circumvented by transferring the investments to a holding or investment company, but capital gains tax would be a disincentive.
There exists a case, therefore, to exempt corporate restructuring to ensure better competitiveness from the attentions of the taxman -- as a matter of fact, the government should, in the national interest, encourage strategic mergers and divestments. The most important changes, however, need to be done in the area of labour laws. Many of the businesses a group is in have no future, because the country as a whole does not have a competitive advantage in the product. Unless such businesses are allowed to close down, they will continue to bleed the group.
The other factor which needs a re-look is thefact that several companies, especially in the public sector, have built up huge infrastructure in the shape of schools and staff quarters, the expenditure on which is no longer viable if the firm is to remain competitive. Whole industries, such as the tea industry, subsidise their workers very substantially. This big business-organised labour pact was possible when there was no threat from imports. Given the fact that only 10 per cent of the workforce is in the organised sector, such luxuries can no longer be justified. Unless tough decisions on these aspects of reform are taken, Indian industry will remain uncompetitive.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
