Foreign Multinationals Spark Buying in Indian Subsidiaries

By JESSE PESTA
Staff Reporter of T HE WALL STREET J OURNAL

NEW DELHI -- Looking for signs of life in India's battered stock market or optimism in the country's so-so economy?

Consider this: Foreign multinationals are voting with their wallets in India by shopping for their own stocks. In the past few weeks, companies ranging from U.S.-based Otis Elevator and Carrier to Hoganas of Sweden, a giant in the global iron-powder business, have made open offers for the shares of their listed affiliates in India, and some of the prices being offered suggest they consider themselves bargains.

U.S.-based chemical maker Cabot offered 100 rupees ($2.13) for Cabot India at a time when it was trading around 55 rupees. Otis and Carrier -- both units of United Technologies -- have offered to buy all shares outstanding of two Indian affiliates, Otis Elevator Co. (India) and Carrier Aircon; the offer for Carrier, too, was at nearly a 100% premium on the stock price prior to the offer. Philips has offered to buy the 17% of light-bulb maker Punjab Anand Lamp Industries it doesn't already own, according to Punjab.

The trend has kicked off a boom in stocks of foreign-affiliated companies as speculators search for other likely targets. Companies including Rayban Sun Optics India (a unit of U.S.-based Bausch & Lomb) and Philips India (also a unit of Philips) have seen their share prices in India rise as much as 40% or more since the mid-May offers for Otis and Carrier, which were two of the early ones. Both Rayban and Philips India deny open offers are planned -- although Philips late last year boosted ownership in its India unit to 83% from 51%.

In contrast to the surging share prices of multinationals since May 15, the Bombay Sensitive index has risen only 4%. The Sensex closed Monday at 3720.15, up 60.34 points, or 1.7%.

In addition to the attraction of depressed prices, analysts point out that 100% ownership means companies don't have to expose so much information about their business tactics to rivals, the market, or local partners. "In tough times, it will safeguard your interest," says Jignesh Shah, strategist at ASK-RJ Investment Management in Bombay.

But if this sounds like an amazingly easy way to make money, it isn't. The buyout trend is a tough one for investors to target unless they are willing to play the game of trying to guess who's next. For another thing, it is concentrated in the smaller, less widely traded multinationals with market capitalizations in the range of a billion rupees or so.

Yet, the trend contains important clues about how foreign companies view India. It is also a notable counterpoint to Dabhol Power, which is embroiled in a fractious battle with the Maharashtra State Electricity Board over the rates Dabhol charges. The fight is closely watched by investors abroad since Dabhol, which is 65%-owned by Enron, is India's largest foreign investment and emblematic of the difficulties foreign companies have encountered here over the years. In the past week or so, both sides have threatened to quit their contract.

Despite these troubles, one analyst says, the spate of open offers for foreign-controlled subsidiaries "works against the story of negative foreign-investment environment" in India.

Hoganas's decision to seek 100% ownership reflected its global strategy, but reflects as well on a changing India: Everywhere else in the world, it owns 100% of its subsidiaries, even Japan and China, says Virendra Sud, its managing director. "If the Indian government had allowed this 15 years ago, when the company came into existence, we would have done it then," he says (the upper ownership limit was 51% back then, he noted). "As the Indian economy opened up and liberalized, we immediately opted for that route." It's purely coincidence he says, that the Indian stock market "has sort of hit rock bottom."

A Cabot executive says the company received government approval to go to 100% ownership in April.

For a beleaguered stock market, the activity adds up to a breath of fresh air. The Bombay Sensitive Index is down 12% from late February just before a big insider-trading scandal led to the resignation of the chairman of the Bombay stock exchange, scuttled one of the most significant bank mergers in years and triggered a lending crisis that threatened some small banks.

The scandal, however, also triggered one of the biggest market reforms in years: The abandonment of a system of margin trading known as badla , which was widely blamed for the market woes earlier this year because it amplified market volatility.

Not that everything has changed on the market. The shares of some companies, including Otis, jumped sharply just before the buyback offers were announced, prompting the chief of the Securities and Exchange Board of India to ask the stock markets to submit a report on the trading activity. It isn't an investigation, he says, but a request for the exchanges to look for signs of improper activity. He's also made the "same request in four, five, six other cases," he says.

Ashok Malhotra, managing director of Otis, says he's "eagerly awaiting the report, because we are also surprised that such a thing could happen."

Write to Jesse Pesta at jesse.pesta@awsj.com