Subsidiary management in India

India may have found a place among the well-known emerging markets in the global economic community, but the concept of good governance still remains blurry, largely due to the bribery, fraud and corruption that have accompanied the sudden growth of international subsidiaries in the region. Running a subsidiary in an environment that combines lax governance with 
minimal regulatory standards means 
successful operations may depend on a company’s willingness to go out of its way to determine the ‘unspoken’ laws of 
business in that country, and to align itself with reputable local allies so it doesn’t fall foul of international or local laws.

The key issues for any business will be reviewing and understanding local and international laws enough to remain compliant with them, avoiding conflicts due to cross-cultural barriers, conducting thorough due 
diligence on people and companies that may become partners in the business, and involving local professionals in the managing of the subsidiary through board 
membership.

The corporate secretary can play an active role in dealing with these challenges.

According to Shriram Subramanian, managing director of Bengaluru-based InGovern Research Services, India’s financial picture is solid. It is the 
second most populous nation on the planet and has a GDP growth rate of 8 percent; it boasts a high savings rate among its citizens, which bodes well for future 
consumption; and with a population that has an 
average worker age of 28, rates of disposable income are likely to rise over the next 30 to 40 years.

India is home to 23 exchanges and remains attractive to international investment, with multinationals like Bank of America, Berkshire Hathaway, Chevron, Citco and Deloitte & Touche setting up subsidiaries throughout the nation. This increase in foreign investment, coupled with a growing demand for global services, has cast a favorable light on India’s potential for profit.

Finding the right partnerships

Unfortunately, trying to reap those profits can sometimes lead companies into trouble. Such has been the case for Telenor, the Norwegian telecoms giant that bought a 67 percent stake in Unitech Wireless, a unit of a local real estate company, for $1.2 billion in 2008, only to discover that Unitech (which has since changed its name to Uninor) had obtained its 2G mobile phone license fraudulently. That revelation touched off a national probe of the entire telecoms industry in India. Former government officials and key executives of several Indian telecoms companies have been charged in the scandal.

Experts estimate that the episode cost the Indian government $39 billion in lost revenues, and billions more in lost investment capital that likely will not enter the country until the issue is resolved and tougher 
regulation of the telecoms industry is implemented. Telenor, meanwhile, is awaiting possible fines for 
owning the troubled subsidiary and is working to 
counteract potential damage to its reputation as a 
trusted carrier in Asia since 1997. Last year the firm came under pressure to leave India over the scandal, but in November it committed to staying, and is now projecting an increase of 4 million Uninor subscribers next quarter, up from 21.4 million in June.

In its defense, Telenor claims that it should not be punished for any wrongdoing that occurred before it invested in Unitech in 2008. Even if Telenor is 
eventually cleared of any corruption charges, however, the scandal points out many of the risks corporations face in establishing subsidiaries abroad.

‘The recent Telenor case has been a disaster,’ says Subramanian. ‘If a company is partnering with any business group, it has to ensure that proper due diligence has been conducted.’

In June, Sivge Brekke, head of Telenor’s operations in Asia, told the Financial Times that his company 
conducted thorough due diligence before its acquisition and waited six months for the Indian government to approve the deal. Subramanian feels that the telecom giant should have raised more questions.

‘It looks like Telenor wanted to get into the Indian telecoms industry at whatever cost, even if that meant going into a questionable deal,’ he says. ‘It is not the case that Telenor wasn’t aware of who it was getting into a partnership with.’

Corporations looking to establish subsidiaries in India must also be willing to conduct thorough due diligence on Indian regulations governing their industry. When undertaking basic business transactions, what is considered reasonable and feasible in the US may not work well in India.

‘Managing multi-jurisdictional transactions is one challenge we’ve experienced at Chevron,’ says Kari Endries, assistant secretary and managing counsel at the international energy giant. ‘Frequently a single business transaction may involve a number of subsidiaries with different local requirements or governance practices, and completing the transaction will require complex coordination of timing.’

Improving standards

Although India is considered to be 
a country that lacks sophisticated infrastructure and high governance standards, it is making significant progress. Companies need to keep up with the modest adjustments India is making, and they must also consider whether some of the governance changes the country implements may cause as many problems as they solve.
‘In only the last few months, India has introduced substantial changes to its regulations governing data 
privacy and annual shareholder meetings,’ says Pia Victor, corporate compliance specialist at Orrick Herrington & Sutcliffe. ‘This may affect a significant number of foreign-owned businesses operating in India.’

One area of governance to which India has devoted a great deal of attention is monitoring the behavior of corporate directors. ‘In India, there is a requirement that all directors have a director identification number,’ Victor notes. This is seen as a major governance obstacle for many subsidiary owners because, for tracking purposes, at least one director must obtain a digital signature approved by the country’s Ministry of Corporate Affairs. There are tight deadlines for obtaining this document, and the process is not simple.

Kevin Penzien, marketing manager of multinational clients at Citco Corporate Services, points out that US multinationals typically appoint US-based executives to serve as board members of foreign subsidiaries. ‘Despite the absence of any statutory requirement, it is best practice to have a resident Indian as a board member,’ he explains. ‘He or she will maintain management and control of the company and help ensure the parent or holding company does not face any potential permanent establishment issues in India.’

David Masse, senior legal counsel and assistant 
corporate secretary for IT outsourcing firm the CGI Group, says, ‘Mind and management of the enterprise’s international subsidiaries must remain local. We achieve this objective by having a consistent scheme of delegation across all companies, by leveraging subsidiary boards of directors and by implementing policy on 
subsidiary board composition that ensures a majority 
of local directors.’

Meetings on the agenda

At the other end of the spectrum, what challenges do Indian subsidiary managers face when dealing with board members that are based in the US or Canada? Taizoon Khumri, owner of TM Khumri & Co, 
a Mumbai-based company of practicing company 
secretaries, believes not meeting with board members outside of India on a regular basis can lead to serious problems in the long run.

‘In my experience, I have seen that foreign nationals who are directors in local subsidiaries are reluctant to come to India for board or committee meetings,’ says Khumri, who has been in the corporate governance business since 1979. ‘They prefer to conduct business over the internet or via video conferencing.’  

Such an approach can lead to a lack of oversight of business operations and poor internal controls that can later affect the host company’s performance, Khumri contends. Having better communication with foreign directors and appointing more local members of the board are both steps in the right direction for effective subsidiary management.

Doing business in an emerging market like India requires a multi-dimensional understanding of the country’s culture and business principles. This is where corporate secretaries can take a more active stance in managing a subsidiary overseas.