Indian takeovers of foreign firms over the last two years?think Tata buying Corus?engendered flag-waving exultation. The reaction to Japan?s Daiichi Sankyo taking over the Indian bluechip Ranbaxy has been muted. But if a profitable, growing and gobalising Indian company has been acquired by a foreign firm, we need to exult over that as well. If Indian firms find foreign firms attractive, the reverse is also perfectly plausible, and as unexceptionable. India is a big and rapidly growing market, and firms from abroad would want to gain a foothold. Often, entry is easier through the brownfield route rather than through greenfield investment, which remains ridden with regulations and bureaucracy. Specifically, in this case, the pharmaceutical industry is facing pressure on its profit margins partly because of competition. Consolidation, thus, makes eminent sense?Ranbaxy itself had been expanding abroad, organically and inorganically. So will this deal open the gates for further consolidation through M&As by both domestic and foreign firms?
The answer in economic terms is in the affirmative. There will be plenty of other Indian promoters willing to sell their stakes at good prices and foreign firms have the incentives and resources to acquire good firms. Even domestic firms should look at merging with one another to reap cost economies. Politically, so far, there has been no nationalist rhetoric thrown at Daiichi. It must stay that way. Many countries including France and the US have invoked irrational nationalism to block foreign takeovers of national firms. India could yet show them the way forward. All this, of course, assumes that takeovers are friendly and that has indeed been the case thus far. But there should be room for hostile takeovers as well, and that is where legal complexities enter. The corporate governance structure of Indian firms is loaded against potential acquirers?promoters, often backed by financial institutions, have a comfortable majority and need not sell. And the takeover code stipulated by Sebi makes it difficult for a minority shareholder to go ?hostile? because of advance disclosure requirements. Still, there is nothing to prevent a determined acquirer. The Competition Commission has the authority to prevent a hostile takeover if it is against the interest of competition. It must use this power sparingly, and independently, not under political or populist pressure.