I read a story about a firm in China, by Henny Sender in the Financial Times of 27 April, which made me wonder about India.
Morgan Stanley scored a coup in 1995 with the creation of a firm "CICC", a joint venture with China Construction Bank (CCB) and some other investors. This new firm was capitalised at $100 million, and Morgan Stanley paid $35 million for 35%. What were they paying for? CICC 'had a virtual monopoly on bringing Chinese companies to local stock markets'. As an example, they were the first firm to get a QDII license, and they were the first to launch a foreign product.
CICC is headed by Levin Zhu, a Ph.D. in Meterology, and a son of Zhu Rongji, the former prime minister. Zhu got his first finance job in 1996, joined CICC in 1998 and gradually gained effective control of the management by 2000, becoming CEO in 2003 (i.e. with 7 years experience in finance after getting a Ph.D. in Meterology). The business model revolved around utilising communist party contacts to obtain business; he was a key player of this team. Mr. Zhu brought value to the business, and got paid well: with numbers like $10 million and $17 million, which look very big by the standards of Indian CEOs.
When Morgan Stanley needed cash in recent months, they wanted to sell shares in CICC. Zhu Rongji retired in 2003, which seems to have adversely affected the business model. In addition, with something like the erstwhile Indian `Press Note 18', Chinese regulators would block all other activities of Morgan Stanley until they were fully divested of CICC. But their efforts at selling shares have done badly because the management team feels it should obtain a bigger stake in the company. The management team is indispensable to the business owing to links to the communist party, and if they do not cooperate, a buyer is likely to be reluctant to step in. The FT article suggests that Morgan Stanley will endup getting a 3x return for their investment, or 9% per year, which is pretty bad. All in all, it's a sad story of the children of the communist party recapturing the pre-1949 wealth of the KMT and their cronies.
How bad is this, by Indian standards? (I think it's time for Sunil Jain to write a book about all the awful things done by Indian regulators). Could it happen in India? Could a foreign firm get a sweetheart deal where they get some exclusive market access, and then the business is run by the son of the prime minister, who uses political connections to gain business in a messy industry, gets paid very well, and then goes on to achieve a substantial stake in the business owing to unfair rules like `Press Note 18', thus leaving the foreign partner with little to show when the time comes to leave?