Navigating the policy maze

Some weeks ago, Facebook released data on internet usage worldwide. Ten per cent of 3.2 billion are in India as of 2015 and by conservative reckoning half of them had used Facebook. Yet the data hid a major business setback for the California-based company - a setback that other multinational companies will study intently to discover how not to navigate public policy in India.

Last September, Facebook chairman Mark Zuckerberg had welcomed Prime Minister Narendra Modi at the company headquarters for a town hall meeting. "Prime Minister Modi and I will discuss how communities can work together to address social and economic challenges," he wrote on his page, in a hardly veiled reference to his pet project, Free Basics, to galvanise growth in India. While several company chiefs had met Modi in India and during his visits abroad, the public meeting gave the Facebook team the impression that the underlying business pitch was one step from being signed, sealed and delivered. Four months on that business pitch came spectacularly unstuck. In February this year the Telecom Regulatory Authority of India, in a generic order, refused permission to Facebook's Free Basics, which entailed differential pricing for internet access based on content.

The episode demonstrated to companies scouring for a foothold in India that staying on the right side of public policy is onerous but can spell the difference between success and failure. The Indian corporate landscape is replete with examples of companies that have managed to claw back when they were almost on the verge of being knocked out, like Blackberry; others like Nestle and Uber went on to make expensive course corrections before they could reinstate themselves in the marketplace. In all these cases, the companies realised their position as the top gun in a market was no guarantee that it would not be hauled up at the first whiff of misdemeanour.

"There is an element of regulatory uncertainty in emerging market economies compared with developed markets," says Rajesh Chakrabarti, former executive director at Bharti Institute of Public Policy at Indian School of Business. India has deceptively similar laws to those in the US or Europe, "but there are differences that can catch you unawares".

Those differences caught Nestle off guard. It has been operating in India for more than a century. In May 2015, amid concerns over "dangerous levels" of lead and MSG in Maggi, the Uttar Pradesh food safety body asked Nestle to recall a batch collected for testing. By June, the Delhi government banned Maggi for 15 days, and some other states ordered tests. On June 5, the FSSAI ordered Nestle to "withdraw and recall" all nine Maggi noodle variants, halt production and stop exports, saying the samples were "unsafe and hazardous" for humans.

Samples of the company's production are supposed to be checked annually. But for years the regulator had let things lie. It has been returning a good part of its annual budget unable to find reasons to spend it. (http://www.fssai.gov.in/Portals/0/Pdf/Annual_Report_2013_14.pdf)

As reports from the different laboratories on Maggi showed up yawning differences, it became difficult for the company to respond. Former economic affairs secretary R Gopalan says, "We have so many rules underlying the laws in our statute books but few are implemented properly. Here was a loophole." He says the issue could have been settled soon only if uniform testing procedures were set down. "There was clearly a problem with the procedures in some of the labs. Since there was no stringency in enforcing those procedures it became a blame game on the regulatory gap." The company ran the full gauntlet from a denial to being handed a five-month ban that led to a 52 per cent dip in its net profit for the year.

The Swiss company's problems highlighted a larger issue for the multinationals in emerging markets. They often come armed with technology that becomes difficult to police. And this is where negotiations help them rather than a head-on battle with multiple stakeholders. Vodafone has learnt this to its cost. The second-largest mobile carrier in India has been fighting tax authorities over acquiring a 67 per cent stake in the mobile phone business owned by Hutchison Whampoa, now part of CK Hutchison Holdings, for $11 billion in 2007. The company began international arbitration proceedings on the dispute in 2014. As recently as in February it received a notice to pay Rs 14,200 crore in taxes and penalties or risk having its assets seized.

Anand Prasad, founder and partner of Trilegal, a law firm which deals with some of these cases, says: "Often it is a case of policy-making catching up with business approaches and models. In the case of Facebook and Uber, there were no rules. Those came up after they had commenced business. So these are not cases of non-compliance with rules but more in the nature of rules catching up with evolution of approaches in conducting business."

None faced this challenge more than BlackBerry or Research in Motion as it was known in 2010. Packed within its smartphones was its operating system, Blackberry Enterprise System, impossible to hack. The success of its claim almost proved to be its nemesis. Siddhartha Dasgupta, its director, corporate affairs says in August 2010, the telecom department gave the company just a fortnight to pack up its bags and leave India, one of its fastest growing markets, unless it shared data on emails and messenger services as and when the government asked for it.

Blackberry furiously negotiated with the government but unlike Facebook that launched a high-pitch campaign to promote Free Basics, didn't open up to the media. There was no big banner poster or pullout in dailies to make the government defensive. "That is how the game is to be played," says Shailendra Mehta, professor of strategy at IIM Ahmedabad and now vice chancellor at Ahmedabad University. In strategy, every barrier is an opportunity, he adds. "Our institutions are not unjust. And among emerging market economies India is often seen as setting the standards."

For governments it sometimes becomes difficult to be flexible when there is a public storm outside, says Gopalan. The stakes have become higher as the attraction of the Indian market has risen - in the past two decades, the per capita income in India has more than tripled. Mehta says in most cases of multinationals operating in markets like India they have to put up a veneer of nationalism to deal with local interests. Chakrabarti adds: "Often the technological challenge brought by them is not understood in the regulatory framework and that adds to the mistrust." Blackberry was able to pull itself out of the impasse though it did not help as its global business portfolio sank. In India, it is now hawking Secusmart, which does voice and text message encryption for the government, to block eavesdropping and snooping on sensitive communication. Nestle, for its part, appointed an Indian, Suresh Narayanan, as managing director as it fought a ban. "The appointment of a new Indian MD (now also the chairman) was the right step taken to revive the Maggi brand," Abneesh Roy from Edelweiss Securities told Business Standard. (Maggi impact: Nestle's December quarter net down 44% to Rs 183cr, February 13, 2016)

Uber has learnt its own lesson. Although other app-based taxi aggregators were already plying in India, Uber found the hard way that assuming a mobile-app-only identity would not cut ice with regulators. The popular taxi-hailing service came under the lens of tax authorities for allegedly not paying service tax. Uber takes the services of taxi operators; it does not own any fleet or have any driver on rolls. When a customer books a service through the Uber app and pays for it through credit card, the payment is directed to Uber's Netherlands unit. After deducting its revenue share, the money is redirected to the taxi driver in India. Since there is no framework to tax such revenue flow under the current law, the taxman is struggling to understand the business model of many such companies. "Principally, Uber is right, but the law has to catch up with it and others," Prashant Singhal, global telecommunications leader at consultancy firm EY India, told Business Standard when Uber was in the throes of its tax troubles.

It had to first cede ground in Delhi that banned it in December 2014 by applying for a radio cab service licence. The ban was lifted in early July 2015.

The taxi aggregator had relied on its technology to ride the Indian market without realising it had to convince the sub-national regulators about the technology, the police about the safety of operations and local taxi operators willing to invoke nationalism to safeguard their interests. But as it faced the three-headed storm, the company held long bit-by-bit talks with the stakeholders. While the company did not respond to an email for its comment on this story, Prasad of Trilegal says what Uber faced "was probably a function of lack of maturity and understanding of the Indian political system and an inability to face of media criticism with a fair approach".