Fording Through Fuzzy Logic

Network18 is a child of India’s liberalisation in 1991 (and by proxy, a child of adversity!). I remember two seminal events from our birth year (1992-93). One, India was forced to pledge its gold to IMF to avert an imminent loan default. Two, the Harshad Mehta scam was our lead story in the inaugural week of India Business Report, the first weekly television show out of India on BBC World. Astonishingly, two of our biggest stories 18 years later (in the last few months), have been generically similar — one, how the Satyam scam erupted and got repaired within 90 days; and two, India’s stunning purchase of 200 tonnes of gold from IMF. Both these stories show how India has taken less than two decades to fix its bankruptcy and paralysing scams. One is tempted to twist the axiom — the more things remain the same in India, the more they change!

I am often fascinated by how Network18’s vicissitudes seem to mirror the ups and downs that India’s economy has weathered in the last two decades. I am sure our chronicle will find an echo in
almost every company that was born in the early 90s. Do recall how India’s industrialists had their first brush with competitive doom in the mid 90s — the East Asian contagion, those cries of Bombay Club and howls of protests against the heavy hand with which the government stamped out inflation and threw industry into a crippling slow-down.

Curiously, Network18 also had its first brush with death around the same time, caused by a similar inexperience with global competitors. We were a tiny $1 million company which had the gumption to get into bed with giants like Wall Street Journal and Hinduja Group. We were innocent lambs in a corporate slaughterhouse — while these corporations (correctly) had a battery of lawyers around the table, we were just a couple of regular guys who at that time were clueless about esoteric concepts like non-compete covenants and bankruptcy protection indemnities. First the JV fell apart (for reasons which are not relevant) — then Wall Street Journal merged their Singapore venture with CNBC Asia — leaving us reeling under the double whammy of simultaneous corporate “events”, but without a shred of protection in a shareholders’ agreement that we did not understand and had been utterly lax about negotiating.

For the very first time, I picked up the phone to one of India’s top corporate lawyers and requested him to “help” us out of the mess. He said, “Sure, but please bring along an advance of Rs. 25,000 when you come for the briefing tomorrow morning.” I was relieved to have a battle-scarred legal veteran speak for us in the bare-knuckle bargaining that followed. In hindsight, it was our innocence and professional commitment that saved us — the newly merged Wall Street Journal and CNBC Asia entity chose to continue its partnership with us. I had learnt one of my biggest business lessons, which
I vowed never to forget — always get a good lawyer!

If I were to name the single biggest obstacle that I — and I daresay almost every “liberalisation’s child” — has faced in building a company from scratch, it has to be “fuzzy regulation”. Do note that I am not saying “wrong” or “unfair” regulation — I fully understand that India’s policymakers were going through as much of a learning curve as we were in a newly privatising economy — so mistakes were par for the course. The problem occurred when regulations were “fuzzily” conceived and written — and worse, when regulators simply froze like deer caught in a headlight, refusing to look through the fuzziness and give decisions. That’s when files got held up, decisions were delayed and companies got pushed to the precipice, simply because nobody was clearing up the fuzz. I can give umpteen examples from Network18’s checkered graph, but here is a real gem.

In the early 2000s, the government changed foreign direct investment rules for news broadcast companies. Foreigners were allowed a maximum of 26 percent “direct plus indirect” equity — and news channels were given a few weeks to re-locate their overseas up-linking hub to India. I am not complaining about the superhuman effort put in by our journalists and engineers in making the complex transition, on a running network, within a matter of weeks. That’s Indian resilience and ingenuity, and we are all proud of it.

Much bigger problems arose in the definition of “indirect foreign equity” — we “humbly submitted” to the government that since we are a listed company, our shareholders change every minute. What’s more, we have no way of knowing how much foreign equity exists in this rapidly changing cast of shareholders. So, this whole business of “indirect foreign equity” is “ab initio indeterminable” — simply put, no one can ever “certify” the quantum of “indirect foreign equity”, because a) you don’t have a fixed register of shareholders; and b) even if you did, you have no way of knowing how much foreign equity is there on the balance sheet of that shareholder.

I thought our arguments were so completely based on common sense that they would be accepted in an instant. To my complete disbelief, it took nearly eight years for this principle to be fully accepted by government (in Press Notes 2, 3 and 4). I will spare you the details, but because of this singular confusion in interpreting “indirect foreign equity” calculations, Network18 lost hundreds of millions of dollars in committed foreign investment.

Finally, when the rules were clarified, global markets had crashed in the post-Lehman Armageddon — now those foreign investment commitments were not worth the paper they were printed on. We had been pushed into a balance sheet crisis which was, perhaps, only half of our own making. The other half was caused by fuzzy regulations.

Why, even the magazine you are reading, Forbes India, was born amid fuzzy rules. It’s the first foreign news magazine to launch under licence in India. The team had to wait for nearly a year — and redesign its masthead a couple of times — as the ministry grappled with procedure to release the new guidelines. There were interminable delays and several false starts — but what the hell, we are finally here, aren’t we?

So I must hasten to add that most regulators are utterly accessible, polite and intelligent people (I mean that sincerely). They fully understand issues — what’s more, they are sensitive to the damage being caused by the delay. Unfortunately, they are just so completely bound by rigid procedures. Ironically, so many of them have told me, off the record — “why did you even come to us? But now that you have, both of us are trapped. You need a quick decision, but I will have to consult half a dozen ministries before I can tell you that your correct action is right!”

It’s perhaps this good neeyat, or intention, that has kept India (and yes, even Network18) bounding up the growth ladder despite hiccups and setbacks. In India, popular wisdom is often scrawled on walls and clunker trucks. One which splendidly captures the story of Network18 and India’s reforms reads as follows — Better Late than Never!