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Tax bait in India starts takeover war

Tax incentives. Some countries, like the United States, use them to help business expand or even survive. Others, like India, use them to attract badly needed outside investment, particularly from their countrymen living abroad.

But in India, the bait has attracted sharks, and two of the country's top 10 industrial houses could find themselves swallowed in an outside takeover move.

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Investment incentives were first introduced cautiously in India early last year. Then, with this year's budget, the door was thrown wide open to Indians living abroad, making the country a virtual tax haven for hundreds of thousands of nonresident businessmen.

Nonresidents are now exempt from wealth tax, capital-gains tax, and a special 18 percent levy applicable to domestic businessmen. They pay only a flat 22.5 percent income tax (a clerk's salary is taxed at the rate of 28 percent), compared with the crushing 67.5 percent often paid by Indian businessmen.

At first the country's industrial houses welcomed the incentives, seeing them as an opportunity for new joint-venture projects and for the import of new technology.

That was in February. By March the issue became touchy. And by this month patriarchs of the nation's industrial houses were looking anxiously over their shoulders.

The New Delhi Stock Market is rather like a languid, sleepy town. Thus, people took notice when the share price index began creeping up in March. April's rise was prompted by spiraling prices for shares in two of India's 10 largest companies: Escorts Ltd., which makes farm machinery, tractors, and automotive parts, and the Delhi Cloth Mills, which specializes in fertilizers, plastics, and textiles, but is a huge conglomerate.

The transactions were being made by stockbrokers. No buyers' names were known. All that was established was that money had at first trickled, then began pouring in, first from London, then from Mauritius and Switzerland.

By the time Swarj Paul, chairman of the British group Caparo and a man who enjoys enormous political influence here, announced in London that he had invested $10 million (US) in the stock market raid, the shares of Escorts and Delhi Cloth Mills had gone up by as much as 300 percent.

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After reaching new highs last week, shares of both DCM and Escorts began coming down, for the first time since February. The decline coincided with an announcement that both companies would attempt to block the registration of the shares.

''If he's not interested in taking over the companies,'' Escorts' chairman, Willy H.P. Nanda, snorts, ''why is he buying at such inflated prices? He will get no more than a 2 percent return.''

Mr. Paul claims that he now controls 6 percent of Escorts'and nearly 10 percent of DCM's stock, which, because of a number of eccentricities in India's industrial base, brings him close to the controlling interest of the major families. And because of a combination of India's tax structure and large equity holdings by financial institutions, all state-controlled Indian houses normally do not hold more than 10 to 15 percent of the shares in family companies.

Thus, the industrial houses were not at all satisfied by government concessions, announced early this month, that a ceiling of 5 percent was being placed on share purchases by Indian nonresidents. For in a nation where financial institutions often hold up to 50 percent of a company's shares, any change in management rests ultimately in their hands. All of their chairmen are political appointees, and Swarj Paul, who has long been close to the prime minister, has become a de facto goodwill ambassador for the Gandhi dynasty abroad.

''The major threat,'' said a Western economist, ''is the potential for the financial institutions to become politicized. . . . And all of this certainly reminds us of the fragility of India's experiment in free enterprise. On a political level, the key question is how this is going to affect the government's attitude towards business, towards foreign investment, and vice versa, of course. . . . If I, as a foreign company, was thinking of investing here, it would make me think twice. . . . No.'' He paused and continued, ''It would make me think three times.''

As the debate continues, there are those within India's industrial community itself who admit that a good deal of somnolence has prevailed in the past. Industrial houses had never felt threatened, because of tight government controls.

But the same sources are quick to rejoin that the old, established Indian houses need not learn lessons from a ''Johnny-come-lately'' to the Indian industrial scene.

They have squirmed under Mr. Paul's accusations that Indian companies are ''feudal . . . family-run dynasties.'' They charge that they do not need guidance from London on a brave new world of industrial democracy.

In the final analysis, what appears to have most unsettled this country's industrial patriarchs is that it's Mr. Paul who is challenging the tradition of the family business house.

He is the son of a trading house family, who made his millions abroad. Nearly every Indian newspaper has prominently displayed what are allegedly excerpts from London's Financial Times that Mr. Paul's Caparo group of companies is ''one of the most predatory'' on the London Stock Exchange.

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