BBC creates a new entity because India's FDI law makes no sense

Or how saving on tax can be an unintended consequence of financial engineering

A former BBC India journalist riding to his new workplace

A thing that governments do sometimes is restrict the amount of investment foreign companies can make in certain industries. One reason to do this could be to protect local companies. For instance if a large, mature retail company from one country enters a small, nascent market in another country, it might out-price and out-compete all of its competitors. Because, well, maybe it knows how to procure or even manufacture stuff for cheap.

In the long run this can be bad. The large foreign retail company and others like it might be the only ones that survive and local companies would never get big.

This is contentious! You’ll find economists arguing all day about this. Some of them will write books with examples of when restricting foreign investment worked out and others will write books of when it didn’t work out. I really don’t know. But one, apparent, reason to restrict foreign direct investment (or FDI) is to help local companies get big instead.

Another reason for a government to restrict FDI is so that it can just generally have greater control over a particular industry. Take coal mining. A company might come into a country, dig out its coal and suddenly leave if it has a change of mood. If you’re a government, you would want the company to be around to clean up the mess. Just in case there is a mess.¹

Of course, sometimes governments might want to control an industry for other reasons. In 2020 the Indian government decided that it would like to have some control over news websites in India and capped foreign ownership in digital media companies at 26%.

When I read about this 3 years ago my first thought was—how do they even enforce this? If you’re a retail company that wants to sell to Indians, you have to physically be in India. If you’re a mining company that wants to mine coal in India, you have to again physically be in India. That’s why the rules work! If you don’t follow the rules, the government will make angry faces at you, penalise you, shut you down, etc.

But if you’re a news website that wants to be read by Indians, you have to just… exist on the Internet? You don’t need a physical presence in India to have a readership in India. But sure, you do need a physical presence in India if you have, well, journalists, that are actually gathering the information you publish.

Anyway last week BBC decided to separate out the “news website” part of the company from the “journalists gathering information” part of the company in India so that it could comply with the stupid FDI regulation. From Bloomberg:

The British Broadcasting Corp. said more than 200 staff will leave to join a newly created media business in India, following the introduction of rules limiting foreign ownership and aimed at increasing the accountability of news organizations.

Four BBC executives will depart to create Collective Newsroom, an Indian company wholly owned by the country’s citizens, which will create content commissioned by the BBC, the BBC said in a statement on Tuesday. They will be followed by about 250 staff and the new venture will be “in compliance with the Indian Foreign Direct Investment law,” the BBC added.

…

Collective Newsroom will produce news commissioned by the BBC. A smaller number of staff will remain in India and employed directly by the BBC, but their work will be sent back to other parts of the world, such as the UK headquarters, for publishing.

BBC is a big British media company. It owns an entity in India where most of its staff are employed. The FDI thing was an annoyance, so to comply, it created a new company called Collective Newsroom, which is owned by four of its Indian executives. Almost all of BBC India’s employees will move to this new company, do the same work, earn the same salaries, publish the same stories, on the same website. They’ll just be employed by a different, Indian-owned company in India.

This new company Collective Newsroom will work for the BBC. In return, it will earn a fee. Presumably this is exactly how BBC India worked with its parent company earlier. The difference being that if you look into BBC’s accounting books now, you will find the expenses recorded as “payments to vendors” as opposed to “salaries” earlier.

I wonder what this does to tax collections. BBC will pay Collective Newsroom for its work, and I’d guess that this amount will be exactly as much as Collective Newsroom happens to need to cover its salaries and operational expenses. So at the end of the day, Collective Newsroom won’t make any money. So it won’t pay any tax.²

A lot of financial engineering is about saving tax. This financial engineering was about operating in a country that doesn’t like you. But hey it still saves tax!³

1. India actually does allow foreign direct investment in coal mining. I just like this example because it’s a neat example of how environmental concerns can be a legitimate reason to exercise more control over an industry.

2. I checked BBC India’s financials and it made a net profit of ₹7 crore ($800,000) in FY2023 and paid ₹3 crore as tax. Not anymore!

3. Okay, this might not strictly be true. BBC India’s profit would now be recognised as BBC’s profit in the UK, so it might just end up paying more tax there instead.