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Coke forced to play by Indian
rules
By Jayanthi Iyengar
NEW
DELHI - The Coca-Cola divestment saga has finally come
to an end in India. The transnational has finally
completed the divestment of 49 percent in its Indian
subsidiary, Hindustan Coca Cola Beverages Private Ltd in
favor of its Indian shareholders. The divestment has
taken place in two stages. Ten percent in the first
stage in October 2002 in favor of two of its employee
trusts. Another 39 percent now, of which about 6 percent
has been placed with bottlers of the company, past and
present. The rest has gone to "financial, private and
high net worth investors", according to a statement
issued by the company late last month.
This
essentially means that Coke has been able to get away
with not placing stake with the Indian public through an
initial public offering (IPO) as it had promised at the
time of entry into India, but has instead divested stake
in favor of friends, associates, workers and financial
institutions.
This earns the company a reprieve
to the extent that its books will not be subject to
wider public scrutiny, which would have accompanied the
listing of an IPO. At the same time, it also means that
Coke will not be on par with Pepsi, its all-time
commercial rival and number one transnational
competitor. The latter continues to enjoy a 100 percent
ownership in its Indian subsidiary.
Many may see
Coke's divestment as nothing more than a multinational
company stepping down equity in one of its subsidiaries
to the public. Yet the divestment saga in India is more
than that. It marks a major victory for the Indian
government in not only being able to make the company
stand by its own commitments, but also to signal to
foreign investors that they will have to abide by the
law of the land.
It is not clear what made Coke
voluntarily agree to divest stake in favor of the Indian
public through an IPO when it entered in 1997. One
reason could have been that it wanted to facilitate the
smooth passage of its foreign direct investment (FDI)
application since it was planning entry through the
acquisition of 40-odd bottlers, instead of investing in
a green field project. This meant that India would gain
in terms of foreign exchange and wider consumer choice,
but not in terms of employment generation, an important
spin-off of FDI.
Besides, it is also possible
that Coke thought that its reentry would be smoother if
it reflected an "India-friendly" image. Its exit from
the country in 1977, after about a 25-year presence, had
been acrimonious.
Coke's exit followed the
introduction of the Foreign Exchange Regulation Act
(FERA) in 1974, under which the Reserve Bank of India
(RBI) began regulating foreign equity. Multinationals
operating in low priority areas like consumer goods were
asked to step down equity to 40 percent either through
equity dilution or through sale of equity. Both Coke and
PepsiCo fell under the non-strategic category of foreign
companies operating in India and were required to abide
by the new norms.
Following the introduction of
FERA (which has since been replaced by a more foreign
investor friendly Foreign Exchange Management Act or
FEMA), over a 1,000 foreign-owned companies stepped down
equity, triggering the stock market boom of the 1970s.
PepsiCo decided to quit India. Coke, which
operated in India through a branch office, submitted its
plan for stepping down equity to the RBI. It offered to
hold 40 percent equity in its bottling and distribution
units, but refused to step down equity in its technical
and administrative unit. Since this was not in line with
FERA, which permitted not more than a 40 percent holding
in all operations, Coke was asked to comply properly
with the new norms.
Coke decided to wind up its
operations in India, but quit making allegations that
the Indian government was forcing it to share its secret
formula for making its concentrate.
The Indian
government slapped its counter charges. It accused the
parent of bleeding profits and repatriating large sums
of funds abroad (as administrative charges) even when
the Indian operations were posting losses. Further,
there were allegations of Coke abusing import licenses -
against which it imported the concentrate - all of which
resulted in bad blood between the two parties.
Perhaps Coke factored in all these issues at the
time of its re-entry. In its application to India's
Foreign Investment Promotion Board (FIPB) in 1997, it
voluntarily offered to divest 49 percent in favor of the
Indian pubic through an IPO at the end of three years.
This was despite the fact that the FDI norms for the
soft drink sector did not require mandatory divestment
of stake and nobody was forcing it to do so.
PepsiCo, which entered later, made no such
promise. Hence it was not bound by such a requirement.
Interestingly, these fine differences are lost on most
commentators who have written on the Coke divestment
saga in India. By 2000, Coke started lobbying to be let
off the hook. It cited the losses - upwards of $400
million - it claimed it was booking in India and sought
exemption from the divestment clause.
When this
application was turned down, it again approached the
FIPB with a fresh application. It sought a five-year
deferment of the divestment clause. It claimed yet again
that Indian investors would not be willing to buy into a
loss-making unit. It pointed out that Indian stock
markets were moribund and hence an IPO from it would
bomb. It argued that wholly-owned subsidiaries were
extensively permitted in India and hence a similar
treatment should be extended to it.
Simultaneously, Coke started lobbying at
government-to-government level. Robert Blackwill, US
ambassador to India, repeatedly mentioned Coke and Enron
in the same breath as one of the many causes why US
multinationals preferred China to India.
The
pressure tactics did not work. A parliamentary standing
committee (a select committee of parliamentarians) had
recommended that Coke should be asked to abide by the
entry conditions. The finance ministry, too, had
objections. The FIPB, which is under the industry
ministry, yet again rejected the Coke application.
Murasoli Maran, the then minister for commerce and
industry, went on record to state that Coke would have
to abide by its own commitment to divest stake through
an IPO.
Maran's decision was dictated by the
following economic and political exigencies:
The FIPB couldn't possibly look at the Coke
application in isolation.
An exemption could be considered only if norms for
stepping down equity as a whole were reviewed and a
broader policy decision was taken to relax these
norms.
A decision had to be taken on Coke against what the
Indian government considered to be the "undesirable"
trend of MNCs rushing to convert their joint ventures
and listed companies into unlisted ones. This was being
done by taking advantage of the relaxation in FDI norms
which permitted 100 percent foreign holding in many
sectors. The government had relaxed norms to attract
fresh investment, but the plan had unexpectedly
boomeranged. Thus, instead of attracting new investors,
this route was being used by existing MNCs to delist
their stock from stock exchanges, denying the Indian
shareholders access to good quality MNC stock.
The ruling BJP was under attack in parliament from
political opponents for not being able to contain the
delisting trend. The parliamentarians viewed delisting
as a measure adopted by the MNCs to limit public
disclosures, thereby avoid public scrutiny of their
operations.
MNCs did business in China despite tougher entry,
exit and minimum capital norms. India was too soft. The
MNCs would abide by Indian norms, provided policymakers
stood by their decision.
Besides Maran,
independent primary market experts like Prithvi Haldea
of Prime rubbished Coke's claim that the public would
not buy into the company's stock. Haldea repeatedly
argued that there was a strong appetite in the market
for quality stock and that Indian investors would lap up
Coke's stock, despite its losses.
Bureaucrats in
the ministry of finance and industry, too, supported the
view. FIPB officials helpfully further suggested to Coke
that if it had problems with divesting through an IPO,
it could consider divesting stake in favor of its
bottlers. That way, the entry condition would be
satisfied.
Coke, however, stepped up the
lobbying. Ambassador Blackwill took up the issue with
the Principal Secretary to Prime Minister, Brajesh
Mishra. This was followed up by the assistant secretary
in the US department of commerce writing to the then
commerce secretary Dipak Chatterjee. Interestingly, both
the letters promptly found their way to the media and
were extensively reported.
In his letter, the US
ambassador told Mishra, "I would like to bring to your
attention, and seek your help in resolving, a
potentially serious investment problem of some
significance to both our countries. The case involves
Coca-Cola, one of the largest single foreign investors
in India.
"It seems to me that in view of
India's ongoing economic reforms and considerable
efforts to attract and maintain greater levels of
foreign direct investment, there should be some
flexibility possible in resolving this issue in a way
that is acceptable to both sides. I would be happy to
provide you with more information on this case if that
would be helpful. I hope you can find some time to look
into this matter," the US ambassador wrote.
In
his letter the assistant secretary, who visited India in
early May 2002, wrote, "Since my return to Washington,
another issue has been brought to my attention that I
would ask receive your immediate attention. Recent
Indian press reports indicate that the minister of
commerce and industry Mr Murasoli Maran has turned down
Coca-Cola's request for a waiver from a requirement to
divest 49 percent of its India holdings by July 2002. I
understand that this is the second time that Coca-Cola's
waiver request has been denied. I find this to be very
unfortunate, not just for the company but also for
India's investment climate. When the Indian government
approved Coca-Cola's Indian investment plans in 1997,
the divestment condition was part of the agreement. But
I believe it is fair to say that the India of 2002 is
different from the India of 1997," he said.
Unfortunately, the protest against MNCs
delisting their stock from the Indian capital markets
was gaining ground. So also was the feeling that so long
as the logic was strong, and case fair, capital
importing nations could dictate terms to foreign
companies. Besides, after Enron, and several other
corporate scandals that followed, the MNC stock itself
was not that high. All of these reasons made it possible
for India to pressure Coke into abiding by its entry
conditions.
Today, some would argue that Coke's
divestment in favor of friends and associates is not the
same as divesting in favor of the public. The fact
remains that Coke has divested in its core company - a
condition it was unwilling to abide by three decades ago
- and it has divested in favor of its bottlers. The last
may be actually more dangerous than partnering with the
public. For in India, unlike in some other countries
including China, Coke has had to face stiff competition
from local bottlers of carbonated drinks. If one recalls
the conditions in the mid 1990s, Parle blocked Coke's
reentry for quite a while by lobbying with the
government.
(©2003 Asia Times Online Co, Ltd.
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