Coca-Cola Bends Rules in India

By Kavaljit Singh
Public Interest Research Group, India
May 13, 2002

The US soft-drink giant, Coca-Cola, reentered India in the 1990s after abandoning its businesses in the late 1970s in the wake of Foreign Exchange Regulation Act of 1973. The Act, meant to 'Indianize' foreign companies, made it mandatory for foreign companies to dilute their shareholdings to 40 per cent. Instead of diluting its shareholdings to the required limit prescribed by the Act, Coca-Cola opted to discontinue its operations in India.

In the new liberalized and deregulated environment of the nineties, Coke made its reentry into India through its 100 per cent owned subsidiary, Hindustan Coca-Cola Holdings. However, Coke's reentry was based upon several commitments and stipulations which the company agreed to implement in due course. One such major commitment was that Hindustan Coca-Cola Holdings would divest 49 per cent of its shareholding in favour of resident shareholders by June, 2002.

Let us closely examine the arguments put forward by Coke. Initially, Coke made its case on the ground that the company has been suffering huge losses in the past, and therefore, it should be allowed to defer its Initial Public Offerings (IPOs) to Indian public by another 5 years. There is no denying that Coke has accumulated a loss of Rs 21780 million and it would take some years for the company to book net profits. But, as far as regulations related to IPOs are concerned, there are no stipulations which prohibit companies suffering losses to issue IPOs. There are a host of loss-making companies in India and elsewhere which have issued IPOs and got listed in the financial markets. In the US, for instance, a number of high profile loss-making companies including Amazon and Yahoo have issued IPOs and are listed in NASDAQ and other exchanges.

Given its long history of dealing with financial markets, Coke must be well aware that much of the shares are bought for capital appreciation rather than for dividends ensuing from profits of the company. Despite loss-making status of Coke in India, investors would certainly buy its stocks in order to reap benefits from capital appreciation.

Coke also pleaded that its IPOs should be deferred for another 5 years due to present depressed market conditions. This is a specious argument. Is there any guarantee that market conditions would be buoyant after 5 years? As forcefully argued by Prithvi Haldea of Prime Database, "can any one in the world define a good market condition or predict what the market conditions would be like in July 2002 or in the years ahead?" He goes on to add, "there were many occasions in the past 5 years when market conditions were not only good but were buoyant, for example in February 2000 when the Sensex had crossed 6000. Why did Coke not then make an IPO during good times in any of the previous 5 years? Moreover, is there a guarantee that Coke would not make losses for any number of reasons even by 2007 or that the market conditions would not be to its liking at that point of time? Are we, therefore, looking at a perpetual, indefinite deferral?"

Coke launched a propaganda blitz in the financial media to mould public opinion in its favor. When it appeared that all its arguments have come a cropper in shaping public opinion in its favor, Coke warned that this agreement, if implemented, would negatively impact foreign investment in India. Making a case for bending the rules, Coke stated that it is "one of the top 5 foreign direct investors in India and this decision would send wrong signals to other foreign investors in the country... will have far-reaching consequences for foreign investments in India." If the media reports are to be believed, the threat has led to a dramatic change in the attitude of Indian authorities on this issue.

The real motives of Coke for not issuing IPOs have nothing to do with depressed market conditions or its accumulated losses. Rather, by offering its shares to public, all activities of Coke would come under public scrutiny and hence its discomfiture. Under the existing laws, it is mandatory for companies to disclose all important documents (including financial reports) to shareholders. Coke fears that an easy access to its internal documents could be used not only by its competitors but also by anti-corporate groups and public-spirited citizens who keep a close watch on TNCs and their operations in India. Coke is quite comfortable with its present status, as the company is able to keep a lot of business information from the arena of public gaze.

This sordid episode has exposed the hypocritical stands of big TNCs and their apologists who don't miss any opportunity to preach sermons on a host of issues related to corporate governance, social responsibility and corporate citizenship. If Coke claims that it has a widespread consumer base in India, what stops it from creating shareholders in the host country?

As per media reports, it is very likely that the Government of India has agreed to bend its rules and allow Coke to defer its IPO by another 5 years. There are speculations that Coke may even get a complete waiver. However, this is not an isolated case. There are several instances in the past where the Indian authorities have succumbed to the pressures of TNCs. This author has highlighted the growing trend of delisting by TNCs from the Indian financial market in this column. If the Indian government bends its rules in favor of Coke, how can it stop other TNCs from voicing similar demands?

Kavaljit Singh works with the Public Interest Research Group (PIRG) in New Delhi.

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