How Coke Arm-Twisted the Indian Government
It's amazing what the awesome clout of a large multinational corporation can achieve.
The government of India is on the verge of changing its policy because of the pressure exerted by the Atlanta, US-based soft drinks giant, Coca-Cola.
Coke is one of the best-known brands in the world. But the corporation and its Indian associates have not exactly covered themselves with glory by the manner in which they appear to have successfully lobbied with the government in New Delhi to change the rules of the game.
Finance Minister Jaswant Singh recently overruled the views of bureaucrats in his own ministry and recommended that the Union Cabinet change government norms related to divestment of equity shares by international companies in their Indian associates.
A draft note has already been prepared for the Cabinet Committee on Economic Affairs and reliable sources say it is just a matter of time before the government's existing policy is changed, thanks to Coke.
By changing its policy, what the government intends doing will be to allow associates of MNCs like Coca-Cola to adhere to entry conditions by divesting its shares to Indians but not granting these Indians voting rights on the shares they would be holding.
This move -- once it is approved by the CCEA -- would represent a clear dilution of the existing policy of the government that was repeatedly upheld and justified for many years by, among others, officials in the Department of Economic Affairs in the ministry of finance.
The story of how Coke arm-twisted the Indian government to achieve its objectives has a long and colourful history that has its origins a quarter of a century ago.
Remember 1977, the Morarji Desai government with George Fernandes as industry minister? That year, Fernandes decided to throw Coke (as well as IBM) out of India because the soft drinks company was refusing to adhere to a particular provision of what was then the Foreign Exchange Regulation Act (FERA).
This provision stipulated that foreign companies should dilute their equity stake in their Indian associates to 40 per cent if they wanted to continue to operate in the country.
It left India and did not return for nearly two decades. By which time, the economic situation had undergone a major transformation. More importantly, the particular provision in FERA had been diluted completely.
(An aside: It is ironical that Fernandes happens to be defence minister in the government headed by Atal Bihari Vajpayee who had served as external affairs minister in Morarji Desai's government.)
On July 19, 1996, the Cabinet Committee on Foreign Investment -- in the government headed by H D Deve Gowda -- had decided to allow Coca-Cola to re-enter India.
On July 31 that year, the government formally approved an investment proposal submitted by Coca-Cola South Asia Holding Inc, USA.
The proposal envisaged the establishment of two subsidiaries in eastern and western India with a total investment of $700 million to be capitalised equally by the two subsidiaries over a period of 10 years.
The proposal further entailed the establishment of a wholly owned subsidiary in Gujarat for setting up bottling plants with an investment of $40 million.
Besides carbonated soft drinks, CCSAH said it would be developing new products such as non-carbonated fruit juices, coffee, tea and milk-based drinks.
On January 21, 1997, the CCFI granted approval to CCSAH to set up two wholly owned subsidiaries as holding companies, which, in turn, would set up downstream ventures such as bottling operations.
There were a few important conditions imposed on CCSAH.
First, whereas the downstream ventures could operate initially as 100 per cent subsidiaries, the ventures would have to offload 49 per cent of their equity capital to Indian shareholders within a period of 'three to five years.'
The CCFI approval was also subject to the condition that the two holding companies would act as investment companies and would not engage directly in any manufacturing activities.
Now comes the somewhat complicated story of Coke's Indian operations.
CCSAH sets up two holding companies in the country -- Hindustan Coca-Cola Holdings Private Limited and Bharat Coca-Cola Holdings Pvt Ltd.
On July 4, 1997, the CCFI approved the following investment plans outlined by the Coke associates.
Hindustan Coca-Cola Holdings Pvt Ltd sets up two downstream subsidiaries for bottling operations named Hindustan Coca-Cola Bottling North West Pvt Ltd (with an investment of Rs 435 crore (Rs 4.35 billion) and Hindustan Coca-Cola Bottling South West Pvt Ltd (with an investment of Rs 250 crore or Rs 2.5 billion).
Bharat Coca-Cola Holdings Pvt Ltd sets up Bharat Coca-Cola Bottling North East Pvt Ltd (with an investment of Rs 250 crore (Rs 2.5 billion) and Bharat Coca-Cola Bottling South East Pvt Ltd (with an investment of Rs 345 crore (Rs 3.45 billion).
Thereafter, on February 11, 2000, the government granted permission for the two holding companies to be merged into one corporate entity called Hindustan Coca-Cola Holdings Pvt Ltd.
Also, the four downstream subsidiaries were merged into a single company called Hindustan Coca-Cola Beverages Pvt Ltd.
According to the original foreign collaboration agreement approved by the government, HCCHL was meant to divest 49 per cent of its equity stake in HCCBL is favour of Indian shareholders within a period of five years, that is, by July 17, 1997.
By a letter dated August 28, 2002, the government extended the deadline for completing the divestment from August 16, 2002 to February 28, 2003.
On March 13, 2003, a meeting of the Foreign Investment Promotion Board was held. The representative of the Department of Industrial Policy and Promotion (DIPP -- a department in the ministry of commerce and industry -- under which the FIPB used to operate) informed the meeting that HCCHL had completed its divestment by the end of February.
Earlier, on January 2, 2003, the FIPB had granted permission to HCCHL to use a sum of Rs 803.36 crore (Rs 8.03 billion) lying as 'unused balance' in the 'advance against share capital' account of HCCBL.
The amount was meant for the purchase of one per cent redeemable, non-cumulative, non-participating preference shares of Rs 10 each.
The DEA in the Ministry of Finance had granted permission to HCCHL to use this money on the condition that 'under any circumstances,' the voting rights of HCCHL shall not exceed 51 per cent in HCCBL.
In other words, what the DEA insisted on was that the Indian shareholders in HCCHL should get at least 49 per cent of the voting rights in HCCBL 'at all times.'
Coke's Indian associates represented against the imposition of this condition by claiming the following.
First, it was argued that the original letter of approval only contained a condition specifying the amount as well as the percentage of foreign equity.
Coca-Cola claimed that it was 'unfair and unjust' on the part of the government to 'impose' a 'new' condition relating to voting rights and that what was required was mere offloading of 49 per cent equity capital.
It was further contended that the government's own guidelines specifically prohibited any change in the conditions contained in the approval letter or the imposition of an additional condition 'unless there is a general policy change.'
On March 13, 2003, at a meeting of the FIPB (now under the ministry of finance and not the DIPP), the DIPP commented that since private limited companies are exempt from Sections 88 and 89 of the Companies Act, 1956, the imposition of a condition relating to voting rights would be tantamount to 'imposing a new condition which is not permissible under the extant policy.'
The Department of Company Affairs (now also under the ministry of finance) confirmed that preference shares could be issued at a 'zero per cent' coupon rate.
Interestingly, this represented a complete about-turn from the position held by various government departments at a meeting of the FIPB held earlier on January 30, 2003.
At that meeting, the Department of Economic Affairs in the finance ministry had made the following four points.
First, the condition of 49 per cent divestment to Indian shareholders was imposed by the DIPP in 1997.
Secondly, there were no 'differential rights' on equity shares at that point of time.
Thirdly, the decision not to change the entry level approval with a divestment clause was taken by the DIPP and the FIPB.
Finally, this position of the government had been conveyed in its action taken report on the observations contained in the 27th report of the Standing Committee on Finance comprising MPs from different political parties.
During the January 30 meeting of the FIPB, it was clarified that the condition of divestment imposed on Coca-Cola with regard to voting rights was strengthened by a judgment of the Bombay high court (in the BPL versus CDC case) that had also been upheld by the Supreme Court.
The Secretariat of Industrial Approvals (in the industry ministry) stated that unlike the foreign direct investment policy in the telecommunications sector wherein there is a specific condition that management control shall at all times vest in the hands of Indian shareholders, other sectors do not have such a condition.
It was pointed out that the DEA itself did not recommend imposition of the voting rights condition in the case of Coke's rival Pepsi that had been considered earlier by the FIPB.
Pepsi had been allowed by the government to hold 100 per cent of the shares in its Indian subsidiary.
The point to note in this context is that Pepsi was allowed by the government to set up a wholly owned subsidiary much before Coke had made such an application before the FIPB.
The question naturally arises as to why Coke agreed to abide by the FIPB stipulation to divest its shares. Did it not think about whether or not the playing field was level at that juncture?
If media reports are to be believed, Coke executives had held out a number of threats if it was "compelled" to sell its shares to the Indian public. The first threat was that this could result in the repatriation of a huge sum -- in the region of Rs 1,600 crore (Rs 16 billion).
The second threat was that it made little sense for Coke to go in for an initial public offering and list its shares in Indian stock exchanges because it would then soon delist its shares as per existing Indian laws.
These veiled and not-so-veiled threats evidently worked. The FIPB recommended to the CCEA that the following condition contained in paragraph five of its letter dated January 2, 2003, be deleted:
"Under any circumstances, the voting rights of HCCHL shall not exceed 51 per cent in HCCBL i.e., the Indian shareholders in HCCHL should get at least 49 per cent voting rights at all times."
The proposal to delete the above condition has been approved by Finance Minister Jaswant Singh. It will now be deliberated upon at a meeting of the Cabinet Committee on Economic Affairs.
Does the story end here? Not exactly.
After the Cabinet's approval comes through, it would imply that the government's policy towards divestment of equity by foreign companies in their Indian associates would have changed in all industries other than those in which a sectoral cap on foreign investment has been specifically placed -- industries like telecom and insurance.
It would, therefore, mean that a company like Coca-Cola could claim to have adhered to its entry condition of divesting 49 per cent of its equity capital to 'Indian shareholders,' but these shareholders would have no voting rights.
In other words, the foreign company would exercise 100 per cent voting rights on the equity shares of its Indian associate while nominally holding only 51 per cent of the capital.
Is this a fair interpretation of the letter of the law? And is this is an example of proper adherence to the spirit of the law?
These questions need to be debated by our legal eagles and policy makers. As for Coke, it must be pretty pleased with its ability to convince the country's bureaucrats and their political masters.
It deliberately dragged its feet on floating an initial public offering of its shares after having signed on the dotted line before the FIPB in 1997.
Time has proved that its persuasive powers can work wonders with our netas and babus.
When there was a payments dispute between the Enron-promoted Dabhol Power Company and the Maharashtra government in 2001, many representatives of the American government (including the US Ambassador to India Robert Blackwill) had been sharply critical of India for allegedly not enforcing a legally valid contract.
Coke has gone one step further. It is on the verge of getting the Indian government to change its policy to suit its interests.
The soft drinks corporation has gone about its job rather coolly. After all, in case you did not know, thanda matlab Coca-Cola.
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