India Should Reject Coca-Cola Proposal on Buyback
New Delhi: In legalistic terms, the government should have rejected
Hindustan Coca Cola Holdings’ (HCCH) proposal to buy back the 49 per
cent shares it had earlier divested in its bottling subsidiary, Hindustan
Coca Cola Beverages (HCCB).
The reason is simple: When HCCH wanted to set up shop in the country,
it agreed to divest 49 per cent of its equity within five years. But
when the time came for this to be done, HCCH didn’t want to go in
for a public share issue and instead divested to its bottlers and
other investors. Now, since it is proposing to buy back these shares,
it basically seeks to nullify the original condition for entry into
If the government is serious about the original stipulation, the buyback
should be nixed.
The counter-view would be that similar divestiture, or listing clauses,
did not apply to other foreign investments—which is why neither Hyundai
nor LG (for instance) is listed on any Indian stock exchange. So why
should this apply to Coke in today’s more liberal policy environment?
And that presumably was the logic used by the Foreign Investment Promotion
Board when it cleared Coke’s proposal.
Such relaxation of the rules could be pragmatism, but it also points
to the fact that restrictive clauses in licences have usually been
ignored in the breach over several decades. Most export commitments
taken from companies when licences were issued for supposedly export-oriented
projects, were never honoured by the companies concerned.
Similar commitments made under the export promotion capital goods
scheme (when exports had to be done in multiples of the capital goods
imports that were allowed duty-free) were also honoured largely in
the breach. And in 1999, to take another instance, when it became
obvious that the policy under which companies had bid astronomical
sums for telecom licences was proving counter-productive, the government
recognised reality and came up with a more realistic set of financial
conditions. The revenue-share policy that was introduced has in fact
stood the government in good stead, because the rapid growth of telecom
has contributed more revenue than might have been realised if the
government had simply held companies to their licence bids.
This history argues strongly against imposing unrealistic conditions
on companies when they seek to access the Indian market. But another
question arises with the condition that a company must divest its
holdings to the general public.
Such a policy (prescribed first under the Foreign Exchange Regulations
Act when it was amended in the 1970s) led to a flood of quality scrips
being floated by the early 1980s and whetted the appetite of retail
investors—contributing in some measure to the birth of India’s stock
market saga. The logic of asking reputed companies to let Indian investors
share in the wealth that they create, and thereby help give depth
and breadth to the capital market, is therefore obvious—especially
when it came with the attendant benefits of greater corporate transparency
and information disclosure.
However, 30 years later, the spirit of the times is not in line with
forcing companies to list against their wishes; indeed, the trend
is towards de-listing by multinational corporations (partly because
they don’t really need external investment funds and partly in order
to minimise regulatory complications in multiple policy regimes).
The solution might lie in shifting from the stick to the carrot: encourage
listing by offering tax rebates to widely-held and listed companies.
There are precedents for this in the statute books, so it is an idea
that already has general acceptance.
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