The Never Ending Story of Coke’s Divestment
In its latest attempts to dilute the divestment conditions, Coke has sought permission from the Indian authorities to deny voting rights to the Indian shareholders. The proposal of offering voting rights to Indian shareholders is “substantive and onerous,” says the company. In a letter (dated January 23, 2003) addressed to the Foreign Investment Promotion Board (FIPB), Coke has sought deletion of the condition under which its bottling subsidiary, Hindustan Coca-Cola Beverages Private Limited (HCCBPL), is bound to provide 49 per cent voting rights to resident Indian shareholders.
Coke was granted permission to carry out business in India through its 100 per cent owned subsidiary with the condition that the company would divest 49 per cent of its shareholding in favor of resident shareholders by June, 2002. For several months before the lapse of the deadline, Coke lobbied hard with the political establishment to ensure that it got exemption from this condition. However, Coke failed in its endeavor and as a result it could not meet the deadline. The company then sought special extension from the Indian authorities. Surprisingly, the Indian government granted special extensions to the company. Having failed to get a waiver on divestment condition from the government, Coke had no option but to announce its plan of divestment. But smartly, it offered equity to resident Indian through private placement (instead of public offer) thereby negating the spirit of its agreement with Indian authorities. The company offered 49 per cent shares to employees and strategic investors as well as franchise bottlers and business partners.
The latest proposal by the Coke to deny voting rights to the Indian shareholders is based on faulty assumptions and therefore should be rejected by the Indian authorities. According to the company, the original letter of approval from Indian authorities only contained a condition specifying the amount and percentage of foreign equity. The divestment condition applied only to the percentage of equity that needed to be offloaded not voting rights, argues the company. But this argument is erroneous. At the time of Coke entry into India in 1997, all equity shares had mandatory voting rights under the prevalent corporate rules. Later on these rules were modified and the provision of equity shares with differential voting rights came into existence. But the company will have to abide by the rules that were prevalent at the time of agreement. Throughout the world, this is a normal practice. Therefore, the company should abide by the rules and provide voting rights to the Indian shareholders.
Without voting rights the very purpose of condition having Indian shareholding becomes meaningless. By denying voting rights, the parent company wants to keep complete control over the Indian subsidiary. At another level, this episode reveals that the parent company does not even trust its own employees, franchise bottlers and business partners in India (to whom it is essentially offering equity), leave aside not public at large.
This latest attempt by Coke has also to be seen in a wider context of corporate responsibility and accountability, particularly when the debate on corporate accountability is on the center stage in the aftermath of financial frauds in corporate America. It is distressing that Coke, not just one of the top most global brand but also a well-reputed American corporation with operations in over 150 countries, is not abiding its agreement. The proposal to deny voting rights would reinforce the prevailing public sentiment in the country that transnational corporations not only violate their agreements but abhor well-established corporate norms such as transparency, public scrutiny and wider social accountability related to their business practices, particularly in the host countries.
By allowing Coke to go ahead with private placement, the Indian authorities have already set a bad precedent. If the Indian authorities also accept the latest proposal by Coke to deny voting rights to the Indian shareholders, it would sent a clear message to foreign investors that agreements can be breached with impunity in India. On March 21, 2003, the Finance Minister, Jaswant Singh, admitted in the Indian Parliament that there are 21 TNCs which had violated the guidelines of granting equity to the Indian public. It is high time that the Indian authorities take stern actions against Coke and other TNCs that are violating the agreements. Otherwise, it not only makes mockery of domestic rules governing the operations of transnational capital but also significantly weakens India’s vocal opposition to investment issues at the forthcoming WTO Ministerial Meeting at Cancun in September 2003.
II
Having failed to get a waiver on divestment condition from the government, Coke has finally announced its plan of divestment. As mentioned in my previous article on this issue (posted at this website) Coke was granted permission to carry out business in India through its 100 per cent owned subsidiary, Hindustan Coca-Cola Holdings, in mid-1990s with the condition that the company would divest 49 per cent of its shareholding in favor of resident shareholders by June, 2002.
For several months before the lapse of the deadline, Coke lobbied hard with the political establishment to ensure that it got exemption from this condition. However, Coke failed in its endeavor and as a result it could not meet the deadline. The company then sought special extension from the Indian authorities. Instead of penalizing Coke for not meeting the deadline, the Indian government agreed to grant special extension to the company. The company got an extension till August 17, 2002. The manner in which the special extension was extended to Coke raised eyebrows. One wonders whether Coke would have received such a generous treatment from the regulatory authorities in the US, where its headquarters are located. One also wonders whether Coke could have easily got away violating established norms of corporate governance and agreements in the US.
A closer look at Coke’s divestment plan shows that the company treats IPO as Initial Private Offering rather than Initial Public Offering. Instead of offering shares to general Indian public through an IPO, Coke has decided to offload its 49 per cent equity through private placement to a handful of its loyal bottlers, employees and strategic investors. Offloading shares to “friendly” investors is nothing but a complete circumvention of the divestment process and contrary to the spirit of divestment clause of Coke’s agreement with the Indian authorities. According to media reports, 50 per cent of equity would be handed over to strategic investors while the rest would be distributed among its bottlers and employees.
Coke has justified its divestment plan on technical grounds. According to the company, the divestment clauses refer only to offloading of equity holdings and therefore the company can decide whether it wants to offload its equity to general public through IPO or through private placement. The company further justifies that the divestment clauses refer only to pruning of equity holdings and not allocation of voting rights. This indicates that the company is not going to provide voting rights to strategic investors as well as its bottlers and employees. It is likely that Coke would work out an arrangement with its investors by offering them higher dividends and other economic incentives to ensure that they don’t have much of a say in the management and decision-making process of the company. By issuing differential voting rights, Coke would ensure that strategic investors, bottlers and employees do not veto decisions of company’s board.
Technically, private placement of equity with differential voting rights satisfies the requirement of the divestment clause in the agreement between Coke and the Indian government. According to critics, there is a wider motive behind private placement of equity by Coke. Prithvi Haldea, a primary market analyst, suspects that there is “an implicit understanding that at some time in the future, Coke will buy back the shares at a predetermined price. This will render even the basic objective of divestment a farce… The rationale behind asking a multinational to divest is to enable local investors to participate in its wealth. A private placement, by its very definition, defeats that purpose. It shows that Coca-Cola has not changed much from 1977 when it chose to exit from India when forced to list on local exchanges.”
While criticizing Coke for not abiding by the spirit of agreement, I am equally critical of Indian authorities for poor drafting of guidelines related to divestment, thereby providing enough leeway for foreign companies to manipulate the agreement. Consequently, the authorities are equally culpable for allowing multinational corporations to make a mockery of divestment guidelines and rules.
The Indian authorities should make it mandatory for the company to float an IPO, which was the spirit behind the divestment clause. By allowing Coke to go ahead with private placement, the Indian authorities are setting a bad precedent. Many other foreign corporations, which signed similar agreements on divestment, are likely to follow Coke’s route. In the wider interests of capital markets and general public, the Indian government should refrain from accepting Coke’s proposal for private placement. At the policy level, the authorities should come out with detailed guidelines related to divestment clause without delay.
It is distressing that Coke, not just one of the top most global brand but also a well-reputed multinational corporation with operations in over 150 countries, has sought refuge by citing technical nuances of the agreement. At a time when the debate on corporate accountability is on the center stage following the disclosure of financial frauds in corporate America, it is high time that Coke abides by the spirit of the agreement and floats an IPO in the Indian capital markets. This would give positive signals to investors, employees, consumers and general public about the long-term commitments of the company in India.
At another level, it would also vindicate the benefits of foreign investment in the developing and the poor world. Otherwise, it would only reinforce the prevailing public sentiment that multinational corporations not only violate their agreements but abhor well-established corporate norms such as transparency, public scrutiny and wider social accountability related to their business practices, particularly in the host countries.