The Never Ending Story of Coke’s Divestment

Kavaljit Singh

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.

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