The Never Ending Story of Coke's Divestment (II)
Why Coke’s IPO is a Sham?
Kavaljit Singh
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
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
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
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
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