The Hindu : Coca-Cola and the capital market

Online edition of India's National Newspaper
Saturday, Aug 24, 2002

Opinion

Opinion - Editorials

Coca-Cola and the capital market

THE MULTINATIONAL SOFT drink company Coca-Cola (Coke) has finally decided to fulfil its obligation to disinvest a part of its holdings in its Indian arm. Its three previous attempts to get an extension had also failed. The company had unsuccessfully argued that the financial position of its Indian subsidiary needed to improve before a portion of its stake was sold in the domestic market. There has been an enormous interest in what course Coke would take, not just in stock market circles but wherever public policy towards foreign capital is discussed. One factor has obviously been Coke's track record in dealing with the Government — admittedly in a different era and business environment. More to the point, the company's methodology to divest (there being little chance that it would pack up rather than comply with a Government order) was bound to be scrutinised. It might be too much of a coincidence but Coke's opting for a private placement of 49 per cent of its stake in its wholly-owned Indian subsidiary touches on one of the raging debates of the liberalisation era.

At a broader level, the issue has a direct bearing on the state of the capital market in the liberalisation era. Foreign direct investors like Coke while being given permission to invest in the country were expected to offer at least a portion of their equity to domestic shareholders. The normal route for that would be an initial public offer (IPO) by its wholly-owned subsidiary, which would also result in a listing of its share in the Indian stock exchanges. The process of listing confers many advantages: to the company, enhanced capacity to tap domestic capital, name recognition; to the domestic investor, liquidity and a chance to invest in a well known foreign company. Coca-Cola's decision to go through with a private placement of the shares — to its bottlers, employees, suppliers and certain high net worth individuals — probably enables it to comply with the letter but not the spirit of its understanding with the Government.

The issue is topical not the least because many multinationals who have been part of the Indian stock markets since the mid-1970s are exiting. Most of them would not have sought a listing here but for the compulsions of the then legal framework, the rigours of the FERA notably. It is a measure of the sea change that has come about that not only can a comparatively new entrant like Coke delay and eventually go for a private placement but even well established companies can delist from the Indian bourses. In either case, the loser is the Indian investor. A SEBI committee which looked at this issue recommends a middle path: since it is now not possible to prevent anyone from exiting, it is better to concentrate on protecting the small investors of these companies through appropriate mechanisms. Clearly, the motivations for a multinational to delist must be better understood. Many of them do not see any further opportunity or need to raise money here. Coke, which is highly visible in India, probably does not care for the additional exposure which a stock market quote would give. It would be simpler to comply with one set of listing and regulatory guidelines, those set by authorities back home. Looking ahead, there is a need to provide incentives to encourage a company including a multinational to go public in India. That, in turn, suggests a more enlightened stock market administration and supervision. Finally, if the economy had been more buoyant the stock prices would not have been at such low levels. Foreign companies might still like to leave the Indian bourses but would have had to forego some advantages.

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