Playing with regulations

The operations of Coca-Cola and Pepsi in India in the last three decades represent a case study of how India's industrial policy and regulations have been dodged, flouted and bent by these companies.

TO Coca-Cola and Pepsi, the multinational cola companies, the controversy over the presence of traces of pesticides in their soft drinks is only the latest in a series of controversies that have studded the two companies' history in India during the last three decades. The presence of pesticides or "foreign matter" in bottles of their soft drinks represents only one aspect of their conduct in India. Across the country - in States such as Kerala, Tamil Nadu, Uttar Pradesh, West Bengal and Rajasthan - they have increasingly come into conflict with local communities in places where their production operations are based. This would be more than a handful for most ordinary companies, but not for Coca-Cola and Pepsi. The two quintessential United States-based multinationals' operations in India in the last three decades represent a case study of how India's industrial policy and regulations have been first dodged, then flouted and finally bent, to shape them according to the fancies of these companies.

Although Coca-Cola has been in India for a longer period than its rival Pepsi, it has had a chequered history in the country. Unwilling to accept the regulations governing the extent of operations of foreign companies in India, as prescribed by the now-defunct Foreign Exchange Regulation Act (FERA), it exited from India in 1977. Interestingly, Defence Minister George Fernandes - then a Minister in the Janata Party government at the Centre - played a key role in the development. Coke's refusal to comply with the stipulated norm that it dilute its equity stake in its Indian subsidiary to 40 per cent resulted in its exit.

Years later, the policy regime entered a more liberal mode. In 1985, the Rajiv Gandhi government delicensed the soft drinks sector. The same year, in May, Pepsi submitted a proposal to enter the Indian market. Pepsi's bid was rejected then, but three years later it made its entry in Punjab. The resulting political furore forced the government to impose several conditions. The government defended itself by saying that Pepsi's foray into agro-processing in terrorism-troubled Punjab would result in more jobs and economic development. But Pepsi's subsequent track record has been one of non-compliance with regulations and the commitments it made to the Indian government.

Meanwhile, Coca-Cola re-entered India in 1997. It too made commitments, and flouted them. Critics of the liberal policy environment have argued that the inability of successive governments to bring the two multinationals to book is closely linked to the control the companies exert on Indian industrial policy.

IN July 1996, the United Front government headed by H.D. Deve Gowda approved a proposal by Coca-Cola South Asia Holding Inc. to establish two subsidiaries in India. The company envisaged an investment of $700 million over a 10-year-period. It also sought the establishment of a wholly owned subsidiary in Gujarat for bottling operations, entailing an investment of $40 million. The company claimed that apart from its flagship products of carbonated soft drinks, it would develop new products such as tea and coffee, non-carbonated fruit juices, and other milk-based drinks.

In early 1997, the Cabinet Committee on Foreign Investment approved Coca-Cola's proposal to float two wholly owned subsidiaries, which were to act as its holding companies in India. These two companies were to set up downstream operations such as bottling plants. Reflecting the politically controversial nature of the agreement, and in keeping with Indian apprehensions about Coca-Cola's operations in India, the government imposed a few conditions on the multinational. The first condition was that it would offload 49 per cent of its equity in its downstream companies (essentially bottling operations) to Indian shareholders. Reflecting the liberal mindset of Indian policy makers, the company was given "three to five years" to comply with this stipulation. The company was also prohibited from engaging directly in any other manufacturing activity.

Soon after the approval, Coca-Cola established two holding companies in the country for its Indian operations. Each holding company in turn floated two subsidiaries to engage in bottling operations. Later, in 2000, the company merged the two holding companies into a single entity, Hindustan Coca-Cola Holdings Private Ltd. (HCCHL). The four bottling subsidiaries were also merged into a single entity, Hindustan Coca-Cola Beverages Private Ltd. (HCCBL). Although it is not clear what motivated the company to engage in a complex task of first creating and then merging the companies, it has attracted controversy for its failure to comply with its own commitment that HCCHL would offer 49 per cent of its stake in HCCBL to resident Indians. More importantly, the government's recent announcement of its decision to dilute the terms on which the company operates in India has fuelled apprehensions that the policy regime can be changed according to the whims and fancies of the multinational.

According to the original foreign collaboration agreement approved by the government, HCCHL was to divest 49 per cent by July 1997. In August 2002, the government extended the deadline to February 28, 2003. In January 2003, in the face of the fast-approaching deadline, the Foreign Investment Promotion Board (FIPB), under the Finance Ministry, gave HCCHL permission to use a sum of Rs.803 crores, constituting the "unused balance" in HCCBL's "advance against share capital" account of HCCBL. Reports in the media at that time indicated that the Department of Economic Affairs (DEA) of the Ministry of Finance permitted HCCHL to use these funds on the explicit condition that HCCHL's voting rights in HCCBL, "under any circumstances", should not exceed 51 per cent.

Coca-Cola, which had lobbied aggressively against the stipulation regarding the dilution of its stake, intensified its effort to change the norms. It argued, rather ingeniously, that since the original commitment was only to dilute its stake, specified in percentage terms, it was free to dilute its stake by issuing non-voting shares to Indian shareholders. The company also argued that fresh conditions, relating to voting rights of shareholders, could not be imposed on it. It was evident that the company, by issuing "dud shares", was seeking to fulfil its obligations in letter, while violating with impunity the spirit of the agreement.

On March 13, 2003, at a meeting of the FIPB, the Department of Industrial Policy and Promotion (DIPP) - a department in the Ministry of Commerce and Industry under which the FIPB used to operate earlier - informed that HCCHL had duly completed its divestment by the end of the February 2003 deadline. At the meeting, the DIPP and the Department of Company Affairs under the Union Finance Ministry, favoured Coca-Cola's claim relating to a revision of conditions relating to voting rights.

The position adopted by the various government departments and agencies in March were in sharp contrast to their earlier position. Earlier, in January, the DEA had asserted that at the time the conditions were agreed to by Coca-Cola in 1997 - with the active participation of the DIPP - the question of issuing different types of shares to various categories of investors did not exist. In fact, the DEA's position was conveyed in the government's "action taken report" submitted to the Parliamentary Standing Committee of the Finance Ministry.

By March, it became clear that the tide was turning in favour of Coke. The company mounted a high-voltage campaign, alleging that the conditions imposed on it were unfair. In particular, it alleged that Pepsi did not face similar conditions. However, critics of the company point out that Coca-Cola's demand for a "level playing field" only confuses the issues at stake. Pepsi's violations of the Indian regulatory system have taken a different form, they say, but Coca-Cola's refusal to comply with its own commitments reflects the company's unwillingness to come under public and shareholder scrutiny in India.

As the deadline approached, the company also issued thinly veiled threats in the media. It said that if it was compelled to dilute its stake, it might be forced to repatriate out of the country funds to the tune of Rs. 1,600 crores. The company also said that forcing it to dilute its stake would be counterproductive because it would, in any case, delist the shares in Indian bourses, just as more than 50 foreign companies have done in the last couple of years.

As the controversy gathered steam in the face of the fast-approaching deadline, a decision on the matter was left to the Cabinet Committee on Economic Affairs (CCEA). The FIPB prepared a favourable ruling for Coca-Cola by recommending to the CCEA in January that it delete the stipulation, "Under any circumstances, the voting rights of HCCHL shall not exceed 51 per cent in HCCBL i.e., the Indian shareholders in HCCHL should get at least 49 per cent voting rights at all times". The CCEA, which met in late June, is reported to have approved HCCHL's proposal to divest 49 per cent to Indian shareholders who will enjoy no voting rights.

It is important to recognise that even a 49 per cent dilution (with voting rights) of Coca-Cola's stake in the bottling company would not have meant it would lose control of the latter.

So, why was the company so vehemently opposed to the dilution? Coca-Cola's critics allege that it is neither related to its contention of "depressed conditions" in the stock markets nor to its accumulated losses. They allege that the company's real motive is to avoid scrutiny by the public, the shareholders, governmental agencies, financial institutions and banks, which a public offering would entail.

THE tale of Pepsi's foray into India is similar. In 1985, soon after the soft drinks segment was delicensed, Pepsi Foods Ltd. attempted a tie-up with the R.P. Goenka Group for a project to export Indian agro-products and to develop Pepsi's products in India. This project was rejected, but in 1986 the company made a fresh bid, and said its project was one that offered the scope to bring about a horticultural revolution in Punjab. Pepsi claimed that its project offered hope in the campaign against terrorism, which was at its peak in Punjab then. Like most other ventures involving foreign companies then, the nascent years of liberalisation, the company entered into a joint venture with the Punjab government-owned Punjab Agro Industrial Corporation (PAIC) and Voltas India Limited. Pepsi held the dominant stake in the joint venture, formed in 1988.

In the face of apprehension about the role of multinationals in India, the government imposed several conditions. In addition, Pepsi also made several promises. It claimed that the project would create employment for 50,000 people nationally and that at least 25,000 of the jobs would be in Punjab. It also agreed to restrict investment in manufacturing soft drinks to 25 per cent of its total investments in India. Instead, in keeping with its pledge to play a major role in agriculture in Punjab, it agreed that 74 per cent of the total investment would be in food- and agro-processing. Pepsi also promised to bring "advanced technology in food processing", apart from marketing Indian agro products abroad.

Pepsi also agreed to the condition that there would be no outflow of foreign exchange on account of soft drinks manufacturing. In particular, the company accepted the condition that 50 per cent of the value of its output would be exported. Moreover, it accepted the rather stringent norm that for every dollar of outflow in foreign exchange, it would bring into the country five dollars. The company also agreed to establish an agro-research centre in Punjab.

Within a couple of years it was evident that the Pepsi dream was souring. The company was nowhere near meeting its obligations. In 1991, the government came under attack for it in Parliament. Interestingly, it was George Fernandes who led the Opposition's onslaught on the Rajiv Gandhi government in the Lok Sabha in a half-an-hour discussion on September 4, 1991. Fernandes said that Pepsi had not only failed to meet its export obligations but also not kept its promise of restricting its production of soft drinks to 25 per cent of its total value of output. "Rather," he said, "the company has become a challenge to the government." Mounting an attack on the company, Fernandes said: "What is there in these soft drinks? What is there in Pepsi cola? The water is taken from our wells, the sugar is manufactured in our factories. Only they add some colour and an ingredient which adds flavour." Fernandes also alleged the company had transferred money overseas by "preparing bogus receipts and indulging in under-invoicing and over-invoicing". In his response, the then Union Minister of State for Food Processing, Giridhar Gomang, said that a team constituted by his Ministry visited Pepsi's plant in December 1990 and found that the company had "made no effort to export 40 per cent of its own manufactured products." He also said that the company had taken "no concrete steps" to establish the promised agro-research centre in Punjab.

By early 1992, the company directly employed a total of 909 persons in its operations in India. Its agro-processing plant in Hoshiarpur district in Punjab, which was to source tomatoes (for which germplasm had been imported by Pepsi) from local farmers, failed to procure it from the farmers even though the company had entered into a contract with them. It was reported that farmers lost Rs.25 lakhs as a result of Pepsi's failure to buy from them.

Pepsi's promised exports also did not materialise. Instead of exporting its own products, which is what the spirit of its commitment to the Indian government mandated, it was exporting basmati rice, shrimps, tea, glass bottles, leather products and a range of products totally unconnected to its own operations. By 1994, Pepsi, in keeping with the trend of collapsed joint ventures, bought out its partners' stake.

By this time policy had changed, and adapted to the changed reality that increasing doses of liberalisation entailed. In particular, in 1997, PepsiCo (the parent company) floated a new fully owned entity, PepsiCo India Holdings Private Ltd., to handle business related to its beverages business. Soon, it had overtaken Pepsi Foods in terms of revenues.

The story of the two companies' operations in India indicates that although they may be rivals the world over, in India they have both managed to twist regulations to suit their ends. More severe critics would allege that the companies made their entry knowing fully well that since the regulatory system was vulnerable to pressure it could be changed later.

Pepsi may be Coke's arch-rival. But in India it would probably agree with Coca-Cola's punch line in one of its advertisements: "Whatever happens, Coca-Cola enjoy(s)".