Getting pragmatic

In legalistic terms, the government should have rejected Hindustan Coca Cola Holdings’ (HCCH) proposal to buy back the 49 per cent shares it had earlier divested in its bottling subsidiary, Hindustan Coca Cola Beverages (HCCB). The reason is simple: When HCCH wanted to set up shop in the country, it agreed to divest 49 per cent of its equity within five years. But when the time came for this to be done, HCCH didn’t want to go in for a public share issue and instead divested to its bottlers and other investors. Now, since it is proposing to buy back these shares, it basically seeks to nullify the original condition for entry into the country. If the government is serious about the original stipulation, the buyback should be nixed. The counter-view would be that similar divestiture, or listing clauses, did not apply to other foreign investments—which is why neither Hyundai nor LG (for instance) is listed on any Indian stock exchange. So why should this apply to Coke in today’s more liberal policy environment? And that presumably was the logic used by the Foreign Investment Promotion Board when it cleared Coke’s proposal.

Such relaxation of the rules could be pragmatism, but it also points to the fact that restrictive clauses in licences have usually been ignored in the breach over several decades. Most export commitments taken from companies when licences were issued for supposedly export-oriented projects, were never honoured by the companies concerned. Similar commitments made under the export promotion capital goods scheme (when exports had to be done in multiples of the capital goods imports that were allowed duty-free) were also honoured largely in the breach. And in 1999, to take another instance, when it became obvious that the policy under which companies had bid astronomical sums for telecom licences was proving counter-productive, the government recognised reality and came up with a more realistic set of financial conditions. The revenue-share policy that was introduced has in fact stood the government in good stead, because the rapid growth of telecom has contributed more revenue than might have been realised if the government had simply held companies to their licence bids.

This history argues strongly against imposing unrealistic conditions on companies when they seek to access the Indian market. But another question arises with the condition that a company must divest its holdings to the general public. Such a policy (prescribed first under the Foreign Exchange Regulations Act when it was amended in the 1970s) led to a flood of quality scrips being floated by the early 1980s and whetted the appetite of retail investors—contributing in some measure to the birth of India’s stock market saga. The logic of asking reputed companies to let Indian investors share in the wealth that they create, and thereby help give depth and breadth to the capital market, is therefore obvious—especially when it came with the attendant benefits of greater corporate transparency and information disclosure. However, 30 years later, the spirit of the times is not in line with forcing companies to list against their wishes; indeed, the trend is towards de-listing by multinational corporations (partly because they don’t really need external investment funds and partly in order to minimise regulatory complications in multiple policy regimes). The solution might lie in shifting from the stick to the carrot: encourage listing by offering tax rebates to widely-held and listed companies. There are precedents for this in the statute books, so it is an idea that already has general acceptance.