After 11 years of hanging like a sword on PepsiCo India Holdings Ltd, the government’s condition that the company must dilute its equity in fully-owned downstream ventures is close to being waived.
The Foreign Investment Promotion Board, or FIPB, has recommended that the finance minister should consider deleting this clause, imposed in December 1997 and giving PepsiCo five years to do it. This was a special condition put on the company while it was increasing its investment in India by $405 million.
In a meeting late last month, FIPB recommended that the proposal for deletion of the divestment clause should be placed before the Cabinet Committee on Economic Affairs (CCEA). Since the nodal agency is FIPB, the divestment clause — imposed by the Cabinet Committee on Foreign Investment, which later morphed into CCEA — may be about to be deleted even as the country and political parties prepare to enter election mode.
Beverages and snacks maker PepsiCo and arch rival Coca-Cola were allowed to set up holding companies provided their subsidiary companies divested their equity and brought it down to 51 per cent in five years. These subsidiaries could buy bottling plants or take equity in franchisee bottlers.
Coca-Cola complied with the divestment clause by selling 49 per cent equity in its bottling subsidiary, Hindustan Coca-Cola Beverages, to strategic investors, bottlers and employees in 1997. Eight years later, it bought back the shares to take control of the bottling operations.
PepsiCo, in 2003, through subsidiary Aradhana Beverages, was given permission to acquire Dillon Kool Drinks & Beverages Ltd, a bottling company, with the condition that it would divest 49 per cent in acquired outfit by January 2008.
In 2006, PepsiCo, this time again through Aradhana, acquired Charminar Bottling Company with the condition that it would divest 49 per cent in Charminar by 2011.
In June last year, PepsiCo approached FIPB with the request to waive the divestment condition, but the board chose to defer the request. It also asked PepsiCo for clarifications regarding the rationale of the divestment condition, and how it was different from that imposed on Coca-Cola.
A year later, in June this year, PepsiCo submitted to FIPB an application for permission to infuse $50 million in the holding company. This proposal, too, was deferred at the July meeting of FIPB, which took the view that the issue of the deletion of the divestment clause should be dealt with first.
The company pointed out that the government’s liberalised policy on foreign direct investment in the food processing sector, which came in 2000, raised the FDI limit from 51 per cent to 100 per cent.
In deliberations at FIPB, the Food Processing Ministry, as well as the Department of Industrial Policy and Promotion, supported the deletion of the contentious clause.
DIPP said the clause — imposed in 1997, requiring the company to bring down its equity to 51 per cent by December 2002 — was imposed at a time when foreign equity only up to 51 per cent was allowed through the automatic route in the sector. However in 2000, the policy was liberalised to permit 100 per cent foreign equity in the sector and the divestment clause therefore made no sense. The Department of Economic affairs conveyed its no-objection to the deletion of the clause, provided no laws were violated.
