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Coke seeks IPO waiver as losses mount to Rs 21.78 billion

Partha Ghosh

Citing an accumulated loss of Rs 21.78 billion as on March 31, 2001, which has wiped out 66 per cent of its investment of Rs 33.08 billion, Coca-Cola India has urged the government to do away with the divestment clause in its foreign collaboration agreement which requires it to divest up to 49 per cent shareholding in favour of resident shareholders, including the public, by July 2002.

It has also requested that pending a decision on the waiver, the time limit for the divestment be extended by another five years to July 2007.

The company expects to break even in 2001-02 with a small surplus. It has projected that it will be able to wipe out the accumulated losses by 2005-06, without taking into consideration the impairment loss of Rs 14 billion.

The matter is scheduled to come up for the consideration of the Foreign Investment Promotion Board on October 4.

Giving an insight into the company's financials, a letter sent by Hindustan Coca Cola Holdings Pvt Ltd to the government says that the company made a loss of Rs 1.84 billion during 2000-01.

"Sixty-six per cent of the total investment has been lost and the book value of the share of Rs 10 each has declined to Rs 3," the letter, written by Gabriel J Pataky, director of Hindustan Coca-Cola Holdings, says. Coke officials were not available for comments.

Apart from the losses, the company has given other arguments for dropping the divestment clause. One, the divestment clause has not been emphasised by the government in the last two years while clearing FDI proposals unless specifically asked for by the concerned ministry. In fact, the government has also done away with the divestment clause in several sectors.

Two, the company cannot meet the three-year profitability criteria laid down by the Securities and Exchange Board of India for a company planning an initial public offer. And finally, no other country in the world has imposed such a condition on the company.

The plea comes within 10 months of the company urging the government to allow it more time to come out with a public issue, and the subsequent denial by the regulators on the grounds that it was too early to consider the case since the divestment clause has to be met only by mid-2002.

At that time, the government had made no mention of a possible deletion of the clause despite the divestment clause having been done away with as a policy matter in several sectors.

However, it had asked the company to re-apply in the second half of 2001. The letter also discloses that two Singapore-based holding companies have so far together invested $785 million (around Rs 33.07 billion) towards equity in Hindustan Coca-Cola Holdings (the holding firm), which in turn has made a consolidated investment of around Rs 33.08 billion in Hindustan Coca-Cola Beverages Pvt Ltd (the downstream beverage subsidiary).

It has been suffering huge operating losses since the commencement of its beverage operations in India. In the first quarter of 2000, after the Altanta-based parent decided to undertake a review of its Indian bottling franchise investments, it was determined that the long-lived assets within the Indian bottling operations were impaired.

The Coca-Cola Company, therefore, recorded an impairment charge of Rs 14 billion in its books of accounts in order to reduce the carrying values of the identified beverage manufacturing and intangible assets to fair value.

Coca-Cola was allowed to set up a wholly-owned subsidiary on the condition that it would ensure Indian participation up to 49 per cent within five years.

The total equity investment approved by the government till date is $827.6 million. Two holding companies have been merged as Hindustan Coca-Cola Holdings Pvt Ltd and four downstream operating subsidiaries have been merged as Hindustan Coca-Cola Beverages Pvt Ltd.

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