In order to continue the flow of investments from its parent firm to India operations, the Indian arm of beverage giant Coca-Cola is knocking on the doors of Foreign Investment Promotion Board (FIPB) to extend the date for redemption of preference shares (from 2012 to 2019) that was allotted by Hindustan Coca-Cola Beverages (HCCB), the manufacturing and distribution arm of Coca-Cola India (downstream subsidiary), to Hindustan Coca-Cola Holding (HCCH), the holding arm, in March 2005.
The preference shares worth around R804 crore, allotted by HCCB to HCCH, lapsed in March 2012. The amount was part of the R3,254-crore foreign direct investment in HCCH approved by the government in late 1990s.
HCCB said the approval is required so that it continues to invest in the resources and capabilities required to meet the company's 2020 vision for India. Last year, the US-based Coca-Cola Company had announced scaling its India investments to $5 billion by 2020. The subsidiary of Coca-Cola in India wants the government to extend the date for redemption of these preference shares by seven years — from March 2012 to March 2019 — by amending the terms of its earlier approval letter issued in 2003.
The proposal comes for consideration before FIPB on January 18. FIPB is the nodal agency dealing with the matters of foreign direct investments entering India. The application of HCCB was filed in late November last year after deliberations with the FIPB and the department of industrial policy and promotions (DIPP) since the beginning of 2012.
As per the application, HCCH has been in touch with the FIPB since January 2012 and has written to the board on several occasions between January and September 2012.
Sources said DIPP in its earlier correspondence with HCCH said since the government had already given an approval for issuing preference shares in January and August 2003, the company will require an amendment in that original approval letter. As per the terms of that letter issued in 2003, the preference shares issued by HCCB to HCCH would be redeemed after seven years from the date of allotment.
"Present request of HCCH is to stipulate that the preference shares would be redeemed after 14 years from the date of allotment," the company said in its application. It also said that an extension of period of redemption of the preference shares will not in any manner change the shareholding patterns of HCCH or HCCB.
Both these entities are owned and controlled by two Singapore-based entities - Hindustan Coca-Cola Overseas Holdings and Bharat Coca-Cola Overseas Holding. The formation of HCCH was allowed by a Cabinet decision in late 1990s to be set up with 100% foreign equity as a holding company which will then invest in the non-alcoholic beverage business of The Coca-Cola Company (TCCC), USA. The government also allowed HCCH to set up a downstream operating subsidiary to engage in the preparation, packaging and sales and distribution of non-alcoholic beverages. Sources said, HCCB suffered financial losses since its early days. After restructuring of its balance sheet, a balance of around R803.36 crore remained unused.
Sources said at this juncture, the holding company (HCCH) had the option of either repatriating the said amount or subject to government approval, utilise the amount by way of investment in preference shares in its downstream subsidiary as TCCC would be in an investment mode in India for the long-term. HCCH opted for investments in the form of preference shares of HCCB.