Coca Cola and India’s 1970 Patent Act and 1973 Foreign Exchange Regulation Act: Two Examples of Political Risk

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Coca Cola and India’s 1970 Patent Act and 1973 Foreign Exchange Regulation Act: Two Examples of Political Risk

From its independence in 1947 until 1991, India adopted a policy in which trade with outside countries was minimized in an attempt to achieve self-sufficiency. This strategy protected and promoted Indian industries.

In the 1970s, the Indian government expanded their effort to protect Indian companies from foreign competition. In 1970, it introduced the Indian Patent Act of 1970 which recognized process patents but not product patents. The Act was designed so that domestic companies could produce substitutes for foreign companies since products were not patentable.

Then in 1973, the Indian government passed the Foreign Exchange Regulation Act of 1973. The Act, which was aimed at “Indianizing'” foreign companies, made it mandatory for foreign companies to dilute their shareholdings to 40 per cent.

When the Foreign Exchange Regulation Act came into force on the January 1, 1974, the Indian government and the Reserve Bank of India (Indian’s central bank) were vested with powers to regulate foreign equity in companies operating in India. Companies in low-priority areas such as consumer goods could continue with 40 per cent equity. Coca-Cola Corporation which was operating as a branch since the early 1950s came under this category. Coca-Cola was directed to continue its operations on condition that its branch would be converted into an Indian company with 60 per cent owned by Indian investor. Coca Cola was given two years to accomplished this.

In addition, under the Patent Act of 1970, Coca Cola was required to share their drink formula with local soft drink companies, something that Coca Cola refused to do because they felt that it differentiated them for the competitors and gave them competitive advantages.

Instead of complying with Foreign Exchange Regulation Act and the Patent Act, Coca-Cola decided to wind up its operations in India and left in 1977.

In July 1991, the Indian government adopted a policy of liberalization and deregulation that was designed to encourage foreign investment. In October 1993, after a lapse of 16 years, Coca Cola returned to India through a 100 per cent owned subsidiary, Hindustan Coca-Cola Holdings. However, Coke's reentry was based upon several commitments and stipulations which the company agreed to implement. One such major commitment was that Hindustan Coca-Cola Holdings would divest 49 per cent of its shareholding in favor of Indian resident shareholders by June, 2002.

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