The Foreign Investment Promotion Board on Thursday is expected to uphold Coca-Cola's plea that the government should exempt it from having to grant 49 per cent voting rights to domestic shareholders in its Indian subsidiary Hindustan Coca-Cola Holdings Ltd. The company's claim has been endorsed by the law ministry.

The department of company affairs is of the opinion that Section 90(2) of the Companies Act exempts private limited companies from the requirements of Section 88 and 89 of the Act, which deal with differential voting rights, a source in the department revealed.

"Private limited companies have all along enjoyed the freedom to issue shares with differential or disproportionate voting rights," he said.

Moreover, the department of industrial policy and promotion is of the view that the condition was imposed recently. It is not an entry-level condition like the one on divestment and hence cannot be imposed.

"The department of economic affairs has said that an entry-level condition should not be removed, which we will abide by. But we have pointed out that the DEA has not imposed the same condition on another beverage Pepsi which also got a similar approval recently," the source added.

To strengthen its case against Coca-Cola, the DEA had also pointed to the fact that in the BPL vs CDC case the Bombay High Court had held that domestic shareholders' voting rights cannot be curtailed.

But, DIPP argued that the BPL vs CDC case referred to the telecom sector, where FDI is capped at 49 per cent. Since there is no such cap in the food processing sector, the same should not apply to Coca-Cola.

Coca-Cola has, however, said that it is willing to issue zero per cent coupon rate preferential shares.

Hence, the question of preferential shareholders acquiring full voting rights under Section 87 of the Companies Act in the event of continuous default in payment of dividend does not arise.

Coca-Cola is offering 49 per cent shares to employees and strategic investors, which could include some of its past and existing franchise bottlers and trade partners, to comply to an entry-level condition agreed upon by it in 1997 that it will divest 49 per cent shareholding to resident shareholders.

While granting Coca-Cola more time to comply with the divestment condition and also to restructure its capital base by converting investment lying unutilised in the advance share capital account, the government had imposed a condition that Indian shareholders will have a 49 per cent voting right.

Coca-Cola recently wrote to the government to withdraw the clause stating that the voting rights were not justified considering the huge investments the US company had pumped into the country.