Understanding FERA and its Impact on Foreign Companies in India

The question asks about the specific year when major multinational corporations, IBM and Coca-Cola, decided to cease operations in India. This decision was a direct consequence of their inability or unwillingness to comply with a significant piece of Indian legislation related to foreign investment and exchange controls.

The legislation in question is the Foreign Exchange Regulation Act (FERA), specifically the version enacted in 1973. FERA 1973 aimed to regulate certain payments, dealings in foreign exchange and gold, and imports and exports of currency and bullion. A key provision of this act was that foreign companies operating in India were required to dilute their foreign equity stake to a maximum of 40%.

Key Provisions of FERA 1973 Affecting Foreign Companies

• Mandated that foreign companies operating in India must reduce their foreign equity shareholding to no more than 40%.
• Required prior permission from the Reserve Bank of India (RBI) for various activities involving foreign exchange.
• Aimed to conserve foreign exchange resources and regulate payments outside India.

Why IBM and Coca-Cola Exited India

IBM (International Business Machines) and Coca-Cola were prominent foreign companies operating in India when FERA 1973 was enacted. They were significantly impacted by the 40% foreign equity limit. Both companies were built on models that required a high level of control over their global operations and technology/formula. Diluting their ownership to 40% meant losing majority control, which they were unwilling to do. They preferred to exit the Indian market rather than comply with this specific regulation.

The Year of Exit

Following the implementation and enforcement of the FERA 1973 regulations, companies were given time to comply. However, by 1977, several foreign companies that could not or would not meet the 40% foreign equity requirement decided to shut down their operations in India. IBM and Coca-Cola were among the most notable foreign investors that chose to leave the country in that year.

Therefore, the year when IBM and Coca Cola shut down their operations for not being able to comply with the Foreign Exchange Regulation Act's mandate regarding foreign ownership was 1977.

Analysis of Options

Let's look at the given options in the context of FERA and the exit of these companies:

• 1964: This year predates FERA 1973. While there were exchange controls, the specific 40% equity mandate that led to the exit of IBM and Coca-Cola was not in place.
• 1981: By 1981, the exits related to the initial FERA 1973 implementation had already occurred.
• 1956: This year is much earlier and is associated with the Companies Act of 1956, which dealt with company regulation but not the specific foreign exchange equity restrictions imposed by FERA 1973.
• 1977: This is the year when the compliance deadline pressures led to the exit of several foreign companies, including IBM and Coca-Cola, due to the 40% foreign equity rule under FERA 1973.

Based on historical facts regarding the enforcement of FERA 1973 and the business decisions of IBM and Coca-Cola, the year they shut down their operations in India is 1977.

Revision Table: Key FERA Concepts and IBM/Coca Cola Exit

Additional Information on FERA and India's Economic Policy

FERA 1973 was a product of India's economic policy at the time, which was focused on self-reliance, import substitution, and tighter state control over the economy, including foreign investment. The high foreign equity limits were intended to give Indian partners greater control and promote local industry development. While it achieved some of these goals, it also led to the exit of companies like IBM and Coca-Cola, impacting access to certain technologies and global brands.

FERA was later replaced by the Foreign Exchange Management Act (FEMA) in 1999, which reflected a shift towards a more liberalized economic environment in India, reducing many restrictions on foreign exchange transactions and foreign investment. This change paved the way for many foreign companies, including IBM and Coca-Cola, to return to the Indian market in the 1990s.