The finance ministry is scrutinising the manner in which the world’s third-largest publicly traded cigarette maker, Japan Tobacco Inc (JT), had brought in foreign investment into its Indian joint venture without raising its equity. The deal bypassed the Foreign Investment Promotion Board (FIPB) and took place even as a ban on new FDI in the sector was being readied.
The ministry has asked the Ministry of Corporate Affairs and the Department of Industrial Policy and Promotion (DIPP) to look into the manner in which JT had pumped an extra $65 million (Rs 293 crore) in its joint venture here.
The transaction was put through in end-March, a few days before the government decided to ban any further FDI in manufacture of tobacco products. Under earlier law, 100 per cent FDI was allowed in such manufacture, but subject to approval from the FIPB.
Meanwhile, the Reserve Bank of India has also asked DIPP to examine the wording of the notification (issued in May) banning new FDI in tobacco manufacture, to see if clauses could be included to prevent ‘clandestine’ current account inflows in the guise of marketing services by subsidiaries or group companies floated by global tobacco firms.
The government of Japan has a majority stake in JT. Some years earlier, JT had taken over the international business of RJ Reynolds, which had invested in India. JT International (India), the company’s arm here, is actually a joint venture with the Mumbai-based Thakkar family, with each partner having 50 per cent stake. JTI (India) has accumulated losses of Rs 128 crore and JT had, in 2008, proposed to FIPB that it be allowed to bring in more equity investment money to address the losses and set the India company on a secure footing.
FIPB had kept the proposal pending for over a year. What finally happened was that JTI (India) issued fresh equity of a face value of Re 1 each to JT, the parent, but at a premium of Rs 298 a share, aggregating Rs 293 crore. It also issued an equal number of shares to the Indian partner, but at par, which meant they paid only Rs 1 crore. This way, JT was able to bring in the required money, but without changing the equity structure. In which case, there was no need, by Indian law, to take FIPB permission; it was only necessary to inform government and the RBI, which was done.
The government action to examine the deal and see what can be done follows complaints from non-government agencies on the way JT and other tobacco MNCs have so used the law to bring in more money into the sector. A JT spokesperson declined to comment on the issue.
As for the RBI letter, it is also triggered by demands that something be done about the marketing services subsidiaries or group companies floated by international tobacco giants that bring in huge amounts of money which is used for building their brands and increase sales even though they can not sell directly to retailers. JT International has a marketing service company, JT International Wholesale, which sells branded products to only wholesalers. It also does marketing and brand-building work.
Foreign investments in Indian tobacco have long been a contentious issue. British American Tobacco had, in the recent past, made an aborted attempt to increase its shareholding in ITC Ltd. Other companies like Phillip Morris and Rothmans have also tried to set up subsidiaries in India.