Confronted with a stringent FDI regime in tobacco, the world’s third largest publicly traded tobacco company, Japan Tobacco Inc, is closing its joint venture in India from December 31. The venture, JT International Indian Pvt Ltd, has already surrendered its licence to manufacture five billion cigarettes per annum to the government.
Japan Tobacco has 50 per cent stake in JT International Indian Pvt Ltd jointly with a Mumbai-based partner. The company has closed its Hyderabad factory and sold most of the machinery. According to sources, nearly 70 employees are expected to lose their jobs, while several have already left the company.
The Indian company used to sell two international brands, Gold Coast and Winston, and during its peak hawked about 300 million sticks per annum in Kerala, Mumbai and Bangalore.
|HUFF AND PUFF
|JT’S YEAR OF ENTRY 1993
|LOSSES $45 million
|SALES 300 million sticks a year
|INDIAN MARKET 102 billion
sticks per annum, dominated by ITC; other significant players include Godfrey Phillips and Golden Tobacco
|FOREIGN BRANDS MANUFACTURED/ IMPORTED IN INDIA
555 (ITC), Benson & Hedges (ITC), Marlboro (Godfrey Phillips and India Philip Morris) and Davidoff (Imperial
Confirming the development, JT International spokesperson Proful Lall said: “The decision (to close) is based on a significant accumulation of investment and an unsustainable business model in an operating environment where readymade cigarette demand has not evolved, with several foreign investment, regulatory, duty and tax-related uncertainties.”
Japan Tobacco has made several attempts to increase its stake in the Indian company from 50 per cent to 74 per cent and bring in $100 million to address its growing losses. However, with the ban on FDI in tobacco, its hopes to be a player of note in the Indian market ended. Its application was rejected in 2010.
The Indian JV also came under government scrutiny for bringing in money through the back door by issuing fresh equity of a face value of Rs 1 each to Japan Tobacco, 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 it paid only Rs 1 crore.
That way, Japan Tobacco was able to bring in the required money, but without changing the equity structure. In that case, there was no need under Indian law to take FIPB permission. It was only necessary to inform the government and the RBI, which was done. Foreign investments in Indian tobacco have long been a contentious issue. British American Tobacco had, in the recent past, made an unsuccessful attempt to increase its shareholding in ITC Ltd. Other companies such as Philip Morris and Rothmans have also tried to set up subsidiaries in India.