DIPP refers tobacco FDI issue back to RBI, finance ministry

The Department of Industrial Policy & Promotion (DIPP) has sent the issue of circumvention of FDI (foreign direct investment) norms by international tobacco companies back to the Department of Economic Affairs (DEA) and the Reserve Bank of India (RBI). DIPP, under the Ministry of Commerce and Industry, says it has no jurisdiction to decide the issue.

DIPP was responding to a communication from RBI that asked it to examine the wording of the notification (issued in May) banning new FDI in tobacco manufacturing. RBI wanted DIPP 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.

In a letter this week, DIPP communicated to RBI and DEA that the department was concerned with investments under capital account transactions as in the FEM (Transfer or issue of Security by a Person Resident Outside) Regulations of 2000. It says current account transactions are governed by the Foreign Exchange Management (Current Account Transactions) Rules, 2000, as amended from time to time, which are framed and issued by DEA in consultation with the central bank.

It has argued that DEA and RBI are the appropriate authorities and has asked DEA to take proper action in this regard.

The issue came to light when, responding to petitions from non-government organisations (NGOs), the finance ministry launched a scrutiny into the foreign investment by the world’s third-largest publicly traded cigarette maker, Japan Tobacco Inc (JT).

The finance ministry asked the Ministry of Corporate Affairs and DIPP to scrutinise the manner in which JT pumped in an extra $65 million (Rs 293 crore) in its joint venture here without increasing its shareholding. It had taken advantage of a loophole in rules without taking prior permission.

The NGOs had questioned the way international tobacco companies were setting up marketing services subsidiaries (100 per cent trading subsidiaries are allowed) which were bringing in money in large amounts for brand building and advertising, though they were not allowed to sell directly to retailers (they can sell only through wholesalers). The NGOs allege brand building and advertising in India was being used to support sales, much of which came through the grey market.

Foreign investment in the Indian tobacco market has been a contentious issue. Recently, BAT had 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. JTI India’s application for increasing FDI from Japan Tobbaco from 50 per cent to 74 per cent has been kept in abeyance for over a year.