FinMin examines FDI loopholes in case of Japan Tobacco

Asks RBI to look into capital infusion by the company in its Indian JV

In what is becoming a key issue for the government’s foreign direct investment (FDI) policy, the finance ministry has asked the Reserve Bank of India (RBI) to again look into the details of the controversial infusion of Rs 293 crore by Japan Tobacco Inc (JT) in its Indian joint venture, which it did without increasing its equity stake and bypassing the Foreign Investment Promotion Board, or FIPB.

The decision, according to the finance ministry, has been prompted by the fact that the infusion of more capital by JT in an Indian joint venture without any increase in its shareholding has “implications for both FDI policy in general and pricing guidelines for foreign investment”.

The method used by JT could provide foreign companies an innovative route in bringing in more investments in Indian companies without breaking the FDI sectoral cap. By pricing shares issued differentially between foreign and Indian partners it is also possible to bypass the requirement of asking for permission from FIPB (as there is no change in the equity structure) and bring in money by just informing the Reserve Bank of India (RBI). The key policy decision needed to be taken is whether there is a need to plug these loopholes or not.

JT International (India) is a joint venture between the Mumbai-based Thakkar family and Japan Tobacco in with each partner has equal stake. JTI (India) issued fresh equity of a face value of Re 1 each to JT, the parent company, but at a premium of Rs 298 a share, aggregating Rs 293 crore.

JTI (India) used this route after FIPB sat on the company’s proposal for over a year to allow JT to increase its equity stake in the Indian venture. While the government policy allowed 100 per cent FDI in tobacco on a case-by-case basis, the proposal from Japan Tobbaco came at a time when the government was planning to ban fresh FDI in this sector. JTI brought in Rs 293 crore in end-March, just a few days before the government banned FDI in tobacco.

The finance ministry has earlier asked both the Ministry of Corporate Affairs and the Department of Industrial Policy and Promotion (dipp) to scrutinise the issue.

Even RBI 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 infows in the guise of marketing services by subsidiaries or group companies floated by global tobacco firms.

Foreign investments in Indian tobacco have long been a contentious issue. Other companies like Phillip Morris and Rothmans have also tried to set up their subsidiaries in India.