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Govt bans FDI in cigarette manufacturing

BS Reporter  |  New Delhi/Kolkata 

India today closed the doors on new foreign direct investment in cigarettes. In a move that would hit global tobacco companies which have made attempts to increase their presence in the country — like Japan Tobacco International (JTI) and Phillip Morris — the Cabinet Committee on Economic Affairs decided on this move today.

The ban applies to new proposals and will not have any impact on existing equity stakes held by overseas companies.

Under the existing policy, FDI up to 100 per cent was allowed in tobacco, with prior permission of the Foreign Investment Promotion Board (FIPB), and subject to the company obtaining an industrial licence. The policy allowed 100 per cent FDI for companies which wanted to set up a manufacturing plant in a special economic zone for exports.

This policy had come under attack from the Ministry of Health, which initiated the proposal to ban FDI in tobacco altogether. It was the ministry’s contention that as a signatory to the Framework Convention on Tobbaco Control, India had the responsibility of reducing consumption.

The decision by the government is expected to impact some of the proposals of these global majors in the pipeline.

Last year, Japan Tobacco International had put in an application to the FIPB for raising its stake in the company from 50 per cent to 74 per cent. The proposal was however held in abeyance, as the government was discussing a new FDI policy on tobacco.

Under the new policy announced today, the proposal will not be cleared. JTI executives in India were not contactable.

Similarly, Godfrey Phillips India, in which Phillip Morris has a 25 per cent stake, has been talking about setting up a new joint venture which would manufacture and sell its iconic Marlboro brand. Experts say that under the new policy announced, such a joint venture, which would entail fresh FDI, will not be cleared.

Phillip Morris International spokesperson said: “We are very disappointed with the government’s decision to ban foreign direct investment in tobacco manufacturing. This is a protectionist measure that unfairly discriminates against foreign manufacturers and bears no relation to the achievement of public health goals. Governmental policies to reduce the harm caused by tobacco use would be better pursued through implementation and enforcement of comprehensive regulation and appropriate tax policy that applies equally to all types of tobacco products.”

British American Tobacco (BAT) --- which was once keen to increase stake in ITC --- said that the ban would have no impact on its Indian business. "We have 32 per cent in ITC and are very happy with our investment. We have no intentions of increasing our stake in ITC. Our business in India is done only through ITC and therefore the government ruling will have no impact on our business in India," said a BAT spokesperson.

While the detailed notification of the ban on FDI is not yet out, a top executive of a tobacco company operating in the country says: “What we understand is that the international tobacco companies cannot increase their foreign equity in existing Indian tobacco companies”.

Industry officials expect the status quo to be maintained in the industry. “It would seem that the Ministry of Health and Family Welfare, along with the advocates of tobacco control, have consistently been opposed to FDI in the tobacco industry. Since the Government had not thought it appropriate to approve fresh FDI proposals for the last many years, it is expected that status quo will be maintained,” said Udayan Lall, director, Tobacco Institute of India. The institute has all the leading tobacco companies in India as its members.

Senior executives in the tobacco industry say that the franchisee route to bring in foreign brands with a tie up with existing tobacco companies, is still being permitted. .

There has been hectic lobbying against the FDI ban both by domestic and international tobacco companies.

Phillip Morris International Chairman and CEO Louis C Camilleri had written to the the former commerce minister Kamal Nath saying protectionism was an ineffective tool to address public health objectives and would only entrench the few existing participants to the detriment of others. Camilleri argued that the health effects of tobacco should be addressed through regulations applied to domestic as well as imported products as well as to all manufacturers.

Foreign investment in tobacco has been a contentious issue for years. Philip Morris, was refused approval to set up its wholly-owned subsidiary in 1997 following objections from its Indian partner. The ITC management not only opposed all moves of its UK shareholder BAT to increase its stake in the Indian company, but also refused it a no-objection certificate to set up 100 per cent subsidiary.

The finance ministry was initially against a blanket ban and wanted a case-by-case clearance. Even the commerce ministry was initially of the opinion that a blanket ban might not be needed. The Department of Industrial Policy and Promotion (DIPP) in the commerce ministry had in fact proposed to scale back the FDI ceiling for the tobacco industry from 100 to 74 per cent and insert a caveat that cigarettes manufactured in the new ventures or in upgraded facilities must be mainly for consumption outside India.

However both the ministries did a volte face and eventually agreed on the proposal for a ban.

First Published: Fri, April 09 2010. 00:57 IST