Tobacco FDI: Commerce min says curbs OK when not in procurement

By: |
New Delhi | Published: August 16, 2016 6:26:29 AM

Amid differences among various wings of the government on a move to further curb foreign direct investment (FDI) in the tobacco sector, the commerce ministry has said it supports the proposal...

Amid differences among various wings of the government on a move to further curb foreign direct investment (FDI) in the tobacco sector, the commerce ministry has said it supports the proposal so long as it doesn’t restrict FDI in tobacco procurement, a senior government official told FE.

A proposal by the department of industrial policy and promotion (DIPP) to ban FDI in technological collaboration in the tobacco sector in any form — including licensing for franchise, trademark, brand name and management contract — has already faced resistance from the NITI Aayog.

However, the finance ministry is learnt to have endorsed the DIPP proposal. FDI is already banned in the manufacturing of cigars, cigarettes of tobacco and tobacco substitutes.

With its suggestion, the commerce ministry — the administrative authority of the state-run Tobacco Board — seems to have supported the DIPP’s proposal as well, as the latter hasn’t recommended a ban on FDI in procurement. This leaves NITI Aayog the only key dissenting government body on this issue.

The commerce ministry’s opinion is based on the premise that any restriction on foreign companies from participating in tobacco auctions in India will hurt farmers’ earnings. A compensation package to lure away farmers from tobacco plantation, so that supplies are choked and consumption trimmed, has often been suggested, but never implemented. At present, global companies are allowed to directly participate in tobacco auctions and they can also set up liaison offices in the country for this purpose.

Cigarette manufacturers — especially Godfrey Philips India — have expressed their concerns against the DIPP proposal. Godfrey Philips India manufactures and markets Marlboro cigarettes in the country under a licence agreement with US’ Philip Morris. While its existing tie-up may be allowed to continue, such a move will dent the possibility of the much-speculated acquisition of stakes in Godfrey Philips India by Japan Tobacco.

However, such a move will hugely benefit domestic companies like ITC, as cigarette is a licensed industry in India.

An early resolution of the issue will be key to curbing speculations about the FDI rules governing the tobacco sector.

Earlier, sources had told FE that NITI Aayog felt such a move could send a wrong signal to the foreign investor community, especially when India had relaxed rules substantially to become the world’s most liberalised country for FDI. The Narendra Modi government has already announced two big rounds of relaxations in the FDI regime, first in November 2015 and then in June this year, easing rules in over a dozen sectors ranging from real estate, aviation, defence to retail and banking.

However, activists have hailed the DIPP proposal, saying the move — albeit belated — is another crucial step to put a leash on tobacco consumption, as India is a signatory to the World Health Organisation’s Framework Convention on Tobacco Control. To discourage smoking, the government already stipulated in April that 85% of a cigarette pack’s surface be covered in health warnings, up from 20% — a decision which was later upheld by the Supreme Court.

Following greater liberalisation of the FDI regime, the country witnessed a 23% jump in gross FDI in 2015-16 to $55.46 billion from a year before, with FDI in equity rising over 29% to $40 billion in the last fiscal. In 2014-15, too, the total FDI inflows rose 25% from the previous fiscal.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.