Govt may ban FDI in cigarette making

Government is all set to ban foreign direct investment (FDI) in cigarette manufacturing. A cabinet note towards this end has been prepared by the commerce and industry ministry and circulated among the other ministries of the cabinet committee on economic affairs (CCEA).

A ban on FDI in manufacturing of cigarettes will affect existing foreign players’ future investment plans in the country. However, it will not affect their existing investments in Indian ventures. At present, three major global players — British American Tobacco (BAT), Japan Tobacco and the Altria Group — have large investments in India. The cabinet note also proposed to prohibit franchise operations for foreign companies to manufacture cigarettes for domestic consumption. It has proposed to allow FDI in SEZs for exports.

According to the note, all the major ministries have given their approvals to ban FDI in cigarette manufacturing. In its comment, which was sent to the commerce and industry ministry on February 3, finance ministry supported the ban. While, the Planning Commission has also approved the ban, health ministry suggested to include cigarette in the list of activities that are prohibited for FDI. At present 100% FDI is allowed in the sector with prior government approval.

If the cabinet approves the proposal, it will affect the plan of Japan Tobacco, which owns brand like Camel, to increase its stake in Indian venture from 50% to 75%, with an investment of $100 million. At present, the rest 50% in the company is owned by KK Modi group.

Similarly, BAT wants to increase its stake in ITC from 31.8% to 51%. Earlier in 1996-97, BAT’s move to hike stake was thwarted by the financial institutions’ nominees on the company’s board. Now, if the ban is approved by CCEA, BAT cannot increase its stake in ITC and it will continue to be a fully professionally-managed company without any promoter. In Godfrey Philips India, Altria group owns 25% stake. The company has recently launched its iconic brand Marlboro in India.

The move to ban FDI in cigarette manufacturing was initiated through a cabinet note dated January 23, 2009. The CCEA, however, deferred the proposal and decided for further inter-ministerial consultation. As the inter-ministerial consultation is now over, the commerce department has moved the note to CCEA again for approval.


Leave a Reply