According to reports, the Union Cabinet is considering a proposal to introduce a complete ban on all foreign investments in the tobacco sector. The Commerce and Industry Ministry has forwarded the final cabinet note for the Cabinet’s consideration, keeping in mind the views of the Health and Finance ministries. This move comes after the ban on FDI in cigarette manufacturing introduced by the Cabinet Committee on Economic Affairs and the DIPP in 2010. This ban was considered to be one of the most stringent in the world and permanently shut the door to companies like Japan Tobacco and Phillip Morris who had plans of manufacturing in India. It was considered as a protectionist measure by foreign companies. However, it was clarified that the 2010 notification would have only a prospective effect and any business activities before the notification would not be affected.
This move however, left a loophole for investment from foreign companies. Foreign companies maintained their trade interests in India through the trademark or licensing route. Currently, investment is permitted in technology collaboration of any form, such as licensing, franchise, trademark, brand name and management contracts etc. Godfrey Phillips India, the manufacturer of Malboro cigarettes in India is formed as a result of such collaboration between the K.K. Modi Group and the American Phillip Morris. Similarly, since 2010, Indian and foreign companies have been entering into such licensing and brand name agreements for mutual benefit. The proposed move is an attempt to plug this loophole and eliminate any possibility of indirect flow of investment in the country.
In 2013, the Reserve Bank of India (RBI) had recommended to the government that a clause needs to inserted in the FDI Policy in order to stop the clandestine flow of investments into the tobacco sector. It cited the example of the lottery business and gambling and betting activities, for which the clause stating “Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, and management contract is also prohibited for Lottery Business and Gambling and Betting activities” has been inserted in the policy. The proposal includes inserting a clause of this nature for the tobacco sector as well.
Earlier this year, the DIPP and the Niti Ayog were split over this proposal as the latter felt that this move would severely impact the already miniscule share of domestic tobacco companies in the market. Further, it raised concerns of increased smuggling of foreign branded cigarettes into the country, which currently hold a 20% market share. Domestic tobacco companies, which have only a 1-2% share in the market had also conveyed to the government that the ban will negatively impact their market share, whereas it shall have little effect on bigger foreign players.
Reacting to this, a non-profit called Crusade Against Tobacco (CAT) wrote letters to the PMO and the Finance and Commerce Ministries stating that the current policy was ineffective in stopping the indirect influx of funds from foreign firms, who were exploiting this loophole. The letters asked the Centre to put an end to this indirect investment, as “the health of the nation was at risk”.
Despite the opposition from Niti Ayog and the lobbying efforts of tobacco companies, the DIPP found support in the Finance Ministry and the wheels on this proposal have been set in motion. If this plan is in place, it would mean that domestic companies can no longer enter into fresh technical collaborations with foreign companies. Several domestic companies sell their products primarily because of the international reputation of the foreign trade mark. Not being able to enter into such agreements could prove detrimental to their profits. Shares of cigarette companies have already plummeted 20% amidst these reports.
The prospective ban further demonstrates the intolerance of the government towards tobacco consumption and the tobacco industry in general. Earlier this year, 85% health warning on tobacco products was made mandatory, taking us further into a plain packaging regime. This regime mandates that all tobacco products carry a uniform and drab packaging, in order to make them less attractive to consumers. It has been implemented in several countries across the world and remains a controversial issue at several international forums. Read our previous post on plain packaging and India here.
Image from here.