After long hesitating to approve foreign investment proposals into the cigarette sector, the government on Thursday put a full-stop to further investment into the sector from abroad.
The move, which is expected to help the existing players like ITC by shielding them from international competition, was justified on the basis of health concerns.
“The approval is expected to enhance public accountability by way of the Government’s commitment towards proliferation of anti-smoking regime in the country.. It will also align the FDI policy with the existing legislation on Tobacco control to a greater extent,” the government said, announcing the ban on further investment by foreign companies into the sector.
The multi-thousand crore Indian tobacco industry is largely dominated by Kolkata-based ITC Ltd, which controls around 80% of the market.
Besides ITC, 32% owned by British American Tobacco, other players include a 50% subsidiary of Japan Tobacco and Godfrey Phillips India, 25% owned by global tobacco giant Philip Morris.
The move is in conformity with the increasing anti-tobacco stand taken by the government in recent years, including a nation-wide ban on smoking in public and higher taxation on tobacco products in the last budget.
Even though tobacco had been on the ‘non automatic’ list as far as foreign investment was concerned, the government has not been granting any investment approvals in this sector for the last several years.
For example, Japan Tobacco had earlier intended to infuse $100 million into its Indian subsidiary, but the proposal was kept pending for years by the government and was later shot down.
However, closing the window forever is likely to improve the chances of existing players by preventing the entry of foreign majors, even as the government is likely to tighten the screws on the industry in the future on the basis of health concerns.
It may also force minority foreign shareholders to rethink their investments in India as they are unlikely to be able to achieve controlling stakes in their subsidiaries.
Most analysts and participants, however, downplayed the importance of the move. “The ban doesn’t change anything for the sector. It remains status quo as there were no great expectations of liberalisation on FDI front. All the major cigarette companies in the country — ITC, Godfrey Phillips and Japan Tobacco India have international stakeholders already,” Nikhil Vora, managing director, IDFC-SSKI Securities said
The Tobacco Board, a government body working for the welfare of tobacco industry, too did not see any major impact on the sector due to the prohibition imposed on the foreign direct investment in cigarette companies.
“In the last over five years there has been no FDI in the sector anyway. So, the prohibition more or less means maintaining the status quo.There would be absolutely no impact on the tobacco industry due to this decision,” J Suresh Babu, the board’s chairman said.
However, Babu said, if the FDI was allowed, the farmers would have got benefited more in the process.
“Right now, several middle men buy tobacco for multi national companies. If the FDI was allowed, the MNCs would have looked for direct presence in the market and the price realization for the farmers too would have improved with the middle men moving out of the system,” he explained.
Anand Shah, FMCG analyst, Angel Broking too agreed. “The tobacco sector has not seen any fresh FDI, or fresh cigarette manufacturing capacity in the recent few years. The move of banning FDI has thus has been more of a formality,” he
pointed out.
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