ITC lights up a tobacco war

ITC is apparently using its political clout for blocking FDI in tobacco, leaving foreign investment proposals high and dry. Intense lobbying on ITC’s part has even led to a shift in the government’s stance

Indian tobacco-to-hotels conglomerate ITC Ltd (formerly Indian Tobacco Co) is apparently up in arms against foreign investment in cigarette manufacturing, its principal profit source. Its intense lobbying for blocking foreign direct investment (FDI) in tobacco has not only caused a distinct turnaround in the government’s stance, it has even split government opinion on the matter.

The department of industrial policy and promotion (DIPP), which is responsible for FDI policy, was, at first, a strong supporter of allowing foreign investment in tobacco in existing joint ventures. In a clear case of government flip-flop, the same department recommended a ban on such a move. It moved an inter-ministerial note in October last year, asking for a complete ban on FDI in cigarette manufacturing. Indeed, commerce and industry minister Anand Sharma, citing health concerns, has put forth a strong case for blocking the proposed FDI move. This is the same tune which was sung by the previous commerce minister, Kamal Nath.

However, opinion within government offices appears divided. While the finance ministry is for allowing FDI in cigarettes, the commerce ministry is vehemently standing by its opposing stance. The issue came to fore last year when the foreign investment promotion board (FIPB) considered a proposal by Japan Tobacco International to raise stake in its Indian subsidiary, JTI India, to 74%. The DIPP had, at that time, supported the proposal, allaying concerns that it would lead to raising fresh capacity for cigarette manufacturing. The government does not allow creation of fresh cigarette manufacturing capacity under the current rules. The DIPP’s call for a complete ban on the proposal late last year marks a complete turnaround. Philip Morris, one of the largest tobacco companies in the world, has made similar attempts to bring in FDI to acquire its partner KK Modi’s stake in Godfrey Philips.

In 1994, ITC was involved in a battle of its own with British American Tobacco (BAT) Industries, which held a 31.5% stake in the company. The British conglomerate had tried to oust ITC’s then chairman, Krishnan Lal Chugh, in a bid to gain control of ITC. However, ITC’s top management and government financial institutions worked hand-in-hand to deal a crippling blow to BAT’s India plans. It also sent a strong signal to other foreign tobacco manufacturers.

ITC is leaving no stone unturned to protect its Indian ownership. It has ensured the government’s nearly 34% stake in the company remains undiluted. When the Specified Undertaking of the Unit Trust of India (SUUTI), which holds an 11.86% stake in the company, was looking at selling its stake in ITC, it was met with severe opposition, which deterred it from doing so.

With foreign players making desperate attempts to break into the Indian tobacco space, Indian counterparts like ITC are going all out to protect their turf. The matter is expected to come up for discussion at an inter-ministerial meet soon. If the government were to accept the proposal to ban FDI in cigarette manufacturing, it would be the final and telling blow to foreign players seeking a larger share of the Indian pie.

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