Japan Tobacco raises investment in Indian unit

The world's third largest tobacco company by sales volume, Japan Tobacco Inc, has invested $65 million (Rs 293 crore) in its Indian unit without increasing its shareholding, just days ahead of a government decision to ban foreign direct investment in cigarette manufacturing.

Japan Tobacco holds 50 per cent equity in JTI India, a joint venture with a Mumbai-based law firm, the Thakkar family. The company manufactures several popular cigarette brands, such as Benson & Hedges and Camel, and other tobacco products like cigars.

Japan Tobacco had been wanting to infuse fresh capital in the Indian unit for some time. The company had earlier sought permission of the Foreign Investment Promotion Board (FIPB) to increase its stake in the Indian venture from 50 per cent to 74 per cent. FIPB, however, put the proposal in "abeyance", where it has remained for more than a year.

JTI India, sources said, has issued fresh equity of Re 1 each to the Japanese company at a premium Rs 298, amounting to Rs 293 crore. It has issued an equal number of shares to its Indian partners, the Thakkar family, which paid only Rs 1 crore for the shares, as they were issued at par.

By issuing the shares on a differential basis, the company has ensured infusion of more capital from the foreign partners without any increase in their shareholding.

The transaction took place at the end of March and government announced the ban on FDI in cigarette manufacturing on April 8. The ban would come into force once the government issues a notification to the effect.

"JTI has injected funds into our Indian business for the purpose of enhancing its financial position, which is fundamental to our current business," a company spokesperson said confirming the development. "We refrain from commenting on the details of our investment, including the amount. This injection of funds does not change the shareholding structure of JTI India and is in line with the policies of the government and the RBI."

Under the existing norms, FDI up to 100 per cent is allowed in tobacco, but only after FIPB clearance.

However, through the innovative route, Japan Tobacco has bypassed the need to go to FIPB as the fresh investment does not entail any increase in the company's shareholding. In such cases, the company is required to only inform the government and RBI.

Sources said the money has been brought in primarily to clear the company's losses, which are to the tune of $45 million, and help it raise loans in the Indian market with a better credit rating, and therefore, at more attractive interest rates.   

Some industry analysts said this deal would have come under the scanner had the new policy been in force. But representatives of some tobacco companies disagreed saying the ban would apply only when shareholding of the foreign company is increased.

Another cigarette maker, Godfrey Phillips India, in which Phillip Morris International has a 25 per cent stake, has been keen on setting up a new joint venture in India. This would manufacture and sell its iconic Marlboro brand. But such a joint venture, which would entail fresh FDI, would  not be cleared under the new norms.

Most foreign companies like Phillip Morris have expressed disappointment over the new policy terming it unfair and discriminatory.

Foreign investment in tobacco has been a contentious issue for years. Philip Morris was denied permission to set up its wholly-owned subsidiary in 1997 following objections from its Indian partner.