HEADLINES:
July 22 2019
Philip Morris flouted FDI rules in cigarettes
07 March 2019

For years, firm paid making costs to its Indian partner to make Marlboro cigarettes

Philip Morris International Inc. has for years paid manufacturing costs to its Indian partner to make its Marlboro cigarettes, circumventing a nine-year-old government ban on foreign direct investment in the industry, internal company documents reviewed by Reuters, showed.

The government, in 2010, prohibited foreign direct investment (FDI) in cigarette manufacturing, saying the measure would enhance its efforts to curb smoking.

Restricting foreign investment leaves cigarette manufacturing largely in the hands of domestic players, and is supposed to prevent any foreign-funded expansion.

A year after the government’s decision, Japan Tobacco exited India, citing an “unsustainable business model”.

Exclusive deal

Philip Morris, though, stayed in India and used another route, according to company documents dated between May 2009 and January 2018. A year before the FDI ban, it struck an exclusive deal with India’s Godfrey Phillips to locally manufacture the world-famous Marlboro cigarettes.

Ever since then, Godfrey has publicly acted as a contract manufacturer of Marlboro cigarettes in India, while Philip Morris’s majority-owned local unit acted as a wholesale trading company and promotes the brand.

But dozens of internal company documents —including invoice bills, legal agreements, e-mails and accounting statements — show Philip Morris has for years indirectly paid costs related to Marlboro cigarette manufacturing in India.

Divided opinion

Some former Indian enforcement officials said the practice of indirectly paying for manufacturing-related costs violates regulatory rules.

However, some lawyers such as Pratibha Jain, a partner at Nishith Desai Associates, disagreed, pointing out that the federal rules did not explicitly prohibit such payments.

Philip Morris’ director for corporate affairs in India, R. Venkatesh, in an e-mail, said the company’s “business arrangements with Godfrey Phillips India comply with Indian foreign direct investment rules.” He did not elaborate.

Three former officials and one former head the Enforcement Directorate (ED), reviewed the Philip Morris documents for Reuters and said the dealings should be investigated for circumventing India’s foreign investment rules.

One of the former officials said that paying for machines to manufacture cigarettes essentially resulted in the promotion of cigarettes, and the government’s intent of banning foreign direct investment in 2010 was to deter that.

Bhure Lal, a former head of ED, said the companies “should be investigated ... they are camouflaging”.

The current ED chief Sanjay Kumar Mishra, did not respond to a request for comment.

 

 

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