January 16, 2017 / 12:15 PM / 7 months ago

Exclusive - Philip Morris jolted by Indian proposal to ban foreign tobacco investment

Philip Morris International Operation Center is pictured in Lausanne August 19, 2009.Denis Balibouse/Files

NEW DELHI (Reuters) - Philip Morris International is fighting to keep a toehold in India's $11 billion tobacco market, as the government considers further tightening foreign investment rules in the sector, according to documents seen by Reuters.

In previously unreported letters from Philip Morris to the trade minister and an influential government think-tank, the U.S.-based company said the "discriminatory" and "protectionist" proposals would represent a blow to its plans to launch new products and make further investments in India.

The two letters dated May and October last year followed local media reports of a possible change in government policy. While the warnings may be part of the firm's negotiations, they show the level of concern the proposals are causing.

"The proposed ban will impact our future investments in India and also force a review of our overall operations, including tobacco crop purchases," Martin G. King, Philip Morris' Asia president, wrote on Oct. 13 to NITI Aayog, India's most influential government think-tank that has a say in federal policies, including those related to foreign investments.

India banned foreign investment in cigarette manufacturing in 2010, but it still allowed tobacco companies to invest through technology collaboration and licensing agreements. Investments could also be made by forming a trading company.

Over the past year, the government has been considering whether to stop these, in a bid to safeguard public health interests, according to the documents and a senior government official.

The new proposal was being discussed by the health and trade ministries at least as early as April last year, according to a government memorandum dated June 3. Neither ministry responded to requests for comment.

A Philip Morris spokesman said the company had "nothing further to add" when asked about the company's view on foreign investment.

The final decision on the rules, based on recommendations from various ministries, will be taken by Prime Minister Narendra Modi's cabinet.

BLOW TO PLANS

Philip Morris entered India in the late 1960s by acquiring a majority stake in the London-based parent of Godfrey Phillips India Ltd. It gradually reduced its stake in Godfrey over the years, in part due to regulatory changes.

Ahead of the 2010 ban on investments into cigarette manufacturing, Philip Morris formed a new wholesale trading company with Godfrey and an investment firm.

Under the current arrangement, Godfrey manufactures Marlboros while Philip Morris' trading firm helps promote them.

That part of its operations would not necessarily be impacted by the foreign investment changes being considered, as such changes usually do not apply to previous arrangements.

However, if the new rules were implemented, Philip Morris' future investment plans in India would be in jeopardy, as any form of new investment or collaboration would be outlawed.

Those plans, the company says, include the possible launch of its heat-not-burn electronic cigarette called iQOS, an alternative product which Philip Morris sees as a key step towards a smokeless future that could also bring health benefits to India.

Godfrey did not respond to a request for comment.

Packs of Marlboro cigarettes are displayed for sale at a convenience store in Somerville, Massachusetts July 17, 2014.Brian Snyder/File Photo

India is a key market for Philip Morris.

Even before the company contemplates introducing alternative products there, demand is strong for conventional cigarettes that still account for most of the company's $74 billion in global annual revenues.

The number of male cigarette smokers, aged between 15 and 69 years, almost trebled in India to 40 million between 1998 and 2015, according to BMJ Global Health estimates. Another 48 million smoke traditional hand-rolled cigarettes, called beedis.

Marlboro faces stiff competition from premium brands of India's largest cigarette maker, ITC Ltd, which is part-owned by British American Tobacco (BAT) as well as several state-run firms.

Still, its market share has doubled between 2012 and 2015 to 1 percent, data from Euromonitor International show.

LOBBYING DRIVE

A man lights a cigarette along a road in Mumbai, India, October 26, 2016.Danish Siddiqui/File Photo

Outlining the firm's importance to India's economy, Philip Morris said in its letters that it spent $460 million on tobacco leaf over the previous five years and more than $200,000 on corporate charities each year.

It says it has employed more than 90 people in its India unit.

The company does not give country-by-country figures for revenues or market share.

Philip Morris' King wrote to the trade minister in May, saying the reported proposals would "dent India's credibility as a reliable investment destination." He also said the move would unfairly favour the domestic industry.

"It is discriminatory in its application since it will provide undue leverage to the domestic industry at the expense of international products," King wrote.

ITC, which has a market share of almost 80 percent, did not comment on the proposed new policy.

King's letter was redirected by the trade ministry to the federal health ministry for further comment.

The health ministry rejected the company's arguments, citing India's obligations under an international tobacco control treaty and domestic laws.

The health ministry said allowing foreign tobacco money was against public health interests and would only lead to expansion and promotion of the sector.

"There should be a comprehensive ban on foreign collaboration in any form," the health ministry wrote on July 27, adding wholesale trading in tobacco should be banned as well.

Philip Morris wrote again in October to argue its case, this time to NITI Aayog, the think-tank.

It said an investment ban could "raise significant concerns" about India's compliance with its obligations under international trade and investment treaties.

Additional reporting by Manoj Kumar; Editing by Mike Collett-White and Paritosh Bansal

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