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November 10th, 2011:

Japan Tobacco’s Indian JV goes up in smoke

Surajeet Das Gupta / New Delhi November 10, 2011, 0:21 IST

Confronted with a stringent FDI regime in tobacco, the world’s third largest publicly traded tobacco company, Japan Tobacco Inc, is closing its joint venture in India from December 31. The venture, JT International Indian Pvt Ltd, has already surrendered its licence to manufacture five billion cigarettes per annum to the government.

Japan Tobacco has 50 per cent stake in JT International Indian Pvt Ltd jointly with a Mumbai-based partner. The company has closed its Hyderabad factory and sold most of the machinery. According to sources, nearly 70 employees are expected to lose their jobs, while several have already left the company.

The Indian company used to sell two international brands, Gold Coast and Winston, and during its peak hawked about 300 million sticks per annum in Kerala, Mumbai and Bangalore.

$80-85 million
LOSSES $45 million
SALES 300 million sticks a year
INDIAN MARKET 102 billion
sticks per annum, dominated by ITC; other significant players include Godfrey Phillips and Golden Tobacco
555 (ITC), Benson & Hedges (ITC), Marlboro (Godfrey Phillips and India Philip Morris) and Davidoff (Imperial
Tobacco Company)

Confirming the development, JT International spokesperson Proful Lall said: “The decision (to close) is based on a significant accumulation of investment and an unsustainable business model in an operating environment where readymade cigarette demand has not evolved, with several foreign investment, regulatory, duty and tax-related uncertainties.”

Japan Tobacco has made several attempts to increase its stake in the Indian company from 50 per cent to 74 per cent and bring in $100 million to address its growing losses. However, with the ban on FDI in tobacco, its hopes to be a player of note in the Indian market ended. Its application was rejected in 2010.

The Indian JV also came under government scrutiny for bringing in money through the back door by issuing fresh equity of a face value of Rs 1 each to Japan Tobacco, the parent, but at a premium of Rs 298 a share, aggregating Rs 293 crore. It also issued an equal number of shares to the Indian partner, but at par, which meant it paid only Rs 1crore.

That way, Japan Tobacco was able to bring in the required money, but without changing the equity structure. In that case, there was no need under Indian law to take FIPB permission. It was only necessary to inform the government and the RBI, which was done. Foreign investments in Indian tobacco have long been a contentious issue. British American Tobacco had, in the recent past, made an unsuccessful attempt to increase its shareholding in ITC Ltd. Other companies such as Philip Morris and Rothmans have also tried to set up subsidiaries in India.

Govt won’t be bullied by tobacco: Roxon

The federal government will not be bullied by tobacco companies into backing away from tobacco reforms due to be passed by the Senate on Thursday.

Australia will become the first country in the world to pass legislation requiring all cigarettes to be sold in plain packs devoid of branding, when it passes the Senate, as expected, following limited debate.

Big tobacco has vowed to challenge plain packaging in the courts once the legislation passes parliament.

Federal Health Minister Nicola Roxon said the government and big tobacco were destined to disagree.

“But we’re not going to be bullied into not taking this action just because the tobacco companies say they might fight us in the courts,” she told reporters in Melbourne on Thursday.

“We’re ready for that if they take legal action. We hope that they don’t. We believe that this is a measure that’s in the interests of the community and it would be better off for tobacco companies to look at ways they could invest in something that’s not so harmful for the community.”

British American Tobacco Australia insists the Commonwealth will be unlawfully acquiring its intellectual property rights and could have to pay billions of dollars in compensation.

Ms Roxon said the government didn’t accept that argument.

“They’re using that as a way of threatening both the government and the Senate to try not to proceed with this law,” she said.

The coalition supports the main plain packaging legislation but not an associated trademarks bill.

The health minister urged the Liberal senators to support the entirety of the legislation, but said that ultimately the government was confident it had the numbers to pass it.