The Reserve Bank of India (RBI) has recommended to the government that a special clause in the Foreign Direct Investment (FDI) policy needs to be introduced to check foreign funds clandestinely flowing into the tobacco sector under the guise of brand building and marketing activities.
RBI in a letter sent to the finance ministry has highlighted the fact that there is a need to check "circumvention of FDI norms by international tobacco companies and their conduits", sources said.
The central bank has recommended that the government should incorporate a specific clause to plug this loophole. RBI has cited the example of the lottery business, in which the government has banned FDI and also introduced a specific clause pertaining to marketing as well.
The FDI notification related to the ban on lotteries states, "Besides foreign investment in any form, foreign technology collaboration in any form, including licensing for franchise, trademark, brand name, management contract, is also completely prohibited for lottery business and gambling and betting activities."
The note further states, "A notification akin to that in the lottery business should be issued in order to prevent such FDI in the guise of current account flow into the tobacco/cigarette industry."
According to the new clause, "Foreign fund investment received by an Indian company in any form, including that in the guise of current account transactions for the purpose of creating band awareness, brand building, promotion and management contract, is also completely prohibited for cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco substitutes etc."
The issue is considered controversial as even the Federation of Indian Chambers of Commerce and Industry (FICCI) has alleged that although the government has prohibited FDI in the tobacco sector since May 2010, multinationals have set up entities in India for wholesale trading. This serves as a platform for creating demand for their brands, which is then met through large-scale contraband/smuggling, according to FICCI.
"This adversely impacts domestic farmer income, employment and revenue interests. Hence, the existing ban on manufacturing must be strengthened by extending the ban to cover FDI in manufacture as well as wholesale trade in these products," according to FICCI.
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