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Philip Morris Pays Its Indian Partner For Making Cigarettes Violating FDI Ban: Reuters

Philip Morris Pays Its Indian Partner For Making Cigarettes Violating FDI Ban: Reuters
A nine-year-old government ban on foreign direct investment (FDI) in the Indian cigarette industry has been apparently flouted by Philip Morris International Inc for years through paying manufacturing costs to its Indian partner to produce its Marlboro cigarettes, claims a report by the news agency Reuters on the basis of internal documents of the company.
FDI in cigarette manufacturing had been prohibited by the Indian government in 2010 on the argument that it would derail its cause of reducing smoking.
That regulation means that only domestic players would be able to operate in the market and blocks any expansion efforts through foreign funding. Following that regulations, Japan Tobacco exited India within a year of its implementation because of what it termed as an “unsustainable business model”.
The Reuters report, based on company documents dated between May 2009 and January 2018, claimed that despite the new regulation Philip Morris stayed back in India and continued to fund its partners in the country through another route. The US company has entered into an agreement with the Indian firm Godfrey Phillips for local manufacturing of the world-famous Marlboro cigarettes about a year before the FDI ban.
And since then, the role of Godfrey has been to act as a contract manufacturer of Marlboro cigarettes in India while the brand is promoted by a local unit which is majorly owned by Philip Morris and one that does business as a wholesale trading company.
But the Reuters report claims that costs for manufacturing Marlboro cigarette in India have been paid by Philip Morris has for years indirectly as shown by many internal company documents which includes invoice bills, legal agreements, e-mails and accounting statements.
Regulatory rules are violated when a foreign company indirectly pays for manufacturing-related costs in India, said some former Indian enforcement officials to Reuters. But that argument was not agreed upon by some lawyers such as Pratibha Jain, a partner at Nishith Desai Associates, who argued that there was no explicit prohibition on such payments because of the federal rules.
The company’s “business arrangements with Godfrey Phillips India comply with Indian Foreign Direct Investment Rules”, said Philip Morris’ director for corporate affairs in India, R. Venkatesh, in an e-mail to Reuters. There was no further clarification of the matter by the company.
The Reuters report claimed that between December 2013 and January 2018, Philip Morris made payments to Godfrey for manufacturing-related expenses to the tune of 45.5 million Indian rupees ($644,200) accoridng to six invoices issued by Godfrey in that period. A range of costs were accounted by Philip Morris to Godfrey which included paying for large cigarette-making machines and expenses for smaller equipment like barcode scanners and printers used in the factories of Godfrey making cigarettes.
According to an e-mailed statement to Reuters from Godfrey Phillips’ head of corporate affairs, Harmanjit Singh, all the commercial arrangements “are in complete compliance with the extant regulations governing the Indian Foreign Direct Investment and other applicable laws, and, incidentally, all transactions are in Indian Rupees. Also, it is our considered view that no illegality can be impugned to these commercial transactions between the parties.”

Christopher J. Mitchell

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