The extant foreign direct investment ("FDI") regulatory framework ("FDI Policy") in India has been systematically updated over the years, to attract and promote FDI, aiming to supplement India's capital requirements across different sectors and ensure sustained growth on a global scale. The FDI Policy is split into investments that can be done under the automatic route (where no approval from the Government is required) and the government route (with prior approval from the Government).1 The automatic and government routes are subject to relevant sectoral caps and entry conditions, with certain sectors being specifically prohibited under the FDI Policy.

I. Effect of Prohibition on Manufacture of Tobacco on the Indian Tobacco Sector:

An example of one prohibited sector in the FDI Policy is the manufacturing of cigars, cheroots, cigarillos, cigarettes, of tobacco products or of tobacco substitutes ("Manufacture of Tobacco"), which till 2010, allowed 100% FDI subject to prior permission of the erstwhile Foreign Investment Promotion Board (abolished in 2017) and the relevant company obtaining an industrial license.2 In May 2010, the erstwhile Department of Industrial Policy & Promotion, now referred to as the Department for Promotion of Industry and Internal Trade ("DPIIT"), introduced a notification banning FDI in the Manufacture of Tobacco, adding this to the list of prohibited sectors for FDI in India.3 At the time, the major foreign investors in this sector were British American Tobacco ("BAT"), Japan Tobacco International ("Japan Tobacco") and the Altria Group.4

By early 2013, Japan Tobacco was closing its joint venture, JT International Indian Pvt. Ltd. ("Japan JV"), citing several foreign investment and regulatory uncertainties in India. Japan Tobacco had made several attempts to increase its stake in the Japan JV, however with the ban on FDI in the Manufacture of Tobacco, such applications were rejected.5 In 2019, internal documents (dated between 2009 to 2018) from Philip Morris International ("PMI"), reviewed by Reuters show circumvention of this ban on FDI in the Manufacture of Tobacco.6 PMI had struck a deal with Godfrey Phillips India ("GPI") to locally manufacture 'Marlboro' cigarettes, with GPI publicly acting as a contract manufacturer of Marlboro while PMI's majority owned local unit acted as a wholesale trading company promoting the brand. In fact, multiple invoices were issued by GPI to PMI for manufacturing charges, which were paid by PMI based on actuals.7 However, whereas the Enforcement Directorate claimed that PMI and GPI were circumventing the aforesaid prohibition on FDI, such prohibition was limited to investments into a company engaging in the Manufacture of Tobacco and not for entering into contract manufacturing agreements for the same.8

II. Balancing Act - Revenue and Public Policy:

Over the years, India has ratified the WHO Framework on Tobacco Control in 2004,9 and the Protocol to Eliminate Illicit Trade in Tobacco Products in 2018.10 To implement global standards of tobacco control, the Indian Government passed the Cigarettes and Other Tobacco Products Act, 2003 ("COTPA") and regularly introduces amendments, rules, and updates to conform with any developments in tobacco consumption regulation. However, even though the consumption and sale of tobacco and tobacco products are being regulated, India is still a major exporter of the same, exporting worth over USD 923.6 million in 2021-2022,11 and the tobacco industry in India employs around 36 million people in farming, processing, manufacturing, and related export activities.12

Considering this, it may be the best-case scenario for India to produce, manufacture and capitalize on the ever-increasing tobacco market, but ensure that the produce is not increasingly consumed in domestic markets and the COTPA is adhered to. In line with this, in August 2020, a multi-party parliamentary committee led by V. Vijayasai Reddy ("Parliamentary Committee"), asked the Government to allow 100% FDI in the Manufacture of Tobacco, subject to conditions such as limiting the produce for export purposes with no domestic sale.13 The Parliamentary Committee's argument hinged on the economic benefits of such FDI, and additionally, to include tobacco in the list of other cash crops in India (such as tea, coffee, rubber and cardamom) which are under the automatic entry route under the Indian FDI policy.14

III. Current Developments in the Indian Tobacco Sector:

On 16 December 2023, BAT expressed willingness to sell around 4% of their 29% stake in ITC Limited ("ITC") stating that their veto rights and seats on the ITC Board are guaranteed by retaining 25% stake in ITC.15 However, the BAT CEO Tadeu Marroco stated that such a move would be intricate due to stringent FDI regulations and requirements for approval from regulators.

A key point to note is that the Indian state owns around 28% of the shareholding in ITC through various state-owned insurance corporations and through the Specified Undertaking of the Unit Trust of India ("SUUTI") and may lobby to buy this 4% stake of BAT in ITC through SUUTI or another state-controlled entity. In fact, the Indian Government backtracked on the proposed sale of 7.87% stake held in ITC through SUUTI in November 2023, and has preferred to hold ITC for the long run.16 Therefore, other than BAT finding suitable domestic players to purchase their 4% shareholding in ITC, BAT could sell to Indian state-controlled entities, adding to their existing holdings in the tobacco & FMCG behemoth.

Considering that the onus on the Indian Government is to balance public policy towards tobacco consumption and promote inflows of funds from abroad, it will be interesting to see whether the Indian Government decides to step in and establish a state-owned tobacco company, which is prevalent in countries in Asia, or attempt to control the internal workings of the tobacco sector by introducing and updating legislation and foreign investment policies.

In conclusion, the current FDI Policy on Manufacture of Tobacco may require revision as proposed by the Parliamentary Committee, not just to capitalize on interested foreign investors looking to set up manufacturing units subject to local laws but also to ensure that such big players go through regulated channels of entry into the Indian market instead of circumventing the FDI policy in any feasible manner they find.


1. Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, Consolidated FDI Policy Circular (Issued on October 15, 2020).

2. Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Government of India, Press Note No. 2, 2010 Series (Issued on May 10, 2010).

3. Ibid.

4. Government all set to ban FDI in tobacco, The Economic Times (Feb. 18, 2010),

5. Japan Tobacco's Indian JV goes up in smoke, The Business Standard (Jan. 21, 2013),

6. Reuters, Exclusive: Philip Morris paid for India manufacturing despite ban on foreign investment,

7. Ibid.

8. Ibid.

9. Framework Convention on Tobacco Control, India – Profile, WHO

10. Cabinet approves accession to the Protocol under WHO Framework Convention on tobacco control to eliminate illicit trade in tobacco products, Press Information Bureau,

11. Tobacco Industry and Exports India, India Brand Equity Foundation,

12. Ibid.

13. Panel seeks 100% FDI in tobacco production, The Hindustan Times,

14. Permit regulated FDI in tobacco: Par Panel on Commerce recommends, The Hindu,

15. ITC's largest shareholder open to cutting stake after stock doubles in 2 years, The Economic Times,

16. As stake value doubles, govt puts plans to sell ITC in cold storage, The Business Standard,

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