Here’s how Marlboro maker Philip Morris exploited a loophole in India’s foreign investment laws

• In a bid to curb smoking, the Indian government banned foreign direct investment on manufacturing in the tobacco sector in 2010.
  
• However, Philip Morris, the world’s largest tobacco company, allegedly made indirect payments to its manufacturing partner, Godfrey Phillips, to produce its iconic Marlboro cigarettes.
  
• To the authorities and Indian consumers, it looked like Philip Morris had outsourced manufacturing to Godfrey Phillips on a contract basis, when in reality, the Marlboro maker had paid for and covered the costs of local manufacturing.

In a bid to curb smoking, the Indian government banned foreign direct investment on manufacturing in the tobacco sector in 2010. While a lot of international firms like Japan Tobacco were forced to exit joint ventures, it seemed that Philip Morris International had an ace up its sleeve to circumvent the law.

The world’s largest tobacco company allegedly made indirect payments to its manufacturing partner, Godfrey Phillips, to produce its iconic Marlboro cigarettes, according to a Reuters report.

As per internal invoices, bills and legal arrangements dated between 2009 and 2018, Philip Morris reportedly struck an exclusive local manufacturing deal with Godfrey Phillips while maintaining its majority-owned wholesale and branding operations in the country.

To the authorities and Indian consumers, it looked like Philip Morris had outsourced manufacturing to Godfrey Phillips on a contract basis, when in reality, the Marlboro maker had paid for and covered the costs of local manufacturing. These included costs of equipment like barcode scanners and cigarette-making machines - which is highly unusual when a company “outsources” manufacturing.

The indirect nature of the payments could have allowed Philip Morris to skirt authorities. Given that it focuses on direct investment, there is some ambiguity in the FDI policy regarding the indirect payment for manufacturing expenses.

Pratibha Jain, a partner at Mumbai’s Nishith Desai Associates, told Reuters that the FDI law did not explicitly ban such indirect payments, especially when they’re made through invoices.

In an email to Reuters, R. Venkatesh, Philip Morris’ country director for corporate affairs, said the company was in compliance with FDI rules.

To determine if there is an actual case against Philip Morris for violating FDI rules, ndian authorities will likely have to investigate the commercial and profit-sharing arrangement between the two companies.

This wouldn’t be the first time Philip Morris has run into problems with the Indian government. In 2017, India’s health ministry reprimanded the company over its marketing tactics such as advertising at kiosks, the handing out of free cigarettes during nightlife events and television promotions.

Separately, the Indian government was considering extending the FDI ban in the tobacco sector from just manufacturing to licensing and technology collaboration as well, but the proposal was put on hold after protests from trade groups and farmer associations.



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