The finance ministry is looking into various aspects of the manner in which the third-largest publicly traded cigarette maker, Japan Tobacco Inc, had brought in foreign investment into its Indian joint venture bypassing the requirement of raising equity.

The deal went past the Foreign Investment Promotion Board (FIPB) even as a ban on new FDI in the sector was being readied.

The ministry of corporate affairs and the Department of Industrial Policy and Promotion (DIPP) have now been asked by the ministry to go into the manner in which Japan Tobacco could manage to infuse $65 million (Rs 293 crore) in its joint venture here.

The transaction went through in March, a few days prior to the government banning any further FDI in manufacture of tobacco products. Subject to approval from the FIPB, 100 per cent FDI was allowed under the earlier laws.

The government of Japan holds a majority stake in Japan Tobacco, which a few years back had acquired the international business of RJ Reynolds, with its investments in India.

Japan Tobacco operates a joint venture in India, JT International (India), with the Mumbai-based Thakkar family, with each partner having 50 per cent stake. JTI (India) is in the red to the tune of Rs128 crore.

In 2008 Japan Tobacco  proposed to FIPB that the company be allowed to additional investment funds to address the losses and set the India company on a secure footing.

The proposal was pending for over a year when finally JTI (India) issued fresh equity of a face value of Re 1 each to JT, the parent, but at a premium of Rs 298 a share, aggregating Rs 293 crore. The company also allotted an equal number of shares to the Indian partner, but at par, which meant the partner paid only Rs1 crore. The company was thus able to bring in the required money, at the same time retaining the equity structure. This being the case,
there was no need to seek FIPB per mission and it was only required to inform the government and the RBI and the formalities were duly completed.

The government move to examine the deal and consider what action could be taken follows complaints from non-government agencies on the way JT and other tobacco MNCs have been able to thus bring in funds and bypassing the provisions to bring in additional funds into the sector.

The RBI letter has also fueled demands for action against the marketing services subsidiaries or group companies floated by international tobacco giants that serve as conduits for huge monetary inflows for building brands and increasing sales even as they are barred from selling directly to retailers. JT International operates a marketing service company, JT International Wholesale, that sells branded products to only wholesalers. It is also engaged in marketing and brand-building work.

Foreign investments in Indian tobacco have long been a contentious issue and British American Tobacco had, in the recent past, made an aborted attempt to increase its shareholding in ITC Ltd. A number of international tobacco giants have tried to establish subsidiaries in India for similar reasons.