In a significant development, the industry ministry has said the UK-based BAT Industries Plc will have to obtain a no-objection certificate from ITC Ltd before the British multinationals proposal for a wholly-owned subsidiary can be cleared by the government. ITC, which was originally promoted by BAT, has yet to clarify its stand on the issue.
BATs proposal for a wholly owned investment and management subsidiary in the country has been pending with the Foreign Investment Promotion Board (FIPB) since October 1996.
The governments move could create a precedent for multinational companies, which may now have to seek prior consent from their existing Indian subsidiaries if they want to set up a 100 per cent subsidiary in the same or allied fields. It will also ensure a level playing field for Indian managements which might feel threatened by their foreign partners plans to float wholly-owned subsidiaries.
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Union industry minister Murasoli Maran said after receiving comments from various ministries, including the finance and commerce ministries, the government has taken a stand that BATs proposal will only be considered vis-a-vis its potential effects on the fortunes of ITC.
We do not want to kill ITC. Since the companies (BAT and ITC) are in the same sector, we have to consider the views of the Indian company. The government has taken a policy stand on this issue, said the minister yesterday.
According to the industry ministry, the decision on BAT is in keeping with the spirit of the new foreign direct investment guidelines, which have accorded adequate protection to Indian partners or subsidiaries of foreign companies which are keen to set up 100 per cent subsidiaries. Under the guidelines, a 100 per cent foreign subsidiary will be allowed only in special cases where the Indian partner has either not been identified or cannot raise the necessary resources.
The multinationals original proposal to invest up to Rs 550 crore (or 100 million) had contained an additional proposal to set up a 50:50 joint venture company with ITC Ltd. The proposed joint venture would have manufactured and marketed BATs international brands, including Benson & Hedges and 555. However, the proposal has already been rejected by ITC.
As a result, BAT was forced to de-link the joint venture plan from its 100 per cent subsidiary proposal in the FIPB application. Instead, it is now considering a proposal by ITCs management to give deferred licensing permission for its international brands to the Indian company after a certain period of time.
In its FIPB application, BAT has proposed to set up its wholly owned subsidiary as an investment and management entity which will manage its existing investments in India and will facilitate future management of its proposed business activities in the country.
BAT proposes to enter into direct competition with ITC by undertaking exports of Indian tobacco, and increase competition in the Indian market through a launch of its international brands and technology transfer. BAT also plans to be actively involved in financial services like insurance and risk & asset management.
The British multinationals proposal to set up a 100 per cent subsidiary has become a contentious issue between the ITC brass and BAT. The two companies differences over the issue have cast a shadow over their recent efforts to improve their strained relationship.
The ITC management has been waging a prolonged battle with BAT, its largest single shareholder, over the question of control over the company. The battle started a few years ago when former chairman K L Chugh raised the banner of revolt by alleging that BAT was trying to dismantle the Indian management of the cigarette company by trying to increase its shareholding to a majority stake of at least 51 per cent.
BAT had then openly demanded the resignation of Chugh from the company chairmanship.
The battle continued when Chugh was replaced by Y C Deveshwar, who occupied the post with the backing of financial institutions despite opposition from BAT. BAT has since openly questioned the way ITC is being managed under Yogi Deveshwar.
We do not want to kill ITC. Since the companies
(ITC & BAT) are in the same sector we have to consider the views of the Indian company. The government has taken a policy stand on this issue. MURASOLI MARAN Industry minister