Will Action Against Philip Morris Impact Foreign Tobacco Players in India

The news of Indian government seeking an explanation from Philip Morris International Inc about their marketing practices in India was followed by a warning of “punitive action” against the international tobacco giant. A Reuters investigation published in July 2017 revealed that the company is displaying colourful ads at kiosks and offering free smokes at parties frequented by young adults to popularise and advertise its products.

While it may look like a stand-alone case of advertising violations under the Cigarettes and Other Tobacco Products, Prohibition of Advertisement and Regulation of Trade Act (COTPA), the government’s plans to initiate action against Philip Morris will have a wider impact on the foreign players in tobacco industry in India.

Illegal Marketing Practices

 The investigation that was based on the leaked internal reports and hundreds of pages of internal documents reviewed by Reuters, revealed details about Philip Morris’ global strategy. The investigation highlighted how India, with a population of 1.3 billion, is a “high potential market” for the foreign firm and that the company was indulging in ‘illegal’ marketing practices to penetrate the market in India.

The representatives of Philip Morris denied the allegations, saying that the company’s advertising is “compliant with Indian law”. R. Venkatesh, the director for corporate affairs for Philip Morris in India, said the company “fully cooperated with the enforcement authorities,” Reuters reported.

Ban on FDI in Tobacco

In November last year, a Cabinet committee sent a note for a complete ban on foreign direct investment in tobacco companies in India.

“We wanted to be sure that for the production of cigarettes or other things (in the tobacco sector), we do not want to encourage FDI because we have ratified (a framework of) the WHO,” Nirmala Sitharaman, the Union Minister for Commerce and Industry, was quoted as saying by PTI.

Soon after the news of Cabinet’s move came out, Martin G. King, Philip Morris’ Asia president, wrote to NITI Aayog, the government’s think-tank on policy issues. “The proposed ban will impact our future investments in India and also force a review of our overall operations, including tobacco crop purchases,” King reportedly wrote on October 13, expressing his concerns about the prospective move.

India banned foreign investment in cigarette manufacturing in 2010, but the tobacco companies are allowed to invest through ‘technology collaboration and licensing agreements’. Investments can also be made by forming a trading company, and the Cabinet note is now seeking to review this policy.

Ambiguity of the Law

Philip Morris is not the only ‘foreign’ or ‘national’ tobacco company that is said to be indulging in marketing methods that Indian officials say are illegal.

Thirty per cent of the stakes in ITC Ltd., India’s largest cigarette maker, that controls about 80 percent of the market in India, are held by British American Tobacco Plc. ITC Ltd. has been accused of using similar tactics, such as advertising at kiosks.

The crux of the problem lies in the ambiguity of the COPTA Act of 2003 that ‘allows tobacco companies to advertise at shops, but subsequent rules issued by the government prohibit it’.

The information about Philip Morris’ revenue by country may not be available but it is estimated that a large portion of its $74 billion revenue is from India. Tobacco consumption is on decline in much of the world, and sales of cigarettes in India have dipped in last five years, but the country remains a huge market, both for national and international players.

A Huge Market

India is home to the second highest number of tobacco users — more than 275 million, according to a Euromonitor study. The BMJ Global Health journal highlights that a major chunk of the buyers are male cigarette smokers between the age of 15 and 69 years. There are 48 million others who smoke the traditional hand-rolled cigarettes, called beedis. Tobacco is also used in various other forms in India.

The Indian government’s stance will also impact the new and advanced products being launched by foreign tobacco companies in India. Philip Morris is expected to roll out the ‘heat-not-burn tobacco’ product called iQOS, which heats the tobacco, generates no smoke or ash and produces a vapour containing nicotine. The company has claimed that conventional cigarettes could become a thing of past, and has predicted a “phase-out period” for cigarettes with the launch of products that secure health concerns.