The government is considering a proposal to prohibit foreign direct investment (FDI) in licensing arrangements involving franchises, trademarks, brand names and management contracts in the tobacco sector, according to sources. The proposal remains at an early stage and is still under discussion.

The move could further tighten India’s foreign investment rules for the tobacco industry, where direct foreign investment in manufacturing certain tobacco products is already prohibited.

Government Reviews Existing Tobacco FDI Rules

At present, foreign direct investment is prohibited in the manufacturing of cigars, cheroots, cigarillos and cigarettes made from tobacco or its substitutes.

However, foreign investment is permitted in technology collaboration in the tobacco sector, including arrangements involving franchise licensing, trademarks, brand names and management contracts.

The government is now evaluating whether these permitted activities should also be brought under restrictions. The proposal is still being examined, and no final decision has been taken.

If implemented, the proposed changes would expand the scope of restrictions on foreign investment in the tobacco sector beyond the existing manufacturing ban.

Similar Proposal Considered in 2024

The proposal is not new. In 2024, the Commerce and Industry Ministry worked on a plan to tighten foreign direct investment norms in the tobacco sector.

The earlier proposal aimed to check promotional activities and curb smuggling in the segment, amid concerns that some firms were attempting to circumvent existing regulations.

However, the government did not take a final decision at the time because of concerns raised by certain groups, including tobacco farmers’ associations.

The renewed discussions indicate that the issue remains under consideration. The government will need to weigh the objectives of tightening tobacco-related investment rules against concerns raised by stakeholders in the sector.

India’s Commitments Under WHO Tobacco Control Framework

The proposed restrictions also assume importance because India is a signatory to the World Health Organization’s (WHO) Framework Convention on Tobacco Control.

Under the convention, India has a responsibility to work towards reducing the consumption of tobacco products.

The government’s review of foreign investment rules comes against the backdrop of the country’s substantial tobacco-consuming population and the public health concerns associated with tobacco use.

According to the estimates cited in the report, cigarettes account for only 10 per cent of tobacco consumption in India. The health burden is largely associated with oral tobacco products and bidis.

India is estimated to have around 250 million tobacco users, making it the world’s second-largest tobacco-consuming population after China. The country also has more oral tobacco users than the rest of the world combined, according to the figures provided.

These estimates underline the scale of tobacco consumption in India and the challenges involved in regulating the sector.

Tobacco Board Established to Regulate the Sector

India established the Tobacco Board under the Tobacco Board Act of 1975, with the board coming into existence in 1976.

The board was set up in recognition of the need to regulate production, promote overseas marketing and address recurring imbalances between supply and demand.

Such imbalances can create market-related problems, making the regulation of production and marketing an important aspect of the tobacco sector.

Any changes to foreign investment rules could therefore have implications for a sector that involves domestic production, overseas marketing and multiple stakeholders, including farmers and businesses.

However, the proposal under consideration specifically concerns foreign investment in licensing and related arrangements. The available information does not indicate that the government has finalised the scope of any new restrictions.

FDI Inflows Rise in April-June Quarter

The discussions on tobacco-sector investment norms come as foreign direct investment inflows into India increased during the first quarter of the current financial year.

FDI rose by 6 per cent to USD 19.81 billion in April-June, according to the figures provided.

The proposed tobacco-sector restrictions remain at the discussion stage, and the government has not announced a final decision. The outcome will determine whether India further narrows the scope for foreign participation in tobacco-related licensing, branding and management arrangements.

For now, the existing prohibition on foreign investment in the manufacturing of specified tobacco products remains distinct from the licensing activities that are permitted under current rules.

The government’s next steps will be important in determining whether the proposed restrictions move forward after consideration of regulatory objectives and stakeholder concerns.