We often come across tobacco control programs and ‘Quit Smoking’ campaigns run mainly by the government. Yet we see PSUs and government-backed entities investing in tobacco players like ITC and VST Industries. A Right to Information (RTI) filed by Voice of Tobacco Victims (VoTV) in 2011 revealed that Life Insurance Corporation of India (LIC) had invested nearly Rs 3,600 crore in tobacco companies!
In this article, we address government and insurance companies’ shareholding in tobacco manufacturers.
LIC and SUUTI Shareholding in ITC is Near ~24%
Life Insurance Corporation of India (LIC) is the largest life insurer in our country. The government holds a majority stake in it. LIC holds a nearly 16% stake in the Indian Tobacco Company (ITC). In fact, government-backed insurance companies like General Insurance Corporation of India (listed), New India Assurance (listed), United India Insurance, and Oriental Insurance are the largest investors in ITC, with a combined shareholding of ~21%.
In the insurance business, charging higher premiums to individuals who smoke cigarettes is a norm. Nevertheless, these companies hold a larger stake in a company (ITC) whose business is mainly cigarettes. LIC charges up to ~40% more in premiums to smokers.
SUUTI or Specified Undertaking of the Unit Trust of India, the government’s investment arm, holds a nearly 8% stake in ITC. Now the question is: Higher Cigarette Sales —> Increase In ITC Revenue —> Increase In Premium For LIC —> Tax Revenue for Government? I’ll let you answer that.
Indian Government vs British American Tobacco (BAT)
British American Tobacco (BAT) is a part of the Big Tobacco Cartel. Big Tobacco is an umbrella term for six global tobacco companies that hold a majority stake in at least one cigarette company in every country across the world. BAT holds ~28% stake in ITC and ~32% in VST Industries (another tobacco company).
The government is indulging in a tiff with BAT over concerns of a hostile takeover. BAT has been a dormant shareholder for years, while ITC flourished into other businesses like FMCG, hotels, finance, fashion, IT, etc. All of a sudden, BAT made attempts to increase its stake in ITC. Other major shareholders like financial institutions and government-owned entities prevented BAT from increasing its shareholding in ITC. While ITC intends to flourish in different ‘non-tobacco’ verticals, the government wants to prevent a foreign entity from entering a lobbied business that brings millions to the government in tax revenue.
Despite the government having large ‘divestment targets’, it has refrained from divesting in ITC for all these years. As of 2022, foreign direct investment (FDI) remains prohibited in the manufacturing of cigars, cigarettes, and tobacco substitutes. The plausible reason for the government’s move could be diplomatic/economic instead of moral/ethical.
What are your views on the Indian government’s shrewd stance on tobacco? Let us know in the comments section of the marketfeed app.