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The Foreign Investment Promotion Board (FIPB) has declined to approve a move by liquor major UDV India - engaged in production of a number of popular brands including Smirnoff, VAT69, Black & White, and Archers Peach Schnapps in India - for bottling of these products through contract bottling units (CBUs).

Also engaged in import and marketing of premium brands like Johnnie Walker, J&B, Gordons and Bailey's Irish Cream, the company was keen to get FIPB approval for arrangements with CBUs since its production in India had declined sharply following the exit of Gilbey's Green Label whisky from its portfolio.

UDV India has already entered into arrangements with various OBUs including Konkan Agro Marine Industries of Maharashtra and the Barwaha (Madhya Pradesh) and Kothputli (Rajasthan) units of Associated Alcohol Breweries for bottling the brands produced in India. While Guinness-UDV India managing director Amar Raj Singh was not available for comment, government sources said the company had requested FIPB to "take on record" its new operating strategy which involves third party bottling and distribution arrangements.

Pacts have been finalised between three OBUs and 10 (1) Pvt Ltd, a company which holds the original IMFL manufacturing licence used by UDV India. These OBUs are already working for UDV India and the company wanted formal FIPB approval for this arrangement, the sources said. According to the existing policy, 100% foreign direct investment (FDI) is allowed in potable alcohol. However, creation of additional capacity for manufacture of potable alcohol is not permitted in view of a ban imposed by the government in '75. Export oriented units are the only exception to this rule.

Therefore, FIPB provides clearances for FDI in this sector on the condition that only existing capacity would be used. What makes matters complicated is the legal position on who is empowered to issue industrial license for setting up units for potable alcohol - state governments or the Centre?

While the Centre has not issued any licenses for new units since '75, many units are operating under licence from state governments. In the meanwhile, the Supreme Court had ruled that all industries engaged in manufacture of potable alcohol would be under the control of state governments. Making the situation more complex is a Kerala High Court order which has observed that obtaining an licence under the Industrial (Development & Regulation) Act is not enough to start a potable alcohol unit.

As a result of legal compulsions and the challenge to the central government's authority, the FIPB has not been recognising potable alcohol units running on licences issued by state governments. A foreign investor has to necessarily have a tie-up with a manufacturing unit licensed by the Centre.

In the case of UDV, since the OBUs chosen by the company are operating under licences provided by state governments, the FIPB has declined approval for the third party manufacturing arrangement. Technically, that makes the arrangements with OBUs "unauthorised" in the eyes of the central government.

UDV's claim is that it had to exit local production since volumes have declined to two lakh cases as compared to the earlier situation of two million cases, senior government officials said. The company had informed the FIPB that it had to discontinue production in India due to low volumes, preferring to concentrate on marketing. No royalty or technical know-how fees is being charged for this technical arrangement as this is necessary to keep business viable, the company had argued.

UDV India had earlier obtained permission from FIPB to carry out wholesale trading. The food processing ministry had suggested that the company should be permitted to do wholesale trading in the brands produced in India too, rather than restricting it to imported brands. Officials said the FIPB was not inclined to expand the wholesale trade permission to Indian brands.

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