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Monday, Jul 08, 2002

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100% FDI may not cheer tea sector

Kohinoor Mandal


A HIGHLY unionised labour force, poor tea prices and extremely low returns on investments will make potential foreign investors think twice before putting their money into the Indian tea sector despite the Union Government's decision to allow 100 per cent foreign direct investment.

Further, the stipulation that 26 per cent of the FDI will have to be divested to an Indian partner within five years is also expected to serve as a disincentive to interested foreign investors.

The industry feels that the stipulation will be a major roadblock because five years is too short a time period for any fair return on investment to be generated.

This apart, it is felt that the decision of the Union Government has not come at the right time. World over, there is over-supply in the tea industry which has resulted in pressure on prices. Clearly, this is not the right time to make fresh investments in the sector.

While the average rate of interest in the Indian debt market is 12-14 per cent, the return on investments in the Indian tea sector is less than 10 per cent. This means that fresh investments as a result of the decision on FDI is unlikely.

Another important depressing factor is that there is hardly any land available for developing it into a tea garden other than in "new'' areas such Orissa, Uttar Pradesh and others.

The only option, therefore, available to new investors is a total buyout of existing tea gardens, which, among other things, will not create any fresh employment opportunities.

In order to buy out a tea garden in West Bengal, there is a further hurdle in the shape of a salami of Rs 15,000 per hectare which, according to the industry, is in any case too high. In fact, there are court cases pending on this matter.

In the Indian tea corporate sector, there will hardly be any change due to the Government decision.

Currently, there are three or four leading foreign companies in the tea sector. The first is Hindustan Lever Ltd, followed by the Goodricke group and George Williamson (Assam) Ltd. Warren Tea also has some foreign holding.

Hindustan Lever does not stand to gain from the Government's decision. This apart, its 100 per cent acquisition of Rossell Industries is almost complete.

It may be noted that two years ago the Union Government turned down Unilever's proposal to acquire 100 per cent of this company.

Hence, the Dutch major floated Lipton India Exports Ltd, a wholly-owned subsidiary of Hindustan Lever. Unilever Plc acquired approximately 37 per cent of Rossell Industries through its wholly-owned subsidiary, Unilever Overseas Holdings, the rest being acquired by Lipton India Exports.

In the case of the two other companies, Goodricke group and George Williamson (Assam), there will be no change in the foreign holding, according to their chief executives. The foreign promoters' holding in Goodricke is 74 per cent and the Magors hold around 70 per cent in George Williamson.

Mr S.K. Mitra, Chairman of George Williamson asked: "Why will the Magors increase the stake when they will have to divest it within five years?''

Mr K.S. David, Managing Director of Goodricke, felt that increasing the stake "does not make any sense''.

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