Endless wait for FDI in multi-brand retail

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The Hindu Business Line

by

K.T. Chandy
Tax Partner
EY

With a population of nearly 1.2 billion, India is a dream destination for global retailers. But their stake in the Indian consumer’s growing wallet is dependent on the Central Government’s evolving policy on FDI in the retail sector, which has caused much political turbulence along the way.

Currently, foreign participation in the multi-brand retail format is not permitted, which is why one does not see the likes of a Harrods, Wal-Mart, or Tesco setting up their hypermarket in India. Global retailers, however, participate in backend wholesale cash-and-carry trading, a retail format in which 100 per cent FDI is permitted, with an Indian partner front-ending it. Thus a foreign retailer cannot undertake pure-play retail trade and transact with an Indian consumer until the Union Cabinet’s revoked decision on allowing FDI in multi-brand retail trade is permitted to go through.

The policy, however, does have strings attached. A foreign investor would be permitted only a 51 per cent stake in the Indian multi-brand retailing company post government approval, and would need to satisfy stringent norms of a minimum investment of $100 million, a 50 per cent investment in backend infrastructure, and a 30 per cent mandatory procurement of products sourced from small industries. Further, a restriction on location of outlets exists, with only cities with a population of one million or more allowed to have FDI-infused multi-brand retail formats.

That aside, FDI in retail is expected to bring to India technical expertise and know-how, with a sophisticated frontend retail presence, in a manner the consumer never imagined. An immediate employment potential of nearly 10 million semi-skilled Indians could enhance the livelihood of that many households.

The multi-brand FDI taboo notwithstanding, FDI in single-brand product retail trading (SBPRT) has had a more liberalised regime. Here FDI is permitted if the products are sold under a single brand in India as well as internationally; the products are branded during manufacturing; and the foreign investor owns the brand. The conditions associated with this sector have led to several regulatory ambiguities, particularly with respect to the need for the foreign investing entity to own the brand, a seemingly futile requirement for a complex MNC doing business worldwide. The FDI limit in this sector was enhanced from 51 per cent to 100 per cent early this year, with fairly stringent riders linked to accessing the higher limit.

Currently, infusion of FDI exceeding 51 per cent triggers the requirement to source at least 30 per cent of the value of products from Indian cottage industries, and the total investment in plant and machinery not exceeding $1 million. The legal interpretations arising from this are numerous. For instance, it is not clear if the entity sourcing indigenous goods should be the investing entity, a group manufacturing company or the SBPRT company. Further, the term ‘value of products sourced from cottage industries’ could have multiple connotations — namely, does it mean cost of products, ex-factory price or sales price? Commercially, too, the policy is unlikely to evoke investor interest in these days of product standardisation, where foreign retailers would need to rely on local manufacturing processes and quality standards for their products. The lukewarm response to this policy highlights the need for the Department of Industrial Policy and Promotion (DIPP) to reconsider it and bring in pragmatic regulation.

All in all, despite the widely divergent sentiment surrounding the opening of the retail sector to FDI, the policy has evolved quite a bit over the years. One hopes, however, that the pulls and pushes of politics would only be stepping stones and not stumbling blocks in the journey towards 100 per cent FDI across the sector.