FDI in retail - MNC retailers to select partners with suitable capabilities (continued)

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Foreign multi-brand retailers, who did not want to enter India through cash-and-carry route, may now explore Indian presence, as they would be able to directly own stake in multi-brand retailing. Foreign retailers such as Sainsbury's, Lawson and others may now explore Indian retail market.

Multi-brand foreign retailers that have already invested in India under cash-and-carry arrangements, such as Walmart, Metro, Carrefour, Tesco, and Woolworths, now have an option to invest in Indian companies undertaking direct retailing.

In existing single-brand retail joint ventures, the foreign multinational joint-venture partner would have the flexibility to raise its stake in the venture beyond 51%. For existing Indian retail players, such as Reliance, Trent, Shoppers Stop and the Future Group, this could provide further options to raise long-term capital for expansion and to attract partnerships with some global players.

This will help bring capital as well as global best practices and retail expertise to the Indian businesses.

Single-brand foreign retail players, who have so far restrained themselves from entering the country for reasons such as wanting the entire stake or ownership in an Indian single-brand retail entity, may now want to explore the Indian market.

One may also potentially see present licensing, distributor or franchise arrangements being converted to either joint ventures with respective foreign retailer or brands, or foreign retailers completely buying out the Indian licensee, franchisee or distributor.

In multi-brand retailing, as the foreign retailer can own a maximum stake of 51%, the retailer would have to scout for an Indian partner to enter Indian multi-brand retail sector.

Further, one will have to wait for clarification on whether the entire amount of minimum capitalization of $100 million is to be invested upfront or over a period of time. Also, would such a condition be too onerous for certain categories of multi-brand retailing such as sport goods, watches, stationery, apparel and electronics.

Also, to comply with the norm of minimum 50% investment in back-end infrastructure, retailers would need to have a precise interpretation of the term back-end infrastructure. Another key condition is that foreign retailers should source certain minimum percentage from micro, small and medium enterprises. This could provide an impetus to the growth of the small-scale sector.

With this relaxation of FDI in multi-brand retailing, it remains to be seen whether the government will also relax the restriction on cash-and-carry companies that are barred from supplying more than 25% of their turnover to group companies.

While FDI in retail sector has been relaxed with conditions, potential foreign retailers would assess customer dynamics, competition, supply chain, infrastructure and import regulations.

They would also typically want to select a partner with complementing capabilities and cultural fitment, adapt products for the diverse Indian micro-markets, use appropriate sourcing models to manage costs and appeal to the Indian customer, and understand the tax and regulatory landscape in India.

(The author’s views are personal)