On September 14, 2012 the Cabinet decided to permit Foreign Direct Investment (“FDI”) in multi-brand retail but the exact terms and conditions attached to this policy has not yet been released officially through a Notification by the Department of Industrial Policy and Promotion of the Ministry of Commerce, Government of India. The multi-brand retail sector in India mainly refers to large supermarket chains. The large international retail chains such as ASDA, Carrefour's, Tesco etc have been waiting years to be able to hold shares in an Indian company which can open supermarkets that can sell directly to the public.
This has generated great excitement amongst some retailers and their advisers, but it may be that their excitement is a little premature. The devil will be in the detail and the detail is not yet clear.
There have been other false dawns. The Government decided on November 24, 2011 to allow FDI in multi-brand retail but had to defer their decision/policy due to strong opposition from various political parties including members of the coalition and local vested interests (such as middlemen and small family businesses).
So what detail is required? Conditions will be attached to any foreign retailers to invest in the multi-brand retail sector. Several have been discussed, but none yet decided. Those which have been discussed so far include:
- The foreign retailer can hold a maximum of 51% of shares in the Indian company.
- Specific consent from the Foreign Investment Promotion Board (FIPB), Government of India would have to be sought.
- A foreign investor would need to make a minimum investment of US $ 100 million.
- 50% of the investment has to be used to develop back end infrastructure (such as cold storage, food processing, manufacture etc) within three years.
- Outlets have to be located in cities with at least a population of 1 million.
Another area of great uncertainty is that each State government will be able to decide whether or not to allow FDI in multi-brand retail in their State and that local State laws will be applicable. There are 28 States and 7 Union Territories in India. This may not be as bad as it sounds because the State governments who have so far opposed the policy will not be able to obstruct international supermarket outlets from opening and operating in the whole of India and retailers can go to States that are welcoming.
We are unable to confirm whether these conditions will feature in the policy due to be announced or whether there will be significant modifications made.
So, at this point foreign retailers must not assume that they can now establish themselves in India without difficulties. We will keep you informed as matters become clearer.