In a significant move to boost foreign direct investment in India’s single brand retail trading (“Single Brand Retail”), the Government of India (“GOI”) in a Press Note released on November 10 announced its liberalized Foreign Direct Investment (“FDI”) policy that eases local sourcing requirements and approval process for FDI in Single Brand Retail, among other major reforms.
Unveiling the FDI reforms for as many as 15 sectors and noting India’s improved ranking in World Bank’s 2016 Study of Ease of Doing Business, the GOI said the “crux of these reforms is to further ease, rationalize and simplify the process of foreign investments in the country and to put more and more FDI proposals on automatic route instead of Government route where time and energy of the investors is wasted.”
These reforms are aimed at streamlining the entire foreign investment environment by opening up sectors and removing obstacles to doing business with and investing in India.
Which FDI rules have changed in Single Brand Retail?
The key FDI reforms are summarized below:
- Timing for mandatory local sourcing is eased. Under the extant FDI rules, foreign owned single brand stores with more than 51% foreign investment are required to locally source at least 30% of the value of products sold and such requirement is reckoned from the date of the FDI investment. Now, the timing to source is eased by reckoning compliance from the date of opening of the first store. This provides some relief to foreign retailers because by counting the time to comply with this rule from store opening, they will have more time to comply with the requirement and to build long-term sustainable supply chains that would benefit not only the businesses but also India and Indian consumers.
- Local sourcing requirement may be waived. In certain situations where it may not be possible for the foreign investor to source locally in certain high technology segments, the mandatory requirement may be waived. More specifically, the sourcing norms in “state-of-art” and “cutting edge technology” may be relaxed subject to government approval. Global brands, particularly those offering technology products, will now be able to seek a waiver from the government if local supply chain is inadequate to meet their required high tech specifications.
- Single brand retailers allowed to undertake e-commerce activities. The extant FDI policy did not permit FDI in the retail e-commerce space, which restriction has now been lifted. Going forward, foreign single brand stores with permission to undertake Single Brand Retail (i.e., sell through brick-and-mortar stores) in India will be permitted to engage in e-commerce activities and sell products through online channels. With e-commerce business booming in India in recent years, this opens up a significant investment opportunity for foreign retailers.
- Same entity can carry out both Single Brand Retail and Wholesale. The extant FDI policy did not permit the same entity to undertake both the activities of Single Brand Retail and wholesale in India, which has now been changed. A single entity can now carry out both wholesale and Single Brand Retail activities in India which opens up a significant opportunity for global single brand retailers interested in operating a mix of retail and wholesale activities in India.
- Indian brands are equally eligible for undertaking retail trading. However, certain conditions of the FDI policy applicable to the sector will not apply in case of FDI in Indian brands.
- Indian manufacturers with 70% FDI can now sell online. Indian manufacturers with foreign investment that are controlled by Indians can now sell their products in any manner, i.e., wholesale, retail, including through online channels, provided they make 70 % of the products and source the remainder from local companies. Earlier, they could sell online only if they made 100% products in house.
What Has Not Changed in Single Brand Retail?
- Government approval is still required for FDI beyond 49%. While 100% FDI is permitted in single brand retail trading companies in India, all proposals above 49% up to 100% still require government approval which can be a lengthy process. FDI up to 49% is allowed under the automatic route subject to certain filings with the Reserve Bank of India.
- Mandatory local sourcing still applies to FDI beyond 51% requiring that at least 30% of the value of the goods sold be sourced from India. For many foreign retailers, this requirement presents an obstacle to entering the Indian market due to myriad challenges in India’s supply chain. The eased rules noted above, however, are likely to abate some of these concerns.
- Products to be sold should be of a single brand in India, sold under the same brand outside India, and branded during the manufacturing process.
- A foreign investor, whether owner of the brand or otherwise, is permitted to undertake single brand product retail trading in India for the specific brand, directly or through a legally tenable agreement with the brand owner. Such foreign investor can undertake single brand retail trading business through one or more wholly owned subsidiaries or joint ventures.
Implications for Global Retail Brands
The liberalized FDI rules in Single Brand Retail are a welcome step in the right direction and demonstrate India’s continued commitment to progressively liberalize its retail sector. With further easing of the FDI rules, India’s growing retail market presents significant opportunities for global retail brands but challenges still abound. For global retailers keen to enter or expand in India, it is vital to fully assess India’s changing regulatory framework and devise their business models and India entry strategy to fit the changing operating environment so as to avoid pitfalls and have success in the Indian market.