The Indian retail market has seen phenomenal growth in the past few years mainly due to the liberalization of the foreign direct investment (FDI) policy pertaining to the sector. While the Government of India has permitted FDI in both ‘single brand’ as well as ‘multi-brand’ retail trade, yet it is in a constant bid to boost FDI in the sector as talks between various bodies emerge for a proposed liberalization of the FDI Policy.
The Department of Industrial Policy and Promotion (DIPP) had mooted a further liberalization of the FDI Policy pertaining to the ‘single brand’ retail trade sector. In respect of the proposals involving FDI beyond 51%, the DIPP was considering a proposal to remove the mandatory requirement of sourcing 30% of the value of goods purchased, from India. Further, the proposal to allow ‘single brand’ retailers to sell sub-brands or sell under different trademarks was also being considered. However, the Minister of Commerce and Industry, Ms. Nirmala Sitharaman has recently stated that there is no proposal under consideration by the Government to amend the sourcing requirements under the FDI Policy. In relation to the proposals for permitting FDI in the retail e-commerce space, Ms. Nirmala Sitharaman has also clarified that FDI in the e-commerce segment is banned. Despite the Government’s stand, very recently in October, 2014, the industry body Associated Chambers of Commerce and Industry has yet again appealed to the Government to review the possibility of allowing 51-100 per cent FDI in e-commerce retailing and for a level playing field for FDI in online and offline retail.
In the wake of this potential liberalization, we have taken the opportunity to take a look at regulation of the ‘single brand’ and ‘multi-brand’ retail trade sector as per the FDI Policy, 2014 (FDI Policy).
Single Brand’ Product Retail
The FDI Policy presently allows 100% FDI in ‘single brand’ retail trade, where, up to 49% FDI is allowed under the automatic route. All proposals of FDI beyond 49% and up to 100% require the approval of the Government i.e. the Foreign Investment Promotion Board.
Further, a very important requirement where FDI crosses 51% in any particular instance is that, 30% of the value of goods purchased must be done from India, preferably from micro, small and medium enterprises, village and cottage industries, artisans and craftsmen, in all sectors. The procurement requirement has to be met, in the first instance, as an average of five years’ total value of the goods purchased, beginning 1st April of the year during which the first tranche of FDI is received and thereafter, it has to be met on an annual basis.
The FDI Policy also imposes the following conditions:
- Products to be sold should be of a ‘single brand’ only
- Products should be sold under the same brand internationally i.e. in one or more countries other than India
- Covers only products which are branded during manufacturing
- More than one non-resident entity, whether owner of the brand or otherwise, can engage in ‘single brand’ retail trading for the specific brand, directly or through a legally tenable agreement with the brand owner. The onus of ensuring compliance with this condition is with the Indian entity conducting ‘single brand’ retail trade. At the time of seeking approval, the investing entity must provide evidence to this effect, including a copy of the licensing/ franchise/sub-license agreement, specifically indicating compliance with the above condition. The requisite evidence should be filed with the Reserve Bank of India for the automatic route and Secretariat for Industrial Assistance/Foreign Investment Promotion Board for cases involving approval
- For cases involving FDI up to 49% under the automatic route, certain filings have to be made with the Reserve Bank of India, such as requisite evidence of compliance with the brand ownership norm and submission of the list of products/product categories (except food products) proposed to be sold in India
- Retail trading by way of e-commerce is prohibited
Multi-brand’ product retail trading
The Government has permitted 51% FDI in ‘multi-brand’ retail trading subject to certain conditions. Although FDI in ‘multi-brand’ retail has been allowed, the policy is an enabling policy only and the State Governments/Union Territories have the discretion to implement the policy.
The FDI Policy stipulates that a minimum amount of USD 100 million has to be brought in by the foreign investor. Furthermore, at least 50% of the total FDI brought in the first tranche of USD 100 million must be invested in ‘back-end infrastructure’ within three years. Any subsequent investment in back-end infrastructure can be made by the foreign entity as needed, depending on the business requirements.
The FDI Policy stipulates that mandatory sourcing of 30% of the value of procurement of manufactured/ processed products purchased, shall be done from ‘micro, small and medium industries’ having total investment in plant and machinery up to USD 2 million as well as from agricultural co-operatives and farmers co-operatives. Moreover, the small industry status would be reckoned from the time it is first engaged by the retailer and would continue to qualify as small industry even if it outgrows its investment limit during the course of its engagement with the said retailer. The procurement requirement has to be met, in the first instance, as an average of five years’ total value of the manufactured/ processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received and thereafter, on an annual basis.
The FDI Policy stipulates the following conditions:
- Fresh agricultural produce, such as fruits, vegetables, grains, poultry and meat products may be unbranded
- Self-certification by the company to ensure compliance with the FDI Policy conditions has to be done and proper accounts are to be maintained
- Retailers can set up stores in those states that have agreed to implement FDI in ‘multi-brand’ retail, even if such states have cities not having population of more than one million
- The Government has the first right to procure agricultural products
- Retail trading by way of e-commerce is prohibited in ‘multi-brand’ retail
The Government’s stand on FDI in retail trade may not be meeting the industry and investor expectations, yet the silver lining is that the new Government is focused on boosting investment sentiments in India. The Government has recently, initiated proposals for easing the country’s cumbersome labour laws and cutting red tape through reforms such as e-governance and single-window platform for compliance with labour laws.