On 10th January 2012 the Government of India allowed foreign retailers to hold up to 100% shares in a company involved in single brand retail, up from a limit of 51% but subject to a number of conditions. Some of the conditions attached to the policy were difficult in practical terms to implement for most foreign brands.
One that was particularly difficult was the need for the foreign investor to be the owner of the brand. The requirement that 30% local sourcing rule from small scale industries or business was unworkable for many premium brands and unreasonable for a large investor.
Several applications for consent from the Government were either rejected or stuck in the bureaucratic process. As a result, The Government has decided to amend these two most problematic conditions. The current position is clarified in a notification dated 21st September 2012 from the Department of Industrial Policy and Promotion of the Government of India. The conditions amended are:
- Products to be sold should be of a 'Single Brand' only.
- Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.
- 'Single Brand' product-retail trading would cover only products which are branded during manufacturing.
- Only one non-resident entity, whether it is the owner of the brand or otherwise, is permitted to undertake single brand product retail trading in India, for a specific brand. If the applicant is not the owner of the brand, then a legally tenable agreement, has to be in place between the applicant and the brand owner for the purpose. The investor has to provide a copy of the appropriate license / franchise / sub-license agreement with the application at the time of seeking approval from the Government. The Indian entity involved in product retail trading in India has to ensure that it complies with the requirements under the policy.
- Only one non-resident entity, whether it is the owner of the brand or otherwise, is permitted to undertake single brand product retail trading in India, for a specific brand. If the applicant is not the owner of the brand, then a legally tenable agreement, has to be in place between the applicant and the brand owner for the purpose. The investor has to provide a copy of the appropriate license/franchise/sub-license agreement with the application at the time of seeking approval from the Government. The Indian entity involved in product retail trading in India has to ensure that it complies with the requirements under the policy.
- Where the foreign investor is seeking to hold more than 51% shares in an Indian company, 30% of the value of goods purchased, has to be sourced from India, preferably from small and medium sized enterprises, village and cottage industries, artisans and craftsmen. The quantum of domestic sourcing has to be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. This procurement requirement would have 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 foreign direct investment is received. Thereafter, it would have to be met on an annual basis. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading.
- It is not possible to conduct retail trading by means of e-commerce for companies that have foreign shareholding.
- Applications for consent under the 'Single Brand' retail policy would have to be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry. The application has to specifically indicate the product/ product categories which are proposed to be sold under a 'Single Brand'. Any addition to the product/ product categories to be sold under 'Single Brand' would require a fresh approval from the Government. The application will first be examined by DIPP to ensure the investment complies with the guidelines and then it will be sent on to the Foreign Investment Promotion Board for final approval.
- These changes have made it easier for foreign brands to comply with conditions for obtaining consent and made the policy far more transparent than it was before. However, it may well be that other problems arise and so we will be monitoring the way that the policy is implemented.