September last year, the Government of India liberalized the foreign direct investment ("FDI") policy relating to retail trading with a view to promote foreign investment. Despite reforms introduced by the Government, the retail trading sector was unable to attract large international retailers given the ambiguity and stringent conditions attached to such investments. This forced the Government to provide clarifications1 or reforms2 in order to ease the entry of foreign investors into the Indian retail markets.

Accordingly, the Government of India has now announced the relaxation of certain conditions that were applicable to FDI in single brand product retail trading ("SBPRT") and multi brand retail trading ("MBRT").

FDI POLICY RELATING TO RETAIL TRADING

In January 20123, 100% FDI was permitted in SBPRT. Subsequently, owing to tremendous pressure, the Government further liberalized the FDI policy and permitted up to 51% FDI in the MBRT. Such investments however, had to be made with prior government approval and were subject to a number of conditions. You may refer to our earlier hotlines "India Notifies 51% FDI in Multi Brand Retail Trading" and "India breaks the FDI shackles: Multi Brand Retail Trading and other sectors liberalized" where we have analyzed the provisions of the FDI policy in relation to SBPRT and MBRT.

Since the reforms introduced did not result in adequate investment in SBPRT and there was no investment in MBRT, the Union Cabinet approved certain changes to the FDI policy relating to SBPRT4 and MBRT5 on August 1, 2013. These changes will amend the relevant paragraphs of the FDI policy upon notification by way of press notes.

KEY AMENDMENTS TO FDI POLICY FOR SBPRT

Pursuant to the notification, one of the important changes that will be brought about in the FDI policy will relate to allowing FDI up to 49% under the automatic route (no Government approval required) in SBPRT. Since 2006, the policy on SBPRT has been liberalized in a phased manner. This change would pave the way for many brands that are willing to operate through the joint venture structure with a local resident holding 51% in the Indian single brand retail entity. The prevalent conditions relating to brand ownership, sale of products under a single brand internationally, branding of products at the time of manufacture for FDI in SBPRT sector, as stipulated under the FDI policy, shall continue to apply for FDI up to 49% even though allowed under the automatic route. In addition, for investments up to 49% under automatic route, the product/product categories as well as documents evidencing brand ownership will have to be submitted to the Reserve Bank of India ("RBI").

The Union Cabinet also approved certain key changes in relation to the SBPRT are as follows:

Click here to view table.

KEY AMENDMENTS TO FDI POLICY FOR MBRT

The key amendments to the FDI policy are as follows:

Click here to view table.

CONCLUSION

Since 2006, the Government of India has taken a calibrated approach towards liberalizing the retail sector in an effort to balance the need for foreign investment and the political turmoil surrounding the issue. With these amendments, the Government has taken a step forward in the reform process.

While it appears that the Government has effected these changes based on industry feedback, a number of issues raised by potential investors still remain to be answered. While investment in SBPRT is showing signs of growth, the real test of these reforms will be FDI in MBRT. India needs to accelerate the reform process and encourage both domestic and foreign investment in the retail sector.