The Government of India ("Indian Government") has approved a number of far-reaching amendments to India's foreign direct investment ("FDI") policy in the retail sector through the issuance of Press Note 4 of 2012 and Press Note 5 of 2012, each dated September 20, 2012. These amendments are discussed below.
Earlier this year, the Indian Government had permitted up to 100% foreign investment in single-brand retail trading in India with the prior approval of the Foreign Investment Promotion Board ("FIPB"), the authority constituted to approve/reject FDI proposals. One of the key requirements for the investment was that only the applicable non-resident brand owner could invest in an Indian company undertaking single brand retail trading activities. Additionally, single brand retail companies with foreign investment exceeding 51% had to procure 30% of the value of the products sold from Indian small industries, village and cottage industries, artisans and craftsmen.
The Indian Government has amended the existing regime by promulgating the following amendments:
- A non-resident company investing in a single brand retail Indian company may be different from the entity which actually owns the brand. Consequently, today, a brand owning non-resident entity and a non-resident entity having rights to use of the brand are entitled to undertake single-brand retail trading in India. However, only one non-resident entity is permitted to make the investment for a specific brand. If a brand licensee/franchisee is the investing entity, then it is required to provide a copy of the relevant brand license/franchise agreement to the FIPB at the time of seeking the investment approval.
- A significant change has also been made to the local procurement obligations. Now, 30% of the goods purchased (and not 30% of the value of the products sold) must be procured preferably and not mandatorily from micro, small and medium enterprises, village and cottage industries, artisans and craftsme.
- Foreign single-brand retail trading companies are not permitted to engage in trading their products through electronic commerce. Thus, online sales are not permitted.
FDI was prohibited in multi-brand retail trading. The Indian Government had approved the liberalization of this sector in late 2011 but the decision was put on hold due to political opposition to foreign multi-brand retail.
Press Note 5 of 2012 sets out the new policy on foreign investment in the multi-brand retail sector. It provides for up to 51% FDI in the multi-brand retail trading sector subject to the prior approval of the Indian Government . Certain conditions have to be fulfilled by a foreign investor in order to participate in the multi-brand retail trading sector in India, which are the following:
- A non-resident investor is required to invest a minimum of USD 100 million in the relevant multi-brand retail company ("MBRC").
- 50 per cent of the FDI proceeds are to be invested by the MBRC in "back-end infrastructure". Back-end infrastructure has been clarified to include processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure. "Front-end units" (e.g., land acquisition cost and lease payments) are specifically excluded from "back-end infrastructure". MBRCs will have three years to establish the back-end infrastructure.
- An MBRC has to source at least 30 per cent (in value) of the products from 'small industries' in India. The flexibility to procure from micro, small and medium enterprises (as in the case of single brand trading companies) has not been extended to the multi-brand retail trading sector. However, as in the case of single-brand retail trading (see footnote 3 above), this procurement requirement is required to be met, in the first instance, as an average of five years' total value of the goods purchased by the relevant company, beginning 1st April of the year during which the first tranche of FDI is received. Subsequently, the compliance will have to be ensured annually.
- An MBRC can only set up outlets in Indian cities with a population of more than 1 million and may also cover an area of 10 kilometers around the municipal/urban agglomeration limits of such cities. Based on provisional data from the 2011 Census of India, there are roughly 53 Indian cities with a population of at least 1 million. In Indian states that do not have cities with population of more than 1 million, retail outlets can be set up in cities of the MBRCs' choice. All retail outlets have to comply with the applicable zoning regulations and plans.
- An MBRC can set up retail outlets only in those Indian states that permit FDI in the multi-brand retail sector All retail outlets will have to comply with the applicable state rules and regulations governing retail such as the Shops & Establishments Act, etc.
- MBRCs may sell unbranded fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products. However, the Indian Government has the first right to procure agricultural produces from the market.
- MBRCs are not permitted to engage in trading of their products through electronic commerce.
Compliance with the abovementioned requirements can be self-certified by the relevant MBRC, although the MBRC must maintain proper records for inspection by governmental authorities/statutory auditors.
The liberalization of the retail sector provides an immense opportunity for foreign investors to invest and benefit from India's growth story.