The Indian Department of Industrial Policy and Promotion has just released its updated Foreign Direct Investment Policy. The Indian Government earlier this year announced changes to the laws affecting foreign investment in the retail sector, paving the way for foreign retailers selling single branded products to move into India without having to partner with an Indian company. The previously announced reforms that would have allowed foreign-owned supermarkets to operate have been shelved, at least for the time being.
Less than a month after suspending the implementation of various reforms relating to direct foreign investment (FDI) in the retail sector,the Indian Government confirmed that it would proceed with its previously announced changes, but only in relation to the FDI laws relating to single brand retailing. Prior to the changes announced on 10 January 2012, foreign investors were permitted to invest in the retail sector in India, provided that they were involved in single brand retail, their equity stake in the relevant investment company was no greater than 51 per cent, and they met various other conditions specified by the Indian Government. The Indian Government revised this position and announced on 10 January 2012 that FDI up to 100 per cent will now be permitted for single brand product retailing. This has now been confirmed, but there are a number of conditions to be satisfied. The updated Foreign Direct Investment Policy sets out these conditions.
A key condition that must be satisfied is that the foreign investor must be the owner of the brand under which its products will be sold in India. Another condition is that if the foreign investor owns more than 51 per cent in the relevant investment company, it must source at least 30 per cent of the value of products sold from Indian “small industries/village and cottage industries, artisans and craftsmen”. The Government has indicated that “small industries” will be industries that have total investment in plant machinery not exceeding US$1 million. This condition has clearly been included to protect the interests of India’s local markets (a major issue of concern was raised when amendments were proposed to the laws affecting multi-brand ownership), however it may have a considerable impact on some potential investors. While some international retailers already source many products from India, others are likely to have issues sourcing products that meet their quality standards or requirements.
The proposed changes to the FDI laws relating to single brand retail are a positive step forward. However foreign retailers considering moving into India without an Indian partner need to carefully consider whether they can meet the various conditions imposed on foreign investors, including the conditions referred to above, and what overall impact this would have on their business. In practice it is often possible to navigate around strict compliance with some of the conditions.