The Government of India has approved significant changes in Foreign Direct Investment in single brand and multi-brand retail trading on 24th November, 2011 based on the recommendations of the Committee of Secretaries, Government of India. It is for the first time that the Indian Government has approved foreign investments into multi-brand retail trading. The present move provides a window of opportunity for large retail supermarkets across the globe to make a foray into the ever-expanding consumer base in India.
Furthermore, single brand retail trading has also received considerable stimulus with 100% FDI now being permitted in this sector. This creates a clear path for investments to be made by foreign companies which are involved in trading under a single brand internationally. The changes it is hoped would be shortly notified by making relevant changes in the Consolidated FDI Policy issued by the DIPP and the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000. To understand the import of the salient changes accepted by the Government, the march of law with respect to FDI in retail trading is sequentially provided herein below.
Prior Position
There was a complete prohibition in multi-brand retail trading as per Paragraph 6.1 of the Consolidated FDI Policy dated 1st October, 2011 issued by the Department of Industrial Policy and Promotion (DIPP). FDI in single-brand retail trading was allowed up to 51% under the Government Route subject to the fulfilment of the following conditions [Paragraph 6.2.16.4 of the Consolidated FDI Policy dated 1st October, 2011 issued by DIPP]:
- 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.
- Only products which are branded during manufacturing would be covered
- The foreign investor should be the owner of the brand.
In addition, the application for single brand retail trading was to be submitted to the Secretariat of Industrial Assistance, DIPP who would consider compliance with the aforementioned guidelines. The application would then be scrutinized by the FIPB for Government Approval.
Changes approved by the Cabinet
A. Single Brand Retail Trading
As per the changes approved by the Cabinet, 100% Foreign Direct Investment will be allowed in single brand retail trading. The prior conditions identified in the earlier policy have been retained. The conditions are single brand, same brand internationally, products branded during manufacture and foreign investor to be the owner of the brand.
B. Multi-brand Retail Trading
The latest changes provide that 51% Foreign Direct Investment in the multi-branding retail sector with the FIPB Approval would be allowed, inter alia, subject to the fulfilment of the following conditions:
(a) Minimum of US $ 100 Million to be brought in by foreign investors.
(b) 50% of the total FDI should be in back-end infrastructure.
(c) 30% of the procurement of manufacturing products should be from small industries.
(d) The retail stores will only be allowed in cities with a population of more than 10 lakh people as per the 2011 Census. As of now there are only 51 such cities in India.
(e) The Government reserves the first right to procure agricultural products.
(f) Fresh agricultural produce including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.
Concluding remarks
The benefits of introducing FDI into multi-brand retail coupled with the conditions of investment in back-end infrastructure could pave the way for improving supply chain infrastructure and logistics besides curbing inflation. This would also result in reduced cost to the ultimate consumer and enable a fair return to the farmers. However, percolation of these benefits depends more importantly on the present political climate wherein the debate over the introduction of the FDI in multi-brand retail rages intensely inside and outside the Parliament, on the streets and in the media. It is to be seen as to how the Government would tread this path and ensure a friendly investment climate prevails and consequent benefits reach people of this country.
Notes
1. Back-end investment is the investment made towards processing, manufacturing, distribution, design improvement, quality control, cold chain, warehouses and packaging, amongst others.
2. Small industries are units which have a total plant and machinery investment not exceeding $250,000 at the time of installation, without providing for depreciation.
[The authors are Consultant and Associate respectively, in Corporate Division, Lakshmikumaran & Sridharan, New Delhi]