Development of Foreign Direct Investment in Retail

by Ms. Shreya Gupta, 5^th Year B.A., LL.B. (Hons.), JGLS

Foreign Direct Investment (“FDI”) in retail has been a much-debated topic in India wherein arguments favoring and contradicting FDI in India within the retail sector have been advanced. Until 2011, the Central Government was opposed to opening up the retail sector to foreign investors. However, realizing that the lack of cold storage infrastructure and other logistics will result in wastage of perishable items, and that most of the retailers in India are small shops which do not have the resources to build the back-end infrastructure, the Central Government relaxed its stance considerably. These concessions are explained below, however, it is the author’s opinion that even though 100% investment is allowed in cold storage and related infrastructure, it is unlikely that many foreign investors will invest unless there are real possibilities for organized retail.

Single-Brand Retail Trading (“SBRT”) and Multi-Brand Retail Trading (“MBRT”) in India has undergone tremendous changes pursuant to three notifications issued by the Department of Industrial Policy and Promotion (“DIPP”) in January 2012, September 2012 and August 2013.

The Notification passed in January 2012 made changes with regard to the SBRT regime in India. These changes are as follows:

•     Increased threshold limit for FDI from 51 % to 100% through the approval route. Foreign brands like Nike, which has up till now held stores in India through franchise outlets, can now actually hold 100% of its Indian business. It is to be noted that this relaxation has been made subject to a few conditions-:
•    Where the FDI is greater than 51%, 30% of the products are required to be sourced from small-scale industries, artisans and craftsmen. The upper limit for determination of these industries has been stipulated as USD 1 million of investment. This value is determined at the time of installation.
•    Approval is required to be taken through the government route. Application has to be made to the Secretariat of Industrial Assistance of DIPP, while mentioning the categories proposed are to be sold under the SBRT regime. DIPP processes the applications, which are followed by the approval of Foreign Investment Promotion Board.

In September 2012, the Central Government issued another notification permitting 51% of FDI in the MBRT sector, subject to the following conditions:-

1.      50% of the FDI brought in the first 3 years is required to be invested in the back-end infrastructure.

2.      30% sourcing is mandated from small-scale industries, with a maximum investment at the time of installation be USD 1 million.

3.      Minimum amount brought in by foreign investors is prescribed as USD 100 million.

4.      MBRT outlets can only be set up in cities with a minimum population of 1 million.

5.      These outlets are required to get approval through the government approval route.

Even after incorporating the above changes, applications were not received from many foreign investors who were willing to invest in SBRT and MBRT in India. Subsequently, the Union Cabinet went on to approve changes relating to SBRT and MBRT and issued a notification on August 1, 2013 to the following effect:

SBRT Up to 49% via automatic route (only the details regarding product categories made to the Reserve Bank of India).  Paves way for foreign brands that are ready to come through Joint Ventures (“JVs”) with an Indian resident holding. Above 49% requires government approval.

MBRT 30% sourcing requirement can be fulfilled from micro, small- and medium-scale industries which have a total investment in plant and machinery equal to or more than USD 2 million at the time of engagement. The state has discretion to choose which city it wants to permit a MBRT outlet.

Despite these changes in FDI policy, there have been a lower number of invitations from foreign investors to invest than one would have been expected. India has a complex regulatory environment which makes it one of most difficult places in the world to do business as is evidenced by the fact that India ranks 134th on the World Bank’s “Ease of Doing Business” Index in 189 countries.

India’s maze of byzantine regulations have given India a name as an unfriendly destination for foreign investment and India must enhance its image before the rest of the world so a change in investor-oriented policies can actually bring the desired level of  foreign investment. Allowing foreign retailers’ entry into India markets, in which they could not earlier make inroads, is a step ahead in the right direction.