FDI IN MULTI BRAND RETAIL SECTOR - India

7/28/2019 FDI IN MULTI BRAND RETAIL SECTOR - India

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FDI IN MULTI BRAND RETAIL SECTOR DOINGBUSINESSININDIJuly 2013,PublishedbyBrusChambers,Advocates&Solicitors,Mumbai,India Sector:CorporateandComm____________________________________________________________________________________________

Ms.AarseeSingh, legalresearcherwithIndianlawfirm,BrusChambers,studiestheimmediaswellasfarreachingeffectsofallowingForeignDirectInvestmentsintheMultiBrandRetailIndia,thechangesbroughtforthintheFDIPolicyof2013,whileanalysingthecurrentFDIscenainthecountry..

Strategising an entry into a foreign market, Foreign DirectInvestment (FDI) is an advanced strategy for companiesthat wish to operate on a global basis with an entrenchedfootprint. It refers to investment to acquire a lasting interestin an enterprise operating in an economy other than that ofthe investor. Entry through FDI for corporate results infootprint which gives a degree of influence/control over themanagement of the enterprise relative to the structurecreated. It usually involves transfer of management skills,technology, systems, processes and expertise. For acountry it is a sturdy and till date desirable source of capitalinflows as opposed to FII flows which include hot money.FDI being a feature of capital control are generallyapplicable in countries professing capital control and the

regulation varies from country to country.

Foreign Investment in India is governed by sub-section (3)of section 6 of the Foreign exchange Management Act,1999read with notification No. FEMA 20/2000- RB dated May 3,2000. The Ministry of Commerce and Industry, Governmentof India is the nodal agency for monitoring and reviewingthe FDI policy on continued basis and prevails in its sectoralinvestment policy/ sectoral equity cap. The FDI policy isnotified through Press Notes by the Secretariat for IndustrialAssistance (SIA), Department of Industrial Policy and

Promotion (DIPP).The foreign investors are free to invesIndia, except few sectors/activities, where prior approfrom the RBI or Foreign Investment Promotion Bo(FIPB) would be required.

The Department of Industrial Policy & Promotion, MinistrCommerce and Industry, Government of India has releathe Consolidated Foreign Direct Investment Policy, 2(FDI Policy, 2013) , which is the sixth edition of consolidated foreign direct investment policy and has beffective from April 05, 2013. The FDI Policy, 20incorporates the changes made in the foreign investmpolicy over the last year. The changes include investmein sectors like single and multi-brand retail, po

exchanges; asset reconstruction companies (ARbroadcasting, civil aviation, and non-banking financompanies. Herein as the recent earlier policy

FDI can come into India in two ways:a. Direct route/Automatic route: It does not reqprior approval either of Reserve Bank of India (or government.

b. Government route: Government route means investment in the capital of resident entities by n


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Allows Pakistan citizens, nationals and companiesto invest in India under the Government route, insectors/activities other than defense, space andatomic energy.

resident entities can be made only with the priorapproval from Foreign Investment Promotion Board(FIPB).

Key changes made in the Consolidated FDI Policy, 2013,are as under:

Allows up to 51% inflow of foreign directinvestment (FDI) in multi-brand retail sector.Allows 49% stake by a foreign airline in the capitalof Indian companies, operating scheduled and non-scheduled air transport services,Raises FDI cap in various broadcasting services to74%.Permits up to 49% foreign investment in the powertrading exchanges.Increases foreign investment ceiling in ARCs to74%, up from 49%.A new paragraph has been added with regards tothe issue price of shares to person resident outside

India. It says that where non-residents (includingNRIs) are making investments in Indian company incompliance with the provisions of the CompaniesAct, 1956, by way of subscription to itsMemorandum of Association, such investmentsmay be made at face value subject to their eligibilityto invest under the FDI scheme.

The passage of 51% Foreign Direct Investment in Multi-Brand Retail trading in India (MBRT)Understanding of what retail means is imperative toappreciate the subject under discussion. It is defined as allactivities involved in selling goods or services directly to thefinal consumer for their personal, non-business use viashops, market, door to door selling, or mail order. In 2004,the High Court of Delhi defined the term retail as a sale forfinal consumption in contrast to a sale for further sale orprocessing (i.e. wholesale).

In India, retail sector is expected to grow at significant ratein coming few years. The overall Indian retail sector isexpected to grow 9 per cent in 2012-16, with organizedretail growing at 24 per cent or three times the pace oftraditional retail (which is expected to expand at 8 per cent),according to the report by Booz & Co and RAI. The Indianretail industry has expanded by 10.6 per cent between 2010and 2012 and is expected to increase to US$ 750-850

billion by 2015, according to a report by Deloitte. India isthe second most attractive destination for retail among thirtyemerging nations, making it the fifth most desired retaildestination in the World.

In todays world Multi Brand Retail Trade (MBRT) hasbecome a mainstay of retail business. MBRT meansmarketing of similar and competing products by the sameoutlet under different and unrelated brands. It implies that aretail store with foreign investment can sell multiple brands,under one roof, as opposed to a single brand retailing in

which a single brand is sold across all outlets. Sayexample Nike, Reebok stores.

The present day evolution of norms for retail in India mareads as:

1995-World Trade Organizations GenAgreement on Trade in Services, which incluboth wholesale and retailing services, came effect.1997-FDI in cash and carry (wholesale) with 10rights allowed under government approval route.

2006-FDI in cash and carry (wholesale) brouunder the automatic route. Up to 51% investmena single brand retail permitted, subject to PrNote 3 (2006 Series).2011-100% FDI in single brand retail permitted.2012-51% FDI in multi-brand retail permitted.

The government has currently approved 100% FDI in SiBrand Retail under the Government approval route subto certain conditions.

It is said that India is a land of Retail democracy. The Indretail industry is generally divided into two major segme

organised retailing and unorganised retailing . Given demographics, rate of GDP growth, consumer spendingmany, India is an inevitable destination for entities havglobal footprint. According to the 2013 A.T. Kearney GloRetail Development Index (GRDI) report, which is an annstudy that ranks the top 30 developing countries for rexpansion worldwide, ranks six Asian Countries includIndia on the GRDI 2013 report. India ranks 14th on GRDI 2013 report. The report says that consumer spendgrowth, continued adoption of modern retail and seconomic fundamentals keep Asian markets attractiveglobal retailers.

The Indian retail market is estimated to exceed US$ billion by 2015, according to the India Retail Report 2(IRIS Research), presenting a strong potential for foreretailers planning to enter India.

For the mandate to permit FDI in MBRT and with the fuentire nation as well as the political parties did not expthe Indian Government to permit 51% FDI by foreign mbrand retailers. India however, took safer and slower sttowards FDI. It permitted 51% FDI in Multi-brand retrading. With caveats, they are as follows:

1. There should be a minimum investment of U100 million by the foreign investor.2. 50% investment is to be in backend infrastruct

development. Backend infrastructure incluactivities like processing, manufacturing, distribudesign improvement, quality control, packaglogistics, warehousing etc.3. 30% of all raw materials have to be procufrom Indias small and medium industries, whave a total investment in plant & machinery exceeding US $ 1.00 million4. The permission to set up malls should be gito only those cities with a minimum population olakhs.


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5. The government has the first right to procurematerial from farmers.6. Products should be sold under same brandinternationally.7. Foreign investors should be the owner of thegoods? (J ust check it should be brands).8. The above policy is an enabling policy only andthe State Governments/Union Territories would befree to take their own decisions in regard toimplementation of the policy.

Post the release of 2013 circular 1the Department ofIndustrial Policy and Promotion (DIPP) has brought outcertain clarifications on FDI policy into MBRT .

On the issue relating to sourcing, the government hasclarified that sourcing pertains only to manufactured andprocessed goods and that it applies only in relation to front-end stores. Further, the term small industry has beenexplained.

As regards back end infrastructure, it is clear thatacquisition is not an option and the retail entity wouldnecessarily have to invest into green-field assets. Similarly,

front-end stores would need to be additional units andacquisition of existing stores is not permitted.

Back-end infrastructure in non-FDI permitting States wouldalso be counted as compliance with the conditions for FDI inMBRT under the FDI Policy Circular. Additionally, existinginvestments by investors into infrastructure or servicecompanies will not be accumulated or be counted towardsinvestment in back-end infrastructure.

The wholesaling entity and the retailing entity should bedifferent units. The entity carrying on cash and carrybusiness will not be allowed to enter into retailing evenwhere all conditions for FDI are satisfied. No franchisingwould be allowed. All front end stores would have to beMBRT company owned and company operated only.

Clarification in relation to State PolicyAny amendment in the FDI policy itself would fall under thedomain of the Central Government. However, the investorwould be required to comply with State laws/ regulations.One would think such a clarification should give foreigninvestors some relief.

However, immediately thereafter another clarificationprovides that FDI policy in MBRT is subject to the applicableState/Union Territory laws/ regulations. The State

Governments have the prerogative of imposing additionalconditions accordingly. Which is nebulous, What is theframework within which State/ Union Territory Governmentscan impose additional conditions? Do the States haveunfettered discretion in imposing conditions? Theclarifications would seem to suggest so..One of the most important aspects on which clarity isawaited and has not yet been provided is sourcingrestrictions among group companies. The term group

companies has been defined by Press Note 2 of 2issued by DIPP on J une 3, 2013.

The other clarifications that are pending are in relation toRequirement of 50% investment in backinfrastructure within three years of the first tranof FDI; andRequirement of 30% sourcing from small indusWhether sourcing from such small industry canallowed towards fulfillment of this conditionality,outgrows, and if so, till what period?

Controversies that are feared to emerge with introduction of FDI in MBRT:

Issue 1: FDI will lead to closing down of sretail stores, leading to unemploymentRetail is a growing sector, there is no empirical dto suggest that small retail stores would collathe entry of pure Indian operatives did not cresuch a scenario, neither has such scenario bseen in evolved markets as France, the poconditions of Thailand and South Africa are diffefrom that of India. Organised retail will need m

workers and may be an employment generator would be in larger cities. Further it is mandatorthe FDI policy 2013, that 50% of any investmover a $100 million would be in the backinfrastructure which India lacks would create fur

jobs as well as infrastructure for developing coulike India. It is important to note here that in mEuropean countries and J apan, which are denpopulated with high real estate costs, the smretail stores has thrived and flourished even in face of big retail outlets.

Issue 2: The global players like Wal-Mart, Tewill have a monopoly over the Indian retail markeWal-Mart and Tesco will not be a threat to Indiaper the FDI policy 2013, Wal-mart and other sstores can come in cities in India with a minimpopulation of 10 lakhs. In India there are onlycities with a minimum population of 10 laAnother mandatory rule is that more than 30%the raw materials will have to be procured fIndias small and medium industry which is a bto local farmers and suppliers. This may eliminmiddlemen who cheat government by not paytax and create layering which results in a hdifferential on price from the farm gate to the rstore.

Issue 3: India doesnt need foreign retailetraditional markets and companies exist

This is an argument of erstwhile Bombay grouptheir vested interest and avoids competition; has only facilitated the middlemen. With growing population of India, its economycomparatively smaller, added with the disadvantof the limited capital that is available. FDI will only provide adequate capital for a develop


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country like India, it will also introduce newtechnology.

Issue 4: Only foreigners will benefit from FDIAnother misconception, that has propped up withthe introduction of FDI is that Indians will work forforeign retail companies and all the benefit will go tothem. But with only 51% limit in multi brand retailsector, most of the profit will remain in India whichis another advantage to our economy. Further if FDIis permitted in other arena MBRT cannot be carved

out.

Issue 5: Comparing foreign retail companies withEast India CompanyAnother strange controversy that has come withFDI is that as East India Company came as a traderand then captured India, foreign Retail Companieswill follow the same policy. It is interesting to notehere that South East Asia has long been a focalpoint for FDI by OECD (organization for economiccooperation and development) based firms. Theyeven attracted investments from rest of the OECD,particularly of United States and Europe. As a result,

in the 1990s South East Asia was collectivelyamong the worlds largest recipients of FDI. So,South Eastern tigers evolved with FDI, so hasupcoming powers as China, it emerged in 1990 asa magnet for FDI with its large and dynamic marketand low cost of production. It can be further saidthat with Current account deficit and looming Indiascredit rating, FDI inflows are a preferred route offoreign investments to hot monies.

SWOT Analysis of FDI in Retail Sector1. Strength:

Major contribution to GDP: The Indian Retail sectoraccounts for 22% of the countrys GDP. Indiacontinues to be among the most attractiveinvestment propositions for global retailers.High Employment Generator: The retail sectoremploys 7% of work force in India, which is rightnow limited to the unorganised sector only. Oncethe reforms get implemented this percentage islikely to increase substantially.Benefits to farmers: In the retailing sector, in mostof the cases, the middlemen/intermediariesdominate the interface between the manufacturersor producers and the consumers. Hence themanufacturers/farmers dont get their actual shareof profit and it goes in the hands of the middlemen.

FDI will resolve this problem as the big companieswill buy directly from local farmers and this willbenefit the farm sector. The Supreme Court whileallowing 51% FDI in multi brand retail also said that the policy is aimed at throwing out the middlemen,who are curse to the Indian EconomyBetter Storage Facilities: India has a shortage ofgodowns due to which every year tons of crops arewasted. Due to the terms and conditions of FDIinvestments, like the minimum limit of USD 100million and 50 percent to be ploughed into backend

infrastructure, the Indian supply chain is likelybenefit. Sophisticated foreign technology considerably boost the domestic supply chthrough efficient storage and transportation facilresulting in minimizing wastage.Improved Economic Relation between IndiaPakistan: Allowing FDI from Pakistan strengthen the bilateral economic relations betwthe two countries. The decision will also facilithe economic integration in the South Asian regi

2. Weakness:Shortage of Talented Professionals: The sretail trade business in India is not consideredreputed profession and is mostly carried out by family members (self-employment and capbusiness). Such people are not academically professionally qualified.Highly Unorganised: The unorganised portionretail sector is as high as 97% as compared to USA, which is only 20%.

3. Opportunities (benefits):Increased employment options: Organised r

will need more workers thus create employment.Healthy Competition and check on inflation: Rgiants such as Wal-Mart, Carrefour, and Tealready have operations elsewhere and until nthey have not become monopolies. They hrather managed to keep a check on the finflation through their healthy competitive practicExclusion of middlemen: Intermediaries middlemen will be evicted, hence directly benefthe farmers, etc. The prices of commodities automatically be checked.Reducing Wastage: As per new FDI policy 20subsequent creation of back-end infrastructwould reduce wastage in perishable food items fruits and vegetables.Increased Capital: Heavy flow of capital will hebuilding up the infrastructure for the growpopulation. India is already operating in budgedeficit. Neither the Government of India domesticinvestors are capable of satisfying the growneeds (school, hospitals, transport, etc.) of the eincreasing Indian population. Hence foreign capinflow will enable us to create a larger capital basEfficient: Foreign retail majors have gaidecades of experience, technologies management practices which will ensure sup

chain efficiencies.It will decrease unorganised labor sector and bthem under organised labor. This will be easieenforce labour laws and also check implementation.

4. Threats:As per the FDI Policy (Circular 1 of 2013), thare many ambiguities on the conditions givenmulti-brand retail sector.


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The United Progressive Alliance government hadin September opened up the multi brand retailsector, braving political opposition from inside andoutside the coalition and even staked its survival.However, the stiff entry conditions and the fact thatonly 11 states and union territories have agreed toallow foreign-funded stores have proved to be a bigdeterrent. Indian retailers feel that the condition innew FDI policy 2013, requiring mandatory freshinvestment in back-end infrastructure, will onlycreate hurdles and neither encourage neither

foreign players nor domestic firms. KumarRajagopalan, CEO of Retailers Association of Indiaalso said that these conditions relating to back-endinfrastructure will take a lot of time and createhurdles for the foreign companies to enter theIndian Market.

After doing the SWOT analysis of FDI in multi brand retailsector, we can see that there are more opportunities thanthe threats. Hence, I feel that FDI in retail will help boost theIndian economy in the long run and will protect a positiveimage of India regarding its liberalization policies. Oncethese multi-chain retailers establish themselves, they will

create infrastructure facilities, and this will help in thereduction of wastage in distribution and storage. FDI willalso transform the way perishable agricultural produce isacquired, stored, preserved, and marketed, and thus helpcontrol Indias persistent food inflation. FDI is an importanttool in the economic development of the Indian nation. I feelthat FDI can be a powerful tool to improve productivity of

Indian Retail Sector. It will positively impact the retail ancillary industries like supply chain, manufacturing agriculture and will also integrate the Indian retails sewith the global retail market. So in my view FDI in mbrand retail sector should be welcomed by all the statethere will be more inflow of money which will boost Indeconomical condition and the new techniques usedthese market players will help local competitors as welfarmers to increase their productivity and efficiency.

BRUS CHAMBERSAdvocates & Solicitors8, Rajabahadur Mansion, 3P

rdP Floor,

Ambalal Doshi Marg, Fort, Mumbai 400001, India.Contact Partner: Mr. Uttamkumar HathiMob: +91-9757282670Off: +91-22-22659969Email: [email protected]: bruschambers.com

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FDI IN MULTI BRAND RETAIL SECTOR - India