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1 F.D.I. in Retail Sector SESSION 10 LEGAL ENVIRONMENT OF BUSINESS

Session 11 leb simple final

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F.D.I. in Retail Sector

SESSION 10LEGAL ENVIRONMENT OF BUSINESS

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Agenda

Retailing : An overview

Indian retail

FDI in Indian retailing

Why FDI?

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Retailing : An overview

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RetailingWorld’s largest private industry

US$ 6.6 trillion sales annually

Indian retailingLargest employer after agriculture - 8% of

populationHighest outlet density in world

Around 12 mn outletsStill evolving as an industry

Long way to go

Retailing: An overview

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Wal-MartTopmost global Fortune 500 company(3

Consecutive Years)Annual Sales of over US$ 250 bn

Fortune 1009 RetailersCarrefour, Ahold, Home Depot, Kroger,

Metro, Kmart-Sears, Target, Albertsons’

Retailing: An overview

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Weekly MarketsVillage FairsMelas

Convenience StoresMom and Pop/Kiranas

PDS OutletsKhadi StoresCooperatives

Exclusive Brand OutletsHyper/Super MarketsDepartment StoresShopping Malls

Traditional/Pervasive Reach

Government Supported

Historic/Rural Reach

Modern Formats/ International

Source of Entertainmen

t

Neighborhood Stores/Convenie

nce

Availability/ Low Costs /

Distribution

Shopping Experience/Efficie

ncy

Evolution of Indian retail

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Informal retailing SectorTypically small retailers.Evasion of taxesDifficulty in enforcing tax collection

mechanismsNo monitoring of labour laws

Formal Retailing SectorTypically large retailersGreater enforcement of taxation mechanismsHigh level of labour usage monitoring

Evolution of Indian retail

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Size : $ 400 billion

Growth Rate : 13%

GDP contribution : 12%

Major sector : Food and Grocery

Employment : 2nd largest industry

(35.06 million)

Types: Organized ( 5%)

Unorganized ( 95%)

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Corporates are increasingly coming into this sector

Demand of branded goods on a large scale

Demand of new and varied products

High quality product is preferred

Varied window display

E-tailers increase the presence

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0 20 40 60 80 100

IndiaC hina

Indones iaThailandMalays ia

TaiwanUS

O rganised

Unorganised

US Taiwan Malaysia Thailand Indonesia China IndiaUnorganised 15% 19% 45% 60% 70% 80% 95%

Organised 85% 81% 55% 40% 30% 20% 5%

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CATEGORIES OF INDIAN RETAIL

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Corporate Houses Tatas: Tata Trent RPG group: Food World, Health & Glow, etc ITC: Wills Life Style Rahejas(Shoppers Stop), Hiranandani (Haiko), DLF(DT

cinemas), etc.Dedicated brand outlets

Nike, Reebok, Zodiac, etcMulti-brand outlets

Vijay Sales, Viveks, Ritu Wear, Sehgal Bro, etc.Manufacturers/ Exporters

Bata, Weekender, Lilliput

Categories of Indian retail

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Modern Format retailersSupermarkets (Foodworld)Hypermarkets (Big Bazaar)Department Stores (S Stop)Specialty Chains (Ikea)Company Owned Company Operated

Traditional Format RetailersKiranas: Traditional Mom and Pop StoresKiosksStreet MarketsExclusive /Multiple Brand Outlets

Classifying Indian retail

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Hypermarket

Big Bazaar , Giants , Shoprite, Star

Department store

Lifestyle, Pantaloon, Piramyd, Shoppers

Stop, Trent

Entertainment

Fame Adlabs, Fun Republic, INOX, PVR

Large Indian retailers

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FORMAT AVERAGE SIZE

Convenience Stores 800 sq. feet

Discount Stores 1000 sq. feet

Category Killers 8000 sq. feet

Specialty Stores Single-category

Shop-in-Shop Within Large malls

Supermarket Large in Size, Typical in layout

Department Stores 10,000 – 60,000 sq. feet

Cash and Carry 75,000 Sq. feet

Hypermarkets 50,000 – 1,00,000 sq. feet

Organised retail formats in India

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Format Description Retailers

Hypermarkets Offering basket of product Spencers, Big bazaar

Cash and Carry Bulk-buying requirement Bharti - Walmart

Departmental stores

Large layout, Wide merchandise mix Lifestyle , Globus

Supermarkets Household product as well as food as integral part of the service

Apna Bazaar , Food Bazaar

Shop-in-shop Shops located in shopping malls Navras ( Big Bazaar)

Specialty stores Focus on individual product type Brand Factory

Category killers Particular segment The LOFT

Discount stores Branded product at discounted px. Levi’s Outlet

Convenience stores

Small Retail stores In and Out

Major Indian Retailers - Categories

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Retail Segment Percentage holding in sector

Major Retailers

Food and Grocery 63% Reliance Fresh, Café Brio, Food Bazaar

Clothing, Textile and Fashion

9% Westside, Shoppers Stop, Globus

Jewellery 5% Tanishq

Catering services 5% IRCTC

Consumer durable 4% Viveks, Vijay Sales, Croma

Pharmaceuticals 4% Piramal Group

Entertainment 3% Bowling Co.

Furnishing, utensils 3% Hometown, Tangent Concept

Mobile handsets 2% The Mobile Store,

Segmentation

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F.D.I.

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The commitment of money or

capital to purchase financial

instruments or assets in order to

gain profitable returns.

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Investment done by citizens and government of one country (home country) invest in industries of another country (host country).

Foreign Investment

through

Foreign Direct Investments

Foreign Institutional

Investors

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WHAT IS FDI?

Movement of capital across national frontiers in a manner that grants the investor control over the acquired asset.

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As per Dictionary of Economics FDI means investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site.

Simply put, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.

WHAT IS FDI?

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Automatic Route Automatic Route GovernmentGovernment

No permission requiredNo permission required Approval /License required. Approval /License required.

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What was the Criteria for FDI?What was the Criteria for FDI?

1991-92 : Dr. Manmohan Singh, Finance Minister

referred to certain criteria for allowing Foreign

Direct Investment. These were :

1. Establishment of basic industries requiring huge

capital and advanced sophisticated technology

2. Infrastructure projects like electricity generation,

road, building, etc.

3. Projects which would generate employment

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1991- FDI allowed selectively up to 51% in priority sectors.

1997-FDI allowed up to 100% in sectors like mining,

manufacturing, Cash and carry/wholesale (under Govt. approval

route).

It was brought under the automatic route in 2006.

FDI Policy InitiativesFDI Policy Initiatives

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2000-06 FDI allowed up to 100% in specified sectors.

FDI limits increased.

Procedures further simplifiedThe top 3 Indian Regions attracting the highest

FDI.

Mumbai, Delhi and Karnataka.

Account for nearly 62% of the total FDI.

FDI Policy InitiativesFDI Policy Initiatives

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April 2006 - May 2010 : 94 proposals were

received

57 proposals approved= inflow of USD196 mn

under single brand retailing

FDI Policy InitiativesFDI Policy Initiatives

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As per Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.

A) FDI up to 100% for cash and carry wholesale trading and

export trading allowed under the automatic route.

B) FDI up to 51 % with prior Government approval (i.e.

FIPB) for retail trade of ‘Single Brand’ products, subject

to Press Note 3 (2006 Series)

C) FDI is NOT permitted in Multi Brand Retailing in India.

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Complications in issuance of licenses like a

hypermarket in Mumbai must apply for 29

unique licenses & then when it has to come up

with second store it has to apply for same 29

licenses all over again

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Private labels Hi-Tech items/items requiring specialized after sales service Medical and diagnostic items Items sourced from the Indian small sector (manufactured with foreign technology)For 2 year test marketing (simultaneous commencement of investment in production facility required)

FDI in Indian retailingCurrent FDI is not permitted in retail trade sector, except in:

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Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players had been operating in the country. Some of entrance routes used by them are:

1. Franchise Agreements

2. Cash And Carry Wholesale Trading

3. Strategic Licensing Agreements

4. Manufacturing & Wholly Owned Subsidiaries

5. Distribution

Entry Options  for Foreign Players prior to FDI Policy

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Foreign company gives name and technology to

local partner. Gets royalty in return.

Easiest track to enter Indian market

In franchising and commission agents’

services, FDI is allowed with the approval RBI

under FEMA

E.g. Nike, Pizza Hut, Tommy Hilfiger, Marks

and Spencer, Mango

1. Franchise Agreements

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100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. E.g. Metro Cash & Carry

Entities established prior to 1997 Allowed to continue with their existing foreign

equity components. No FDI restrictions in the retail sector pre-1997 Foodworld

51:49 JV between RPG and Dairy Farm I’nal (it’s leading food retailer in India now)Mc Donalds

2. Cash & Carry Wholesale Trading 

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foreign brands give exclusive licences and

distribution rights to Indian companies

Indian companies sell it through their own

stores, or enter into shop-in-shop

arrangements or distribute the brands to

franchisees

E.g. Mango with Piramyd, SPAR with

Radhakrishna Foodlands Pvt. Ltd.

3. Strategic Licensing Agreements

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Bata, Nike, Reebok, Adidas, etc. have wholly-owned subsidiaries in manufacturing which are treated as Indian companies and are, therefore, allowed to do retailThey sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. E.g. Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited

4. Manufacturing & Wholly Owned Subsidiaries

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International company sets up local distribution

office

Supply products to Indian retailers to sell

Also set up franchised outlets for brand

E.g. Swarovski, Hugo Boss

5.Distribution

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In July 2010, Department of Industrial Policy and

Promotion (DIPP), Ministry of Commerce circulated a

discussion paper on allowing FDI in multi-brand retail. The

paper doesn’t suggest any upper limit on FDI in multi-

brand retail. If implemented, it would open the doors for

global retail giants (Wal-Mart, Carrefour and Tesco) to

enter and establish their footprints on the retail

landscape of India.

On the last count……

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Let the liberalisation be in steps rather than

being a leap.

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LICENCES & PERMITSINDUSTRIAL DISPUTE ACTSHOP & ESTABLISHMENT ACTCOSUMER PROTECTION ACTWEIGHT & MEASUREMENT ACTPACKAGING ACTPREVENTION OF FOOD ADULTRATION ACT

PREVENTION OF BLOCK MARKETING ACTANTI-HOARDING & PROFEELING ACTMONEY LENDING ACTPROVIDENT FUND ACTMINIMUM WAGES ACTESI ACTGRATUITY ACTBONUS ACT

INEFFICIENT LABOUR

PRESENT CONDITION OF TRADERS

Inspector Raj

Political Interference

Anti Socal Elements

WATER TAX

POWER PROBLEM

HIGH BANK CHARGES

SALES TAX

OCTROI

SERVICE TAX

WEALTH TAX

PROFESSIONAL TAX

INCOME TAX

ENTRY TAX

VAT

STAMP DUTY

POOR MARKET CONDITION

PURCHASE TAX

ESSENTIAL COMMODITIES ACT

CENTRALEXCISE

FDI in Retail Trade

Fringe Benefit Tax

New Naka Complex

Cash Transaction Tax&

Quarterly ‘C’ Form

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Retail Traders

TelecomAviation

Banking

Insurance

Steel

Information Technology

Infrastructure

Pharma

Mining

ProfessionalEducation

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M.N.C. REGIMEM.N.C. REGIME

CONTRACT FARMING

COLLECTION OF AGRICALTURE PRODUCTS

TO OWN FACTORY

TO OWN DEPT. STORE

TO CUSTOMER