September 2012

Permitting FDI in multi-brand product retail trading 

The Cabinet has approved the proposal of the Department of Industrial Policy & Promotion for permitting FDI in multi-brand retail trading, subject to specified conditions.The proposal had earlier been approved by the Cabinet in its meeting on 24.11.2011. However, implementation of the proposal had been deferred, for evolving a broader consensus on the subject.

In pursuance of the aforestated decision of the Cabinet on 7.12.2011, discussions have been held with State Governments, representatives of consumer associations/organizations, micro & small industry associations, farmers’ associations and representatives of food processing industry and industry associations. The Chief Ministers of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana and Governments of the State of Manipur and the Union Territory of Daman & Diu and Dadra and Nagar Haveli, have expressed support for the policy in writing. The Chief Minister of Jammu & Kashmir, through his press statements, has publicly endorsed the policy and asked for its implementation. The State Governments of Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have expressed reservations.

During the consultations with the stakeholders, views for and against FDI in multi-brand retail trading were expressed. On balance, however, the discussions generally indicated support for the policy, subject to the introduction of adequate safeguards.

Accordingly, the following proposals have been approved:

(i) Retail sales outlets may be set up in those States which have agreed or agree in future to allow FDI in MBRT under this policy. The establishment of the retail sales outlets will be in compliance of applicable State laws/ regulations, such as the Shops and Establishments Act etc.

(ii) Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking; In States/ Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The locations of such outlets will be restricted to conforming areas, as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.

(iii) At least 50% of total FDI brought in shall be invested in ‘backend infrastructure’ within three years of the induction of FDI, where ‘back-end infrastructure’ will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure.

(iv) A high-level group under the Minister of Consumer Affairs may be constituted to examine various issues concerning internal trade and make recommendations for internal trade reforms.

Other conditions/safeguards, approved by the Cabinet on 24.11.2012, would remain unchanged. The suspension of Government’s decision taken in the Cabinet meeting on 24.11.2011 to permit FDI up to 51% in MBRT, therefore, stands removed.

The respective State Governments administer the Shops & Establishment Act within their territorial jurisdiction. “Trade & Commerce within the State” is a subject allocated to the State Governments, under the Constitution of India. State Governments are also responsible for aspects ancillary to MBRT, such as zoning regulations, warehousing requirements, access, traffic, parking and other logistics. As such, the policy provides that it would be the prerogative of the State Governments to decide whether and where a multi-brand retailer, with FDI, is permitted to establish its sales outlets within the State. Therefore, implementation of the policy is not a mandatory requirement for all States.

Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census (including an area of 10 kms around the municipal/urban agglomeration limits of such cities). On the other hand, States/ Union Terrritories, which do not have any city with a population exceeding 10 lakhs, but are desirous of implementing the policy, would have the flexibility to do so.

Thus, the revised condition gives primacy to the decision of the States in this regard, recognizing that the FDI policy constitutes, at best, an enabling framework for the purpose.

Adequate safeguards have been built into the policy, some of which have been further strengthened.

A three year timeframe has been fixed for setting up the back-end infrastructure, which includes capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure. This condition will bind the foreign investors to invest in critical back-end infrastructure, which is a felt need across the country. It would also make the foreign investors accountable for proper implementation of the condition.

The decision would benefit stakeholders across the entire span of the supply chain. Farmers stand to benefit from the significant reduction in post-harvest losses, expected to result from the strengthening of the backend infrastructure and enable the farmers to obtain a remunerative price for their produce. Small manufacturers will benefit from the conditionality requiring at least 30% procurement from Indian small industries, as this would enable them to get integrated with global retail chains. This, in turn, will enhance their capacity to export products from India. As far as small retailers are concerned, it is evident that organized retail already co-exists with small traders and the unorganized retail sector. Studies indicate that there has been a strong competitive response from the traditional retailers to these organized retailers, through improved business practices and technological upgradation. Global experience also indicates that organized and unorganized retail co-exist and grow. The young people joining the workforce will benefit from the creation of employment opportunities. Consumers stand to gain the most, firstly, from the lowering of prices that would result from supply chain efficiencies and secondly, through improvement in product quality, which would come about as a combined result of technological upgradation; efficient grading, sorting and packaging; testing and quality control and product standardization.

Implementation of the policy will facilitate greater FDI inflows, additional and quality employment, global best practices and benefit consumers and farmers in the long run, in terms of quality, price, greater supply chain efficiencies in the agricultural sector and development of critical backend infrastructure.

The high-level group, to be constituted under the Minister of Consumer Affairs, is expected to look into various aspects relating to internal trade, to make recommendations on internal trade reforms to the Government, whenever required. This is in response to a demand articulated by traders’ associations during the course of consultations. Reforms in internal trade will ensure distributional efficiencies and also that the benefits from trade are available to all sections of society.

Amendment of conditions in the policy on Foreign Direct Investment in single-brand product retail trading  

The Cabinet has approved the proposal of the Department of Industrial Policy & Promotion for amendment of the existing policy on Foreign Direct Investment in Single-Brand Product Retail Trading.Vide Press Note 1(2012 Series) dated 10.1. 2012, Government had permitted FDI, up to 100%, in single brand product retail trading, subject to specified conditions, including, interalia, the conditions that:

(i) The foreign investor should be the owner of the brand.

(ii) In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen. ‘Small industries’ would be defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a ‘small industry’ for this purpose. The compliance of this condition will be ensured through self-certification by the company, which could be subsequently checked, by statutory auditors, from the duly certified accounts, which the investors will be required to maintain.

The CCEA has approved modification of the above mentioned conditions, for the activity of single brand product retail trading, as under:

(i) Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking single brand product retail trading in respect of the specific brand for which approval is being sought. The onus for ensuring compliance with this condition shall rest with the Indian entity carrying out single-brand product retail trading in India. The investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing/ franchise/sub-licence agreement, specifically indicating compliance with the above condition.

(ii) In respect of proposals involving FDI beyond 51%, sourcing of 30%, of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where it is feasible. The quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading.

Amendment in the condition relating to brand-ownership has been felt necessary, in view of the fact that, globally, single brand retailers often adopt a variety of business models, wherein the brand owning entity and investor entities are kept separate, even though in some cases, they may be having the same parent. Some single brand retailers adopt models where there is no link between the investing arm and the brand owning arm. In such cases, the brand owner entity could issue an exclusive licence/franchise to the investor entity, to use the brand for the purpose of retail trading, either globally or for a specific region, through appropriate agreement/(s). Such business models were not found to be in consonance with the condition that the foreign investor should be the brand owner. In view of the fact that the global business models do not strictly conform to this condition, a number of investors, who would otherwise have looked at investments in India, may not be able to do so. Therefore, keeping in view the constraints being faced by genuine foreign investors with different business models, as mentioned above, it would facilitate investment if this condition is liberalised. However, in order to address the concern that more than one franchisee/licensee may apply for undertaking SBRT for the same brand, which could lead to difficulties in monitoring compliance and fixing responsibility for non-compliance of the specified conditions, it has been mandated that, only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner in respect of the specific brand for which approval is being sought. The onus for ensuring compliance with this condition shall rest with the Indian entity carrying out single-brand retail trading in India. The investing entity shall provide evidence to this effect at the time of seeking approval from Government, including a copy of the licensing/ franchise/sub-license agreement, specifically indicating compliance with the above condition.

Regarding the condition that 30% sourcing be mandatorily done from Indian small industry, investors have pointed out that it would be difficult to comply with this condition in the case of very specialized/high technology items. Global single brand retailers are often engaged in the business of retailing specialty/high-tech products. Such products are niche products, wherein it may not be viable for the foreign investors to build capacities wherever they engage in retailing, owing to the specialized requirements of quality and precision which the local small industry may not be able to provide. Investors are, therefore, of the view that the condition of 30% mandatory sourcing from Indian small industries/ village and cottage industries, artisans and craftsmen, is acting as a deterrent to the desired foreign investment in this activity.

The other category of products relate to the entire range from household appliances, utensils, furniture, crockery to furnishings, etc. These products are far more amenable to sourcing from MSMEs, village and cottage industries, artisans and craftsmen. Therefore, the proposed modification of the condition is envisaged to take into account the circumstances of both the specialized/high technology niche products, as well as the general category, covering a wide range of items. The fact that 30% domestic sourcing is being mandated would imply that the single brand retailers would have to build production capacities in the country, either in existing units, or set up new ones, catering specifically to their sourcing requirements. Hence, even the 30% domestic sourcing is expected to develop production capacities in the country, with the attendant global best practices, relating to design, production and quality. Since single brand retailers are global players, Indian suppliers and vendors to these retailers would have an opportunity of becoming a part of their global supply chains. Thus, Indian products could find their way in the stores of these single brand retailers located in other countries, thereby augmenting exports from India as well.

Thus, the amended condition relating to sourcing of 30%, of the value of goods purchased, being done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where feasible, is expected to benefit Indian producers, including the Indian handicrafts sector, which provides livelihood to millions and is important from the point of low capital investment, high value-addition and high potential for export, as also to meet the critical need to integrate Indian producers with the domestic and global markets. Skill integration with craftsmen abroad is likely to help develop synergies with international brands and generate more employment. The consequential benefits, arising from the integration of global best practices in management, along with global standards in quality, design, packaging and production, would help build capacities of local producers, by making it worthwhile for them to scale-up their production, thereby creating a multiplier effect on employment and income generation. This would also lead to up-gradation of technology, which, in turn, would have a further multiplier effect on the economy.