Volume 4, Issue 8

27th September, 2012

Business Alert
FDI Reforms in Retail Trading

The Government has, on 20th September, 2012, despite mounting political pressure, notified the latest changes in FDI norms pertaining to single and multi-brand retailing, power exchanges, air transport services and broadcasting sector.  

The intent and essence of these changes have already been captured in our previous alert; we wish to highlight, through this alert, the changes brought about in the Retail Sector.

Single Brand Retail:

To assuage the growing uncertainty and difficulty in implementing the various conditions laid down for single brand retailing in India by foreign investors, the Government has attempted to clarify and ease the norms for single brand retail.

The changes in brief are as follows:

  1. The requirement that only the owner of the brand should be the foreign investor has been eased.  The FDI that is coming into an Indian entity engaged in single brand retailing can now be brought in by any non-resident entity having a valid agreement with the brand owner.  This widens the opportunity for greater FDI inflows into the country since the owner of the brand may not always be in a position to invest directly. In such cases, the application seeking approval has to be accompanied by documents such as the license / sub-license / franchise agreements and the necessary evidence to prove that the foreign investor has the necessary authority from the brand owner to use the brand name.

  2. Domestic sourcing requirements:

    1. Entities with 51% FDI or less continue to be exempt from sourcing requirements. For entities with more than 51% FDI, the present requirement of sourcing at least 30% of the inputs locally has been relaxed by making sourcing from MSMEs, village and cottage industries, artisans and craftsmen preferable as opposed to compulsory earlier.
    2. The revised rules also attempt to clarify the basis of computation of the sourcing requirement by specifying that 30% of the purchase value shall be sourced from India.
    3. The compliance process in respect of the 30% domestic sourcing requirement has been clarified as under:
      1. The quantum of domestic sourcing will have to be self-certified by the Indian entity and subsequently checked by the Statutory Auditors.
      2. Entities have been now been given a window of 5 years to initially meet the domestic sourcing requirement. Accordingly, the sourcing requirement would have to be initially computed as 30% of the 5 year average annual purchase value beginning April 1 of the year in which the first tranche of FDI is received.
      3. Thereafter, the 30% domestic sourcing requirement would have to be complied on an annual basis
  1. There has been no relaxation in the norms governing B2C e-commerce segment.  It has been clarified that Indian companies with FDI, irrespective of the percentage thereof, cannot engage in Business-to-Consumers (B2C) e-commerce.

There is no change to the existing requirements in respect of the following:

  1. The products sold shall be of a ‘single brand’ only

  2. Products have to be sold internationally under the same brand, i.e., the product must be sold under the same brand name in at least one country other than India

  3. Only those products that are branded during their manufacture are permitted to be retailed

  4. Applications seeking approval would be in the first instance be processed in the Department of Industrial Policy and Promotion (DIPP) for ensuring compliance with the prescribed conditions and finally in the Foreign Investment Promotion Board (FIPB) for according approval

It remains to be seen as to how a single brand manufacturer can manage the logistics of 30% domestic sourcing in single brand retail, considering that manufacture of the single brand retail products may take place outside India.

Multi Brand Retail:

51% FDI is now permitted in Indian companies engaged in multi-brand retail under the Government Route (with approval from the Foreign Investment Promotion Board or FIPB) subject to the following conditions:

  1. The foreign investor would have to bring in at least USD 100 million (approximately INR 550 crores) into the Indian entity as FDI, although the time line for bringing in such FDI has not been specified. It can be presumed that such time line will have to be specified in the detailed plan to be provided to FIPB for approval by the proposed investor.

  2. At least 50% of total FDI is required to be invested in back-end infrastructure within 3 years of the first tranche of FDI. Back-end infrastructure has been defined to include capital expenditure on all activities such as processing, manufacturing, distribution, design improvement, packaging, storage, ware-housing, quality control, etc. but excludes expenditure on front end units, land cost, rentals, etc.

  3. At least 30% of the value of procurement of manufactured / processed products purchased shall be sourced from Indian ‘small industries’ having a maximum investment (valuation at the time of installation without depreciation) of USD 1 million in plant and machinery.  The self-certification requirements and the time frame for meeting the sourcing requirements are similar to those provided under single-brand retail.

  4. Fresh agricultural produce is permitted to be sold unbranded. It has been clarified, however, that the Government will have the first right to procure agricultural products from farmers.

  5. As in single brand retail, companies with FDI are not permitted to engage in multi-brand retail B2C e-commerce.

  6. The States have been given the discretion to agree or refuse to implement FDI in multi-brand retail.   Certain States like Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand and the Union Territory of Daman and Diu and Dadra and Nagar Haveli have already conveyed their assent in implementing this policy.

  7. Multi brand retail outlets can be set up by companies having FDI only in cities with a population of at least 10 lakhs as per 2011 census. In states or union territories which do not have cities with population of 10 lakh or more, such retail outlet may be set up at their discretion in any city, preferably the largest one.  Such retail stores may cover an area of 10 kilometers around the municipal / urban agglomeration limits of such cities.

  8. Applications to obtain approval are required to pass 2 levels – the Department of industrial Policy (DIPP) for ensuring compliance with the notified conditions and the Foreign Investment Promotion Board (FIPB) to accord the final approval.