India: FDI issues in single-brand retail

Author: | Published: 24 Feb 2014
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Sudish Sharma Sonia Abrol
Since liberalisation, India has been an attractive destination for most international brands. From time to time, the Indian Government reviews foreign direct investment (FDI) limits when FDI is allowed in new sectors, whereas limits of investment in the existing sectors are modified according to economic conditions and considerations. One sector that has drawn a lot of interest and attention is single-brand retailing, which was significantly liberalised in 2012 but was attached with several onerous conditions, such as local sourcing from small vendors.

The extant FDI policy of India on single-brand retail envisages that each investor in this sector will sell products of a single brand only, whereas several multinational groups own multiple brands under a single entity or investment group. Foreign investors argue that having separate companies for each brand creates operating complexities, in some cases making the Indian venture unviable.

Investment proposals from several brands have been stuck at the Department of Industrial Policy and Promotion for months for mixing up single-brand retail with wholesale trading or franchise business models. For the wholesale model, there are no conditions, but for the single brand a 30% local-sourcing condition kicks in the moment the FDI limit crosses the 51% mark. Franchisee stores, on the other hand, are operated by third-party individuals and entities. However, applicants have been ignoring the fact that the yardsticks for determining and undertaking each of the aforesaid activities in India are different, and so each activity requires a separate company to ensure compliance.

Single-brand retailers hold that the franchisee route in tier two or tier three cities makes much more business sense than opening their own stores. In June 2013, the Government of India clarified that multi-brand retailers or global supermarket operators planning to invest in India must own and operate their stores, and that it won't let FDI-funded ventures operate franchisee stores. However, experts are of the view that imposing such conditions on supermarket chains could further impact the struggling sector.

Sudish Sharma and Sonia Abrol