The government has more or less clarified the status of private equity investment in Indian retail. And its not good news for foreign PE firms looking to invest specially in a firm which is a franchisee of a foreign brand. What is interesting is that PE firms will not get to invest even in retail companies where foreign investment is allowed.
VCCircle learns that a proposal from Jacob Ballas Capital India Pvt Ltd (which manages New York Life Investment Management’s capitalin India) to pick up a stake in Ravi Jaipuria owned Devyani International (which is the Indian franchisee of various international brands including Pizza Hut, Costa Coffee and Disney) has been rejected by the nodal body for clearing foreign investments — FIPB. Jacob Ballas had struck a deal to acquire 21.5 per cent in Devyani for Rs 300 crore. When contacted by VC Circle, Sunil Chawla, Partner, Jacob Ballas Capital, declined to comment. “We don’t comment on specific deals. We keep looking at many deals at any point of time,” Chawla said. He, however, said: “We are still trying to understand the specific implications of such a move. Overall, the government is giving out wrong signals to the investors especially a strong sector like retail which needs a lot of investments in India.”
Apparently, the issue relates to Devyani being a franchisee of Disney Artist products. The opinion is that it would amount to an circumvention of the FDI norms which doesn’t allow foreign investment in multi brand retail firms.
Currently, the government allows global brands to invest up to 51 per cent in Indian retail companies provided they sell all products in their outlets under a single brand. However, as per this report, PE firms will not get to invest even in this category because only the owner of the global brand is permitted to invest in the Indian company.
The exception to this would be food and beverage retail where 100 per cent FDI is allowed. What this means is that Devyani International will need to split its business where one entity would cover retail franchisee operations of fast food and coffee chains Pizza Hut, KFC and Costa Coffee.
The operations of Disney franchise would have to be separated to induct PE money. The FIPB has apparently asked Devyani to alter the proposal to incorporate the change. This indirectly sets a precedent for future treatment of PE deals in the retail sector. Whether foreign PE funds can invest in retail companies, franchisee-led or foreign-owned, has been a grey area but the decision related to Devyani now clarifies the position of the government.