| Log in

Impact Assessment Of FDI In Retail

25 November, 2011

The opening of the retail sector to foreign investors will have three key impact beginning with wide scale mergers and acquisition activity due to entry of foreign players in front end retailing, gush of investments in logistics, realty and manpower training besides job creation in the organised sector of the economy.

Foremost, for foreign investors, a formal relaxation in investment rules for retail sector would bring to an end complex corporate structures and ventures that have been crafted to circumvent existing norms.

Since foreign investment is not allowed in multi-brand retail as of now, investors split a retail company into two with foreign investor (strategic or financial) typically owning the backend of the business while roping in an Indian partner to front end the actual store operations.

“The complexity and regulatory uncertainty attached to such structures has kept many foreign retail players out of the Indian market, and now, several more reputable names from overseas markets will seriously consider entering the Indian market. The existing players who have entered the Indian market already through “back-end only” models too will now welcome this move, as this would enable them to move their Indian plans to a more straightforward and transparent model,” says Vijay Sambamurthi, managing director of law firm Lexygen.

The world’s largest retailer Wal-Mart has a similar JV with Bharti Group of Mittals and so has TPG-Shriram for Vishal Mega Mart. With the proposed relaxation in norms, these foreign investors would pick 51 per cent stake in the front end business too and by some measure it is likely in existing ventures the separate backend and front end firms are merged while retaining the 51 per cent overall foreign investment limit.

Ownership of majority stake has been a long term demand by many of the large international retailers to enter the otherwise juicy Indian market.

Some of the large international retailers like Wal-Mart, Carrefour and Metro already operate their own large outlets in India but they are limited by law to sell only to store owners or institutional buyers as a wholesaler since the government allows 100 per cent foreign ownership of firms engaged only in wholesale cash and carry retail.

Moreover, once the new rule comes into force, even single brand retailers such as the world’s largest luxury products group LVMH or porcelain figurines maker Lladro will be able to fully own its stores in India. As of now foreign investment in such firms that sell one brand is capped at 51 per cent. This limited their growth as their ability to expand stores network was dependent on the local partner bringing in more money to maintain the equity holding as mandated by law.

“I would certainly expect more acquisitions and enhanced foreign investment/ PE investment in the Indian retail space with the opening up of FDI in multi-brand retail sector. Also joint ventures on the lines of Bharti-Walmart will be a big investment opportunity going forward,” according to Garima Basu, partner at ALMT Legal, London.

On the one hand the policy change would stoke significant M&A activity in the country with existing players realigning their existing partnerships and new players entering the business, the second big impact will be on large scale investment flow particularly to boost logistics to cater to demand of large retailers as also for leasing or buying land for setting up new stores.

It remains to be seen if this leads to a revival in the fortunes of the realty firms laden with debt and slowing demand from the other key business category, residential properties.

Given speculations about the proposed local sourcing requirements, a large chunk of products to be sold in India would have to be bought from local suppliers which will buoy Indian manufacturers particularly small and medium enterprises. One segment that could specially benefit is apparel makers who presently depend on huge orders from foreign retailers to carry on their business.

Thirdly, the policy change would also boost employment with lakhs of new jobs being created in the organised retail and logistics business.

What Does It Mean For Private Equity Firms

The private equity investment in the retail sector has been muted largely due to the existing foreign investment norms. Among the handful of PE deals in the space besides TPG-Shriram-Vishal Mega Mart include Aditya Birla PE’s investment in V-Mart besides previous investments of ICICI Venture in Trinethra and Subhiksha (that went bust) in addition to some firms with dual business structure such as kidswear apparel maker and retailer Lilliput (that is now fighting a legal battle with its PE investor Bain Capital and TPG).

For one, the clarity in ownership is likely to attract fresh investments in various early entrants in the retail business most of whom are losing money due to lack of proper systems.

The entry of foreign retailers with a majority stake ownership will also attract PE investors to back retail firms in early stage of growth locally as they can now possibly look at a liquidity event by selling out to larger retailers as the market consolidates in the future.

This makes for huge opportunity for buyout groups to hunt for deals in India’s ailing retail sector.

E-commerce

The online retail market has suddenly got a rush of blood over the past year or so. Boosted by a string of fund raising deals in the e-com business, there has been a surfeit of online retailers launching operations in India.

But the most talked about ‘would-be’ entry is of Amazon, the world’s largest online retail firm. Incidentally, there have been strong speculations that the firm is in the process of launching an India business soon, and analysts are closely watching the route through which it can begin operations. The issue is tricky as of now.

Currently, FDI up to 100 per cent is permitted in business-to-business (B2B) e-commerce activities under the automatic route, i.e., without the need to obtain prior approval from foreign investment promotion board (FIPB), the nodal government body monitoring foreign direct investment in India.

“The FDI policy also specifies that such (e-com) companies would engage only in B2B e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well. This has enabled e-bay to run a successful online retail platform in India as it engages in B2B sales,” according to Basu of ALMT Legal.

But she adds that if FDI in multi-brand retail is opened up, these e-retailers could also raise direct invoices on the end-customer making it easier for them to replicate the sales models which they follow in other countries, instead of having to follow the current approach where invoices are raised by the manufacturer/seller of the product on the consumer. “E-retailers like Amazon would benefit significantly from such a move,” according to Basu.

So do we see Amazons of the world plucking some Indian e-com firms?


View Comments
Welcome, FDI In Retail But The Devil Will Lie In The Detail

Welcome, FDI In Retail But The Devil Will Lie In The Detail

Vijay Sambamurthi 6 years ago
Last evening, the Union Cabinet cleared a long-awaited, much-debated and...
PMO in favour of FDI in e-commerce

PMO in favour of FDI in e-commerce

Sainul K Abudheen 4 years ago
The Prime Minister’s Office (PMO) is keen to allow foreign direct investment ...
The hazards of FDI in pharma biz in India

The hazards of FDI in pharma biz in India

Raj Ramachandran and Manav Raheja 5 years ago
It’s not every day that a movie star appears before a parliamentary committee...
1 Comment
ROSHAN JHA . 5 years ago

This article gives a very comprehensive knowledge of impact of FDI on both off-line and on-line trade in India.

Impact Assessment Of FDI In Retail

Powered by WordPress.com VIP