The Indian government on Tuesday allowed foreign investors to float and run wholly owned single brand retail stores even as the bigger reform measure of opening multi-brand retailing to international investors remains mired in political cobweb.
Currently, foreign direct investment (FDI) in retail trade is prohibited except in single brand product retail trading in which up to 51 per cent FDI is permitted, subject to certain conditions.
The Department of Industrial Policy & Promotion, part of the Ministry of Commerce & Industry, has now allowed FDI up to 100 per cent in single brand product retail trading, under the government’s approval route. However, the government has put on hold provisions for 51 per cent FDI in multi-brand retail.
The relaxation in foreign investment norms for single brand retailing would be subject to following conditions:
1. Products should be sold under the same brand internationally, i.e., products should be sold under the same brand in one or more countries other than India.
2. ‘Single Brand’ product retail trading would cover only products which are branded during manufacturing.
3. The foreign investor should be the owner of the brand.
4. Proposals involving FDI beyond 51 per cent would need to ensure mandatory sourcing of at least 30 per cent of the value of products sold, to be done from Indian ‘small industries/village and cottage industries, artisans and craftsmen.’
The government has said that ‘small industries’ will be defined as industries with a total investment in plant & machinery not exceeding $1 million. This valuation refers to the value at the time of installation, without providing for depreciation. If this valuation exceeds at any point in time, 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, to be subsequently checked by statutory auditors, from the duly certified accounts, which the company will be required to maintain.
What Does It Mean
The relaxation in foreign investment in single brand retail sector comes as a compromise for the government who has not been able to arrive at a political consensus to open multi-brand retail stores to foreign investment.
Nevertheless, the reform has far-reaching implications for corporate activity and even consolidation of businesses. One of the biggest beneficiaries of the latest policy announcement will be brands like Ikea, the Swedish furniture retail giant, as also various fashion apparel brands that depend on local partners to expand their retail footprints in India.
Another beneficiary might be the US coffee chain Starbucks that struck a local sourcing JV with Tata Coffee last year and was said to be in talks with the Tata Group for opening its retail stores in the country. Given the relaxation, it may now open its own stores while maintaining its sourcing deal with Tata Coffee that will also allow it to meet the mandatory norms.
On the flip side, some of the conditions imposed as part of opening the sector further for single brand retailing, is self-defeating. For example, quite a few product categories, could-have-been candidates for this space, fall under the luxury product segment. And those are made in their respective country of origin – Swiss watches for instance and Lladro porcelain work. It would be difficult for these brands to meet the 30 per cent sourcing condition.
Another irritant could be in the process. As per the conditions set by the government, applications seeking permission for single brand retail trade would specifically indicate the product/product categories proposed to be sold under a ‘Single Brand.’ Any addition to the product/product categories to be sold under ‘Single Brand’ would require a fresh approval of the government.
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