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India opens up with FDI in multi-brand retail, aviation and other sectors

14 September, 2012

The government gave the green signal on Friday for allowing up to 51 per cent foreign direct investment (FDI) in multi-brand retail and allowed foreign airlines to buy stakes of up to 49 per cent stake in Indian airlines in two big bang economic reform moves that could see a flurry of foreign investment coming into the country and boosting investments in various allied sectors including real estate and logistics.

The twin policy moves, which came one day after the government took bold steps to cut subsidies in fuel, had been anticipated and the 30-stock benchmark index Sensex rose 2.46 per cent. The announcements came after markets closed for trading on Friday.

Retail:

The union government has played it safe and added a rider that state governments would have the option to opt out of the policy move for stores to be set in their respective states.

The government said the chief ministers of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana and governments of Manipur and the union territory of Daman & Diu and Dadra and Nagar Haveli, have expressed support for the policy in writing. This means these states can soon see action from foreign retailers and would push up real estate prices in these regions.

The chief minister of Jammu & Kashmir, through his press statements, has publicly endorsed the policy and asked for its implementation while the government said state administration of Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Orissa have expressed reservations.

Multi-brand FDI has been a contentious issue with several political parties that rule a number of individual states opposed to the move on the argument that it would affect livelihood of small mom and pop retailers.

The government had announced its decision to allow foreign investors to hold equity stake of up to 51 per cent in Indian retail chains in December 2011, but had kept the implementation on hold. This was after the proposal was greeted with widespread opposition.

The final notification of FDI in multi-brand retail would allow global retailers like Walmart and Carrefour among others to start opening their own retail stores in India. Currently many of them operate wholesale retail outlets, which is allowed to sell to only shop owners.

Some of them like Walmart also have joint ventures with local partners, which has allowed them to be an equity partner at back end logistics operations of front retail chains owned by their Indian partners. After the government notifies the final guidelines, such overseas retailers may sew deals to buy 51 per cent stake in the front-end retail operations.

The government also set up other riders for multi-brand retail:

1. Retail sales outlets may be set up only in cities with a population of over 1 million.

2. At least 50 per cent of total FDI brought in shall be invested in `backend infrastructure’ within three years of the induction of FDI, where ‘back-end infrastructure’ will include capital expenditure on processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure.

The government will constitute a group under the Minister of Consumer Affairs to examine various issues concerning internal trade and make recommendations for internal trade reforms.

The government also eased norms related to single brand retail by relaxing the earlier condition that foreign retailers had to be the owners of the brand (as some retailers have separate legal ownership of the brand and operate through branding licences) and also easing local sourcing norms for some categories which may find it difficult to meet 30 per cent local sourcing requirement due to nature of the product.

Aviation:

The government has also allowed foreign airlines to invest in Indian carriers, which is expected to boost fortunes of loss making Indian airlines. The cabinet allowed foreign carriers to pick up to 49 per cent stake in Indian airline operators.

Although such airlines already have foreign investors, such investments were limited to financial investors through the foreign institutional investors (FII) route. In the revised policy the total foreign investment cap has been kept at 49 per cent which could be a mix of FDI or FII or all FDI.

There are already speculation of low cost airlines SpiceJet bringing in a foreign partner, while debt-heavy Kingfisher Airlines could also hope to bring in a foreign partner to ease its financial woes.

(Edited by Prem Udayabhanu)


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1 Comment
Abhay . 5 years ago

Well It may or may not be an attempt to deflect attention but over all its a great move by the Government. See the report by India Brand Equity Foundation: http://www.indian-economy.ibef.org/FDI-in-multi-brand-retail-Policy-details.aspx It is being welcomed by the Nation & Industry. We should not create negative sentiment for a good move.

India opens up with FDI in multi-brand retail, aviation and other sectors

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