FOREIGN DIRECT INVESTMENT POLICY WITH REGARD TO RETAILING IN INDIA
Keywords:
Foreign Direct Investment, Retail Sector, Organised and Unorganised Retailing, FDI Policy, Single Brand, and Multi BrandAbstract
Foreign Direct Investment (FDI) is the most influential channel through which foreign capital comes into a country. In India FDI is being allowed in different sectors of the economy in different percentage/ratio through either the government approval or the automatic route. Before the economic reforms in 1991, the inflow of FDI in India was comparatively limited. But, with the introduction of the Industrial Policy of 1991 there is a paradigm shift in Indian economic planning, whereas it has opened the markets to foreign capital. India’s retail sector has undergone a rapid transformation over the past decade. With the marked growth in India’s per capita income and a rising middle class accompanied by a massive scale of urbanization, it is the retail sector that is pitted to be the real growth engine for the Indian economy. The Government of India has allowed 51% FDI in multi brand retail and 100% in single-brand retail. However, government in States and Union Territories are free to make their own policies. Obviously this has led to significant interest among policy analysts to develop the necessary regulatory frameworks to channelize the move. The theme of this article is to understand the concept of retail in India and to know the reasons behind allowing Foreign Direct Investment in retail sector. The article also explores the evolution of FDI in retail sector and provides brief information about the FDI in Single brand and Multi-Brand retail sector in India.
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Franchise Agreements is an easiest track to come in the Indian market. In franchising and commission agents’ services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA). This is a most usual mode for entrance of quick food bondage opposite a world. Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.
Under Strategic Licensing Agreements, some foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd.
The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited
Under Cash And Carry Wholesale Trading, 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not consumers. Metro AG of Germany was the first significant global player to enter India through this route.
FDI in activities not covered under the automatic route, requires prior Government approval. Such proposals are considered by the Foreign Exchange Promotion Board (FIPB)
Companies proposing foreign investment under the automatic route do not require any government approval, provided the proposed foreign equity is within the specified ceiling and the requisite documents are filed with the RBI within 30 days of receipt of funds.
Single-Brand Retail: Firstly, FDI up to 49 per cent was allowed under the automatic route, but beyond that, government approval was required. Secondly, the liberalisation was subject to certain conditions, such as products should be of a ‘single brand’ only and to be sold under the same brand internationally. In respect of proposals involving FDI beyond 51 per cent, the mandatory sourcing of at least 30 per cent would have to be done from the domestic small and cottage industries which have a maximum investment in plant and machinery of $1 million (about Rs 5 crore).
Multi-Brand Retail: Under multi-brand retail, conditions for investment required companies to invest at least 50 percent of the first US$100 million into ‘back-end infrastructure’ such as manufacturing, processing, packaging, distribution, logistics, design improvements, quality control, warehouses, storage, and agriculture market produce infrastructure and to source 30 per cent mandatory local sourcing from small industries only.
http://www.indiaretailing.com/2016/06/23/retail/fdi-in-retail-milestones-from-2006-to-2016/5/
Dr. N.N.Sharma, FDI and Corporate Governance, Gaurav Book Centre Pvt. Ltd., New Delhi, 2015, p.159
Para 5.2. 15.3 of the Circular on Consolidated Policy of FDI 2016
Retail of goods of multi-brand even if produced by the same manufacturer would not be allowed
Products should be sold under the same brand in one or more countries other than India
(i) Conditions mentioned at (b) and (d) will not be applicable for undertaking SBRT of Indian brands.
(ii) An Indian manufacturer is permitted to sell its own branded products in any manner i.e. wholesale, retail, including through e-commerce platforms.
(iii) Indian manufacturer would be the investee company, which is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in house, and sources, at most 30% from Indian manufacturers.
(iv) Indian brands should be owned and controlled by resident Indian citizens and/or companies which are owned and controlled by resident Indian citizens.
(v) Government may relax sourcing norms for entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible.
The list of States/Union Territories which have conveyed their agreement are 1. Andhra Pradesh 2. Assam 3. Delhi 4. Haryana 5. Himachal Pradesh 6. Jammu & Kashmir 7. Karnataka 8. Maharashtra 9. Manipur 10. Rajasthan 11. Uttarakhand 12. Daman and Diu and Dadra and Nagar Haveli (Union Territories)
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