More policy changes for FDI in multi-brand retail in IndiaAugust 12, 2013 / By
The first announcement allowing FDI in multi-brand retail trading was made in September 2012, with the industry acknowledging the proactive approach. Even the caveats of state governments being the final deciding authority in allowing multi-brand retail chains in their respective states and cities being limited to those with a population of over one million were considered safeguards.
Since then, it has been relatively quiet. Two major provisions of the policy caused concern among retailers. One was retailers having to invest 50% of their total investment in greenfield developments and back-end infrastructure of cold storage and supply chains. The minimum investment in multi-brand retailing ventures had to be USD 100 million. The other was retailers having to source 30% of their material from small businesses that had invested less than USD 1 million in plant and machinery. The period for the second provision was not defined. For example, if a small business increased its capital expenditure investment above the limit, would the retailer have to change supplier in order to adhere to the 30% sourcing cap?
The provisions also put paid to the hopes of Indian retailers not backed by big corporate houses, and who were looking at the policy as a means of infusing foreign equity in their operations.
Some clarification was provided in June 2013 by the Department of Industrial Policy and Promotion (DIPP). The infrastructure of existing multi-brand retail chains bought by foreign retailers was not to be counted as part of the mandatory investment criterion. New retailers had to invest in their front-end operations from their own pockets, thus disallowing the franchisee route of growth to global firms. In addition, the sourcing requirement of 30% from Micro, Small and Medium Enterprises (MSMEs) was restricted to processed goods only and agro goods were not included. This sourcing could not be used for their global business, but only for domestic sales through retail chain stores.
The result was that no investment proposal was officially received, although firms such as Tesco and Ikea were waiting in the wings.
On August 1, 2013, the government attempted to assuage the concerns of retailers through further concessions on investment regulations. The 30% sourcing from MSMEs has been revised to include firms where investment in plant and machinery was USD 2 million. Additionally, the sourcing requirement is applicable only at the beginning of the relationship, i.e. if a firm grows above the USD 2 million limit, the relationship will endure. The investment in back-end infrastructure has been capped at USD 50 million only. The other major concession has been that firms will now be allowed to operate in cities with a population lower than the one million limit introduced earlier, subject to the approval of the state governments.
The bigger challenge, however, remains in getting the Indian polity’s approval and achieving majority consensus. Until that time, such concessions are likely to remain on paper. Retailers are likely to seek more clarifications and concessions and real ground activity seems some distance away. An improvement in the fortunes of the retail sector is likely to take a while.
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