The Ministry of Commerce & Industry has put the onus of monitoring any violation by companies that have been allowed foreign direct investment (FDI) in the retail sector on state governments.
It has directed them to create a “suitable mechanism” to hold periodic scrutiny against violation of Foreign Exchange Management Act (FEMA). The move comes after it was found that some foreign retail companies or joint ventures, which had permission to undertake only “cash & carry wholesale trading” were violating the rules. They were apparently selling directly for personal consumption, which is prohibited. It was also noticed that companies that were allowed to operate single-brand retail outlets sold multiple brands in violation of permission.
In a communication a few days ago to chief secretaries and administrators of states and Union Territories, the ministry stated that they should “develop a suitable mechanism to take up periodic checks and send a report” to the ministry at the earliest. It also warned that such companies might be violating other acts (apart from FEMA) on which suitable action may be required to be taken by the states. Foreign companies, apart from FIPB clearance, also need to take necessary licence, registration and permits under various state laws that have to be complied with for running the business.
As per current policy, wholesale cash & carry business with FDI of up to 100 per cent is allowed. A company can sell goods to retailers, industrial, commercial and institutional users, but not directly for personal consumption. A parliamentary standing committee on commerce in its 90th report on foreign and domestic investment in retail stated that in many cases the rules were being violated and goods sold for personal consumption, which virtually meant backdoor entry of foreign retail in India.
Secondly, the committee noted, that while FDI of up to 51 per cent was allowed in single-brand retailing, there were many cases in which retailers were selling other branded products or bundling them with ones for which they had permission, as combinations or bargain buys. The ministry said it tantamounts to violation of FEMA. The government has cleared till date over 51 FDI proposals for single-brand retail. Under this policy a bevy of international brands has entered the country, which include Zara (with Trent), Giordano, Marks & Spencer, Armani (with DLF), Cartier, Lerros, Louis Vuitton, Puma, Nokia, Fendi, LVM and Gas. German giant Metro and Bharti-Walmart have got permission to run cash & carry business in the country.