CA Kamal Garg

From political gallerias to business colonnades, the ‘FDI in Retail’ holds a perennial content to contention feature right from its nascent stages. This feature is rekindled when the recent news about Flipkart and Myntra was published in leading newspapers[1] about investigation being launched against them by the Enforcement Directorate for possible violation of FDI Policy where-under foreign direct investment is not allowed in e-commerce retailing that involves business-to-customer sales. The present write up discusses about the FDI Policy in Retail Trade and the remedies that may be available for such violations.

FDI is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA), 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a notification, which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time-to-time. Further, the Ministry of Commerce and Industry, Government of India is the nodal agency for reviewing and regulating the FDI policy on a continued basis and for changes in sectoral policy/sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP). As per the FDI Policy, the foreign investors are free to invest in India, except in a few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be required.

Para 6.2.16 of the Consolidated FDI Policy Circular, effective from 17th April, 2014, provides as follows:

6.2.16 Trading
6.2.16.1 Cash & Carry Wholesale Trading/Wholesale Trading (including sourcing from MSEs) 100% Automatic
6.2.16.1.1 Definition: Cash & Carry Wholesale trading/Wholesale trading, would mean sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Wholesale trading would, accordingly, imply sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption. The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales. Wholesale trading would include resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales and B2B e-Commerce.
6.2.16.1.2 Guidelines for Cash & Carry Wholesale Trading/Wholesale Trading (WT):(a)      For undertaking WT, requisite licenses/registration/ permits, as specified under the relevant Acts/Regulations/Rules/Orders of the State Government/Government Body/Government Authority/Local Self-Government Body under that State Government should be obtained.

(b)      Except in case of sales to Government, sales made by the wholesaler would be considered as ‘cash & carry wholesale trading/wholesale trading’ with valid business customers, only when WT are made to the following entities:

(I)      Entities holding sales tax/ VAT registration/service tax/excise duty registration; or

(II)     Entities holding trade licenses i.e. a license/registration certificate/membership certificate/registration under Shops and Establishment Act, issued by a Government Authority/Government Body/Local Self-Government Authority, reflecting that the entity/person holding the license/ registration certificate/ membership certificate, as the case may be, is itself/ himself/herself engaged in a business involving commercial activity; or

(III)    Entities holding permits/license etc. for undertaking retail trade (like tehbazari and similar license for hawkers) from Government Authorities/Local Self Government Bodies; or

(IV)    Institutions having certificate of incorporation or registration as a society or registration as public trust for their self consumption.

Note: An entity, to whom WT is made, may fulfill any one of the 4 conditions.

(c)      Full records indicating all the details of such sales like name of entity, kind of entity, registration/license/permit etc. number, amount of sale etc. should be maintained on a day to day basis.

(d)      WT of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture

(e)      WT can be undertaken as per normal business practice, including extending credit facilities subject to applicable regulations.

(f)       A Wholesale/Cash & carry trader cannot open retail shops to sell to the consumer directly.

6.2.16.2 E-commerce activities 100% Automatic
6.2.16.2.1 E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.
6.2.16.3 Single Brand product retail trading 100% Automatic up to 49%Government route beyond 49%
(1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices.(2) FDI in Single Brand product retail trading would be subject to the following conditions:

(a)      Products to be sold should be of a ‘Single Brand’ only.

(b)      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.

(c)      ‘Single Brand’ product-retail trading would cover only products which are branded during manufacturing.

(d)      A non-resident entity or entities, whether owner of the brand or otherwise, shall be permitted to undertake ‘single brand’ product retail trading in the country for the specific brand, directly or through a legally tenable agreement with the brand owner for undertaking single brand product retail trading. The onus for ensuring compliance with this condition will rest with the Indian entity carrying out single-brand product retail trading in India. The investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing/franchise/sub-licence agreement, specifically indicating compliance with the above condition. The requisite evidence should be filed with the RBI for the automatic route and SIA/FIPB for cases involving approval.

(e)      In respect of proposals involving FDI beyond 51%, sourcing of 30% of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors. The quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. This procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the goods purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading.

(f)       Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of single-brand retail trading.

(3) Application seeking permission of the Government for FDI exceeding 49% in a company which proposes to undertake single brand retail trading in India would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The applications would specifically indicate the product/product categories which are 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. In case of FDI up to 49%, the list of products/product categories proposed to be sold except food products would be provided to the RBI.

(4) Applications would be processed in the Department of Industrial Policy & Promotion, to determine whether the proposed investment satisfies the notified guidelines, before being considered by the FIPB for Government approval.

6.2.16.4 Multi Brand Retail Trading 51% Government
(1) FDI in multi brand retail trading, in all products, will be permitted, subject to the following conditions:

(i)       Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.

(ii)      Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.

(iii)     At least 50% of total FDI brought in the first tranche of US $ 100 million, shall be invested in ‘back-end infrastructure’ within three years, where ‘back-end infrastructure’ will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure. Subsequent investment in backend infrastructure would be made by the MBRT retailer as needed, depending upon its business requirements.

(iv)     At least 30% of the value of procurement of manufactured/processed products purchased shall be sourced from Indian micro, small and medium industries, which have a total investment in plant & machinery not exceeding US $ 2.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. The ‘small industry’ status would be reckoned only at the time of first engagement with the retailer, and such industry shall continue to qualify as a ‘small industry’ for this purpose, even if it outgrows the said investmentof US $ 2.00 million during the course of its relationship with the said retailer. Sourcing from agricultural co-operatives and farmers co-operatives would also be considered in this category. The procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the manufactured/processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis.

(v)      Self-certification by the company, to ensure compliance of the conditions at serial nos. (ii), (iii) and (iv) above, which could be cross-checked, as and when required. Accordingly, the investors shall maintain accounts, duly certified by statutory auditors.

(vi)     Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census or any other cities as per the decision of the respective State Governments, and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.

(vii)    Government will have the first right to procurement of agricultural products.

(viii)   The above policy is an enabling policy only and the State Governments/Union Territories would be free to take their own decisions in regard to implementation of thepolicy. Therefore, retail sales outlets may be set up in those States/Union Territories which have agreed, or agree in future, to allow FDI in MBRT under this policy. The list of States/Union Territories which have conveyed their agreement is at (2) below. Such agreement, in future, to permit establishment of retail outlets under this policy, would be conveyed to the Government of India through the Department of Industrial Policy & Promotion and additions would be made to the list at (2) below accordingly. The establishment of the retail sales outlets will be in compliance of applicable State/Union Territory laws/ regulations, such as the Shops and Establishments Act etc.

(ix)     Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading.

(x)      Applications would be processed in the Department of Industrial Policy & Promotion, to determine whether the proposed investment satisfies the notified guidelines, before being considered by the FIPB for Government approval.

(2) List of States/Union Territories as ment ioned in Paragraph 6.2.16.4(1)(viii)

  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 & Diu and Dadra and Nagar Haveli (Union Territories)

In terms of Section 13(1) , Chapter IV of FEMA 1999, if any person contravenes any provision of FEMA, 1999, or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees Two lakh, where the amount is not quantifiable and where the contravention is a continuing one, further penalty which may extend to Rupees Five thousand for every day after the first day during which the contravention continues. The provisions of Section 15 of FEMA, 1999 permit compounding of contraventions and empower the Compounding Authority to compound any contravention as defined under Section 13 of the Act on an application made by the person committing such contravention. In terms of rule 4 of the Foreign Exchange (Compounding Proceedings) Rules, 2000, the powers to compound the contraventions have been prescribed for compounding authorities with regard to the sum involved in such contravention and no contravention shall be compounded unless the amount involved in the contravention is quantifiable.

The compounding application will be examined in terms of sub rule (1) of rule (4) of the Foreign Exchange (Compounding Proceedings) Rules, 2000 to assess whether the contravention is compoundable and the amount of contravention is accordingly quantified. The nature of contravention is ascertained keeping in view, inter alia, the following indicative points :

  1.  whether the contravention is technical and/or minor in nature and needs only an administrative cautionary advice;
  2.  whether the contravention is serious in nature and warrants compounding of the contravention; and
  3.  whether the contravention, prima facie, involves money-laundering, national and security concerns involving serious infringement of the regulatory framework. However, the Reserve Bank of India reserves the right to classify the contraventions as stated above and neither the contravener nor others have any right to classify any contravention as technical suo motu.

It is clarified that whenever a contravention is identified by the Reserve Bank of India or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide (i) whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/cautionary advice; (ii) whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or (iii) whether the issues involved are sensitive/serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE). However, once a compounding application is filed by the concerned entity suo motu, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

Section 15(2) of FEMA states that where a contravention has been compounded under sub-section (l), no proceeding or further proceeding, as the case may be, shall be initiated or continued, as the case may be, against the person committing such contravention under that section, in respect of the contravention so compounded.

(The above article is contributed by CA Kamal Garg having professional and academic interests in IFRS, Accounts, Auditing and Corporate Laws arenas. He can be approached at cakamalgarg@gmail.com)

Read Other Articles written by CA Kamal Garg

[1] ET Bureau | 5 May, 2014

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