FDI and Multi Brand Retailing

Foreign Direct Investment is the most effective and efficient source of funding for Companies seeking leverage of funds from across the border. As FDI has broaden the horizons of fund raising for Companies it also involves a number of compliances with respect to Central Government, Ministry of Finance, Reserve Bank of India (RBI), Department of Industrial Policy and Promotion (DIPP) and also sometimes the Enforcement Directorate (ED).

One of the burning topic of discussion since last decade under FDI has been Multi Brand Retailing. Though Single Brand retailing has been allowed long back, multi brand retailing has been struggling to get recognized by the Indian law makers to get a sanction.

As we all know to make some law effective we required that the bill is passed by both the houses of the parliament and get the assent of the president of India, there have never been consensus over this issue. While CPI(M) being the main party apposed to the whole idea of allowing foreign giants to control the Indian Retail market and allowing FDI in multi brand retailing in India, many politicians thought of taking this idea into main stream and benefit the society at large.

Opposition party CPI(M) leader Mr. Sitaram Yechury even went on saying that we would use “all options” available in the rules of business in Parliament to thwart government’s attempt to implement FDI in retail.

Let us have a look at the history of Single and Multi-Brand Retailing in India: –

1995

World Trade Organization’s general agreement on Trade in Services,which included both wholesale and retailing services, came into effect

1997

FDI in cash and carry (wholesale) with 100% rights allowed under the Government approval route.

2006

FDI in cash and carry (wholesale) brought under the automatic route
Up to 51% FDI in single brand retail outlet permitted, subject to press note 3 (2006 series)

2011

100% FDI in single brand retailing
Multi brand retailing still restricted.

2012

On 7^th Dec 2012 India allowed 51% FDI in Multi Brand Retail subject to government approval (DIPP)

As per the consolidated FDI policy which is effective from August 28, 2017 Foreign Direct Investment in Multi Brand Retailing is allowed up to 51% but subject to the approval of Government, Department of Industrial Policy and Promotion (DIPP).

“FDI in multi brand retail trading, in all products, will be permitted, subject to the following conditions:

Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.
Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.
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 frontend units;
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.
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.
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.
Government will have the first right to procurement of agricultural products
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 the policy. 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.
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.

By the aforesaid conditions it can be clearly seen that as prima facie FDI in Multi Brand Retailing is allowed but it has to go a long way to truly penetrate deeper into the Indian market. As Indian Market is still having a conservative view with regards to FDI entering the Indian Market. The primary reason for this concern might be the poor infrastructure, lack of robust logistic network and shortage of funds or inability to fight competition at an international stage at this point of time.

Big Companies with an advantage of economies of scales due to its colossal size whereas Indian producers are still struggling with the contemporary style of doing business.

Initiative like start up registration with DIPP and availing special tax initiatives and better assess ability to funds, easier and simpler Tax regime by the introduction of GST and economic reforms by way of new Companies Act, 2013 would definitely prove to be a big aid for the Indian manufacturer and retailer in long term.

But one thing is for sure that globalization is not a one-day event but an on-going process and we as a nation are moving from one phase of development to another. Changes with respect to allowance of FDI in Multi Brand Retailing are sure to come in future but the time that will be taken for that no one can predict.