Our recent eAlert! of 20 December 2011 reported the Indian Government's halt on its proposed major reforms to foreign direct investment (FDI) in India's retail sector. The Government's original proposal of 24 November 2011 would have allowed foreign multi-brand retailers to participate in retail joint ventures as well as single brand foreign retailers to own 100% of their operations in India.
The Indian Government has again reviewed its FDI policy and in a press note released on 10 January 2012, announced that it has now decided to allow FDI of up to 100% by foreign companies into single brand retail in India. Previously, foreign single brand companies could only own up to 51% in an Indian single brand retail joint venture with an Indian partner.
But there's a catch with the new policy. Foreign single brand companies that wish to invest in more than 51% in the single brand retail joint venture, or own the single brand joint venture outright, are required to ensure that 30% of the value of the single brand products sold are sourced from Indian "small industries/village and cottage industries, artisans and craftsmen". "Small industries" are defined as industries which have a total investment in plant and machinery of US$1 million or less. The announcement is also unclear on whether the 30% requirement applies to a retailer's products sold only in India or worldwide.
The existing rules for the foreign company continue to apply, namely:
- products must be sold worldwide by the foreign company under a single brand
- products must be branded during the manufacturing process
- the foreign company must be the owner of the brand.
This development takes immediate effect and is a faltering step towards greater access to new FDI in India. The local requirement will suit certain retail brands (eg food retailers). However retailers who source/manufacture single brand products in other countries (eg Australia, China or the United States of America) will be ineligible from owning more than 51% of the single brand retail joint venture. India's market opening is still compromised by the politics of its large labour force but each step forward should be encouraged.
Middletons' India Group will continue to monitor developments to changes in India's FDI policy and will keep you updated.
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