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On 10th January 2012 the Government of India allowed foreign
retailers to hold up to 100% shares in a company involved in single
brand retail, up from a limit of 51% but subject to a number of
conditions. Some of the conditions attached to the policy were
difficult in practical terms to implement for most foreign
brands.
One that was particularly difficult was the need for the foreign
investor to be the owner of the brand. The requirement that 30%
local sourcing rule from small scale industries or business was
unworkable for many premium brands and unreasonable for a large
investor.
Several applications for consent from the Government were either
rejected or stuck in the bureaucratic process. As a result, The
Government has decided to amend these two most problematic
conditions. The current position is clarified in a notification
dated 21st September 2012 from the Department of
Industrial Policy and Promotion of the Government of India. The
conditions amended are:
Products to be sold should be of a 'Single Brand'
only.
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.
'Single Brand' product-retail trading would cover only
products which are branded during manufacturing.
Only one non-resident entity, whether it is the owner of the
brand or otherwise, is permitted to undertake single brand product
retail trading in India, for a specific brand. If the applicant is
not the owner of the brand, then a legally tenable agreement, has
to be in place between the applicant and the brand owner for the
purpose. The investor has to provide a copy of the appropriate
license / franchise / sub-license agreement with the application at
the time of seeking approval from the Government. The Indian entity
involved in product retail trading in India has to ensure that it
complies with the requirements under the policy.
Only one non-resident entity, whether it is the owner of the
brand or otherwise, is permitted to undertake single brand product
retail trading in India, for a specific brand. If the applicant is
not the owner of the brand, then a legally tenable agreement, has
to be in place between the applicant and the brand owner for the
purpose. The investor has to provide a copy of the appropriate
license/franchise/sub-license agreement with the application at the
time of seeking approval from the Government. The Indian entity
involved in product retail trading in India has to ensure that it
complies with the requirements under the policy.
Where the foreign investor is seeking to hold more than 51%
shares in an Indian company, 30% of the value of goods purchased,
has to be sourced from India, preferably from small and medium
sized enterprises, village and cottage industries, artisans and
craftsmen. The quantum of domestic sourcing has to 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 foreign direct
investment 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.
It is not possible to conduct retail trading by means of
e-commerce for companies that have foreign shareholding.
Applications for consent under the 'Single Brand' retail
policy would have to be made to the Secretariat for Industrial
Assistance (SIA) in the Department of Industrial Policy &
Promotion (DIPP), Ministry of Commerce and Industry. The
application has to 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 from the Government. The application will first be
examined by DIPP to ensure the investment complies with the
guidelines and then it will be sent on to the Foreign Investment
Promotion Board for final approval.
These changes have made it easier for foreign brands to comply
with conditions for obtaining consent and made the policy far more
transparent than it was before. However, it may well be that other
problems arise and so we will be monitoring the way that the policy
is implemented.
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