India: DIPP Clarifications On Single Brand Retail - Branding It Right!

Over the years, the Indian retail trading business has been perceived as a lucrative investment destination by global investors. Most of the international brands have either entered Indian markets or are looking at setting up shops in India soon. The recent policy changes introduced by the current BJP-led central government have certainly given a boost to global investors' sentiment towards investing in India.

Background

In 2006, the Government of India (Government) had allowed 51% foreign direct investment (FDI) in single brand retail trading (SBRT) under the government approval route (i.e. with the prior approval of the Department of Industrial Policy & Promotion (DIPP) / Foreign Investment Promotion Board (FIPB)). The SBRT sector was further liberalised in (i) January 2012, when the Government permitted 100% FDI in SBRT under the approval route; and (ii) August 2013, when FDI in SBRT was allowed upto 49% under the automatic route (i.e. without any prior approval of the DIPP / FIPB), and beyond 49% under the government approval route.

While FDI by non-residents in the SBRT sector is subject to the prescribed conditions under FDI Policy, these have also been eased by the Government in recent years. Some of the existing conditions include: (i) products must be sold under 'single brand only'; (ii) products should be branded during manufacturing; (iii) products are required to be sold under the same brand internationally; (iv) local sourcing requirement of 30% of value of goods purchased; for FDI beyond 49%; (v) foreign entity or entities, other than the brand owners, may also invest in the SBRT sector pursuant to a legally tenable agreement with the brand owner, etc.

DIPP's New Clarifications

To further liberalise the extant conditions and attract FDI in the SBRT sector, the DIPP in its clarification dated 7 July 2015 has set out the following:

  • The non-resident entity or entities, whether owner of the brand or otherwise, can undertake SBRT business in India through one or more wholly owned subsidiaries or joint ventures in India.

    The consolidated FDI Policy released by the DIPP on 12 May 2015 (FDI Policy) was silent on this aspect. This specific clarification comes as a much awaited relief and will provide further structuring options to foreign players in the SBRT sector.
  • DIPP has also clarified that the conditions for FDI in the SBRT sector under the FDI Policy will equally apply to 'Indian brands' receiving FDI in India.

The above clarifications are without prejudice to other conditions applicable to the SBRT sector under the FDI Policy.

Khaitan Comment

Since the FDI policy in respect of the SBRT sector has evolved gradually, there are still nascent policy issues which need to be addressed for commercial ease of doing business in this sector. Accordingly, the DIPP's clarifications are a welcome move; especially since the FDI Policy was silent on these aspects. Such clarifications on policy matters from the DIPP will only enhance the investors' faith in the Indian economy.

Having said this, there are still certain issues (including policy matters) on which the FDI Policy in respect of FDI in SBRT is silent or ambiguous and require clarity. For example, it is unclear whether a foreign retailer can sell products under various sub-brands through one retail entity in India. Further, it is not clear whether foreign retailers can have retail entities and franchisee arrangements in parallel in India. However, given the current Government's commitment towards growth of the Indian economy and attracting FDI, we can hope for more clarifications being issued soon on such aspects in the FDI Policy which need clarity.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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