Though foreign investment in single brand retail
trading has been permitted in India, one of the biggest hurdles
that foreign investors face is the mandatory domestic sourcing
condition. The government has in the past modified this condition
to boost foreign investment in this sector but the same has been
received with scepticism. Recent news reports however seem to
indicate that the government is relooking at the matter to come up
with a solution that will benefit the foreign investors and meet
the government's welfare objective.
The Government of India (GoI) appears to be
giving an impetus to foreign investment in single brand product
retail trading (SBRT). In July 2015, the GoI
clarified that non-resident entities can undertake SBRT in India
through one or more wholly owned subsidiaries or joint ventures.
This clarification will enable the likes of Nike and Adidas to open
wholly owned exclusive stores in parallel to the existing franchise
stores. However, the hotly debated mandatory domestic sourcing
requirement continues to remain the biggest hurdle to foreign
investment in SBRT. Latest news reports suggest that key players
such as Ikea and Apple have been making representations to the GoI
on alternatives to the mandatory domestic sourcing requirement that
will still satisfy GoI's welfare objectives relating to skill
development, capacity building and employment generation.
By way of background, foreign investment in SBRT has been
permitted up to 100% since January 2012, but is subject to
obtaining government approval and compliance with a few sector
specific conditions. The mandatory domestic sourcing requirement is
one such condition that applies where foreign investment in SBRT
will exceed 51%. In its original form, this condition required 30%
of the value of goods purchased to be sourced from Indian/domestic
micro, small and medium enterprises (MSMEs),
village and cottage industries, artisans and craftsmen. Given the
skepticism surrounding the feasibility of this condition, in
September 2012, the GoI amended the condition to allow sourcing of
any domestically manufactured products. However, this change has
not had any significant impact on foreign investment in SBRT.
Consequently, the GoI is considering a further dilution in domestic
sourcing condition and the market expectation is that this
condition could be dropped or significantly diluted in the not too
If the GoI takes a positive step in this respect, it will
certainly provide a boost to the investment cycle in general and
the SBRT sector in particular.
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