India: Liberalisation Of FDI In The Single Brand Product Retail Trading Sector

Last Updated: 26 April 2018
Article by Karan Ajitsaria and Charumathi

India has seen a significant increase in the inflow of foreign funds in the recent past. As per the Fact Sheet on Foreign Direct Investment (FDI), in India, between April, 2000 and December, 2017, prepared by Department of Industrial Policy & Promotion, the trading sector alone has garnered approximately 4% (Four Percent) of the total foreign investment in India. With the positive growth in the Indian economy, and the spending power of the consumers in India today, the potential for the trading sector is very high.

As per the Consolidated FDI Policy of India (Consolidated FDI Policy), any Indian company, engaged in single brand retail trading (SBRT), and contemplating a foreign investment of above 49% (Forty Nine Percent), has to obtain the prior approval of the government for the said foreign investment. This is commonly known as an investment under the 'government route'. Further, entities engaged in SBRT and contemplating foreign investment above 51% (Fifty One Percent) have to mandatorily source 30% (Thirty Percent) of the value of the goods from India, preferably from medium, small and micro enterprises, village and cottage industries, artisans and craftsmen, in all sectors. The Consolidated FDI Policy specifies that an entity engaged in SBRT which has more than 51% (Fifty One Percent) foreign investment, is allowed to meet the 30% (Thirty Percent) sourcing requirement in the first instance, based on an average of the total value of the goods purchased over 5 (Five) years, beginning from the 1st of April of the year of commencement of its business (i.e. from the year the first store of such SBRT entity opens). Upon the completion of the first 5 (Five) year period, such entity must meet the 30% (Thirty Percent) local sourcing requirement on an annual basis. The Consolidated FDI Policy also stipulates conditions like filing with the Reserve Bank of India / competent authority the investment/ licensing/ franchisee agreements executed by the Indian entity carrying on retail trading in India, etc.

The mandatory requirement of sourcing of goods from local suppliers by entities engaged in SBRT and contemplating foreign investment above 51% (Fifty One Percent) has obstructed foreign retailers from investing in the Indian market, primarily due to the inability of the local suppliers to meet the high standards/ quality requirements of foreign retailers. In a move to boost infusion of FDI in the SBRT sector, the Central Government has, by way of Press Note No. 1 (of 2018), issued by the Department of Industrial Policy & Promotion (Ministry of Commerce & Industry), on January 23, 2018, inter alia, modified the FDI norms applicable to entities engaged in SBRT, by relaxing certain conditions applicable to foreign investment in the said SBRT sector. The said Press Note provides that the amendments introduced therein shall come into effect only upon notification by the Reserve Bank of India under regulations framed under Foreign Exchange Management Act, 1999 (which is currently pending).

The key amendments to the extant Consolidated FDI Policy with respect to the SBRT sector are as below:

  1. 100% (One Hundred Percent) FDI in entities engaged in SBRT is now permissible under the automatic route. This would mean that no Government approval would be required for the said investment, as is required currently. Further, persons resident outside India may, upon notification of the amendment, fully own and operate Indian entities engaged in SBRT, without approaching the Government for approval, subject, however, to compliance with the applicable SBRT sector specific conditions mandated in the Consolidated FDI Policy and other applicable laws.
  2. An entity engaged in SBRT shall be permitted to comply with the mandatory sourcing requirement of goods, from India, in the following 2 (Two) ways:

    1. either directly for itself, towards its operations in India; and/or
    2. by a set-off of its incremental sourcing of goods from India for its global operations during the initial 5 (Five) year period, beginning from the 1st of April of the year of the opening of the first store (against the mandatory sourcing requirement of 30% (Thirty Percent) of purchases from India). After the completion of the initial 5 (Five) year period, the entity engaged in SBRT must meet the 30% (Thirty Percent) sourcing norms directly towards its operations in India, on an annual basis.

The amendment to the Consolidated FDI Policy defines incremental sourcing to mean, the increase in terms of the value of global sourcing from India for that single brand (in INR terms) in a particular financial year, over the preceding financial year, by the entities engaged in SBRT, either directly or through their group companies. The entities engaged in SBRT are currently not allowed to set off their local sourcing requirements against sourcing made from India for their global operations, including without limitation through their group companies.

Foreign retailers, who have refrained from investing in India due to the difficulty in acquiring 100% (One Hundred Percent) stake in the Indian entity, may now be interested in investing in India with full control over the Indian SBRT entity.

The mandatory sourcing requirement stipulation has been one of the major impediments in attracting FDI in the SBRT sector. By liberalising the restrictions with respect to local sourcing (i.e. allowing foreign retailers to set off their local sourcing requirements against their global operations and permitting entities to achieve the 30% sourcing requirement gradually over a period of 5 (Five) years), the Government has paved the way for an open and friendly environment for FDI in the SBRT sector. However, the Government has not completely removed the mandatory local sourcing requirements keeping in mind the interests of the manufacturing sector in India.

The restrictions on sourcing continue to apply to foreign investors intending to invest more than 51% (Fifty One Percent) in the Indian SBRT entity. In view of the hesitancy of many foreign retailers in sourcing locally, the foreign retailers may opt not to invest more than 51% (Fifty One Percent), thereby retaining control of the Indian SBRT entity and sourcing its goods either from India or abroad, at its sole discretion.

It remains to be seen whether the amendments to the Consolidated FDI Policy in the SBRT sector, would translate into profits and lead to any significant increase in infusion of FDI in the SBRT sector. Further, the industry is now looking at the Reserve Bank of India to make corresponding amendments to the regulations framed under Foreign Exchange Management Act to make the above amendments effective.

It is pertinent to note that no amendments / concessions (including in the mandatory local sourcing requirement) have been proposed by the Government for entities engaged in the multi brand retail trading sector. FDI in multi brand retail trading sector is still capped at 51% (Fifty One Percent) and any foreign investment in the said sector can only be effected through the Government approval route.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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