J. Sagar Associates partner Raj Ramachandran writes on the recent liberalized policy for Foreign direct investment (“FDI”) in single brand product trading.
Some good news in the first fortnight of new year is that vide a press note issued on January 10, 2012 the Government has liberalized the policy for Foreign direct investment (“FDI”) in single brand product trading. Until now, FDI in retail trade was prohibited, except in single brand product trading where up to 51% FDI was permitted under the government route. There were conditions imposed even for 51% FDI, which inter alia included that the products to be sold should be of a single brand, the products should be sold under the same brand internationally, the products should have been branded during manufacture and that the foreign investor should be the owner of the brand.
With this recent change, applications can now be made to the Government seeking permission for up to 100% FDI in entities for engaging in single brand product trading. The press note however specifies an additional condition to be complied with where the proposal involves FDI in excess of 51%. The condition is that there should be mandatory sourcing of at least 30% of the value of products sold from Indian small industries/ village and cottage industries, artisans and craftsmen. The term “small industries” has been defined in the press note to mean industries having a total investment in plant and machinery not exceeding USD 1 million. The valuation would be the installed value without providing for depreciation. It has also been clarified that the valuation of the small industries will have to be met at all times, and if at any time the valuation is exceeded, such industry shall not qualify as a small industry for this purpose. The entity that has sought FDI will have to self-certify such compliance, and this will also be subject to verification/ checking by the statutory auditors of the accounts maintained by such entity.
The above liberalization, as the press note refers to it, should encourage large foreign corporations who previously had to necessarily identify a local partner to hold the 49% equity if they intended to have a presence in India. With this change, there should be more investment forthcoming in the single brand product trading sector and also some consolidation of shareholding in existing joint ventures over a period of time.
In multi brand retail, the union cabinet had, in November 2011, cleared up to 51% FDI under the government route. The policy had put in place certain ‘safeguards’ in that the retail sales locations could be set upon only in cities with a population of more than 1 million, which as per the press information bureau would only cover 53 cities out of the 7935 towns and cities in India. Minimum investment of USD 100 million was stipulated, with at least half the investment to be made in back end infrastructure like cold chains, refrigeration, transportation, packing, sorting and processing. Other conditions included sourcing of a minimum of 30% from small industries having investment of not more than USD 1 million. Although the policy was introduced as an enabling framework to be adopted by states, this unfortunately had to be rolled back. The approval for multi brand retail would have been quite a game changer, but it now appears that there be some more waiting period before this becomes a reality.
Until then, may be the 100% FDI in single brand product trading could be looked up to! Given the similar conditions imposed in terms of sourcing from small industries and the valuation of the investment, etc, that govern 100% FDI in single brand product trading and the manner in which this will be implemented on the ground, the Government may perhaps require to course correct the policy while reintroducing FDI in multi brand retail with so called ‘safeguards’ for domestic stakeholders.
The author is a Partner at J. Sagar Associates. Views are personal.