Indian policy on 51% FDI in multi-brand retail simplified

22 Sep '12

6 min read

If you are a foreign retailer entering or expanding in the Indian market, you will need an Indian joint venture partner, to evolve strategy around store location, back-end infrastructure and procurement contracts and to obtain necessary regulatory approvals both at the centre and state levels. The process of set-up (i.e. market analysis through to store opening) can take a minimum of 18 months for any new entrant.

If you are an Indian retailer, existing operations will need to be restructured to meet policy conditions for a potential FDI partnership.

On 20 September 2012, the government of India issued a notification that will go a long way in developing India as an important market for single-brand players. Single-brand retail trading rules have been simplified by making them more business friendly.

Single brand retail trading:

The earlier FDI policy on this segment of the retail trading window allowed 100% FDI, with government approval, subject to the following key conditions:

• Products should be only of a single brand.

• Products should be an international brand.

• Products should be branded during manufacture.

• The investor should be the brand owner.

• Thirty per cent should be mandatorily sourced from small enterprises of the value of goods sold. (Not applicable in case the FDI was capped to 51%).

Realising the difficulty in complying with the sourcing condition, considering single-brand retail players typically deal with speciality and hi-tech products, the government has now enabled 30% sourcing to be undertaken from anywhere in India.

Only a preference has been stipulated to use small and medium enterprises for sourcing. For convenience of initial roll-outs, the sourcing compliance requirement for first 5 years has been averaged. After this period, it will be annual compliance.

Additionally, the sourcing commitment will now be counted on the basis of the value of goods ’purchased’ as against the earlier value of goods ’sold’. The policy now also permits a person other than a brand owner (e.g. licensee/ franchisee) to invest into a single-brand retail company on a territorial exclusivity basis.

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