FDI In Multi-Brand Retail: Government Taking A Step Forward

It has been a while since foreign direct investment (FDI) in multi-brand retail was allowed in retail. This was supposed to one of the major triggers for the sagging Indian economy. However, the step hasn’t yielded the expected results so far. Not many new players have approached the government, indicating a tepid response.

Finally, the government seems to be taking the matter forward. Reports suggest that with the government keen to encourage foreign retailers to set up shop in India, multi-brand retailers are likely to be asked to invest 50% of only the first tranche of investments in back-end infrastructure.According to the policy on FDI in multi-brand retail announced in September 2012, foreign investors would need to invest at least 50% of the total FDI within three years of the first tranche in back-end infrastructure. Back-end infrastructure have been defined as investments made for processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agricultural market produce infrastructure and other such processes. Note that expenditure on land cost and rentals has been keep out of this ambit.

However, retailers had raised doubts about whether the 50% would be as a share of the total investment or merely as a part of the first tranche. Clarity on this front would provide an impetus to the retail sector, which has witnessed a dull season over the past few quarters.

Apart from this, the government recently issued guidelines clearly defining the concept of a 'group company' in the FDI policy, which is expected to address concerns over backdoor entry of foreign retailers into India through the wholesale route. In a press note, the Department of Industrial Policy and Promotion (DIPP) stated that a “Group company means when two or more enterprises, which directly or indirectly are in a position to either exercise 26% or more voting rights in the other enterprise or appoint more than 50% of members of board of directors in other enterprise". Experts welcomed the new definition, which is in line with the one in the foreign trade policy.

There have been charges that Bharti-Walmart's sale to Bharti Retail has breached this group sale rule. If Bharti Walmart and Bharti Retail are considered a ‘Group Company’ according to the new definition, the two companies will have to reduce the volume of goods sold by one to another.

Further intimation is expected to come in from the DIPP. However, the overall impact on the sector is expected to be positive.