FDI in Multi Brand Retail Trade – The Journey

Dinodia Capital Advisors

September 2012

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Executive Summary

For more than a year, every problem in India has been blamed on the incumbent

government by national and international lobbies and “Policy Paralysis” has been the

reason cited for every shortfall including the falling rupee, the worsening fiscal deficit, high

inflation, high interest rates and delayed capital expenditure plans

On September 14, 2012 the government broke the shackles and came out with the much

needed and highly anticipated reforms regarding Foreign Direct Investment (FDI) in the

Multi-brand Retail Sector (MBRT) of India with a surety of no roll – back this time

Dinodia Capital Advisors‟ view is that these reforms will create price competition and

remove the multiple layers of inefficiency between the farmers and the final retailer and

hopefully help the farmers and producers of goods realize a bigger share of the pie in

the long-run

Given the current negative sentiment of foreign investors (post Vodafone and Draft GAAR

Guidelines) and the lack of capital inflows in India, these reforms will encourage foreign

firms to give India a serious look and encourage them to invest capital in the country

As foreign firms who partner with local Indian firms are able to generate profits and achieve

success in India it will encourage FDI in other sectors as well and create a positive

image for India globally as a good place to do business!

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The Story So Far….

1997

2006

2010

20112012

100% FDI being

permitted in cash &

carry wholesale trading

under the government

approval route

FDI permitted in cash & carry,

wholesale trading comes under

the automatic route

FDI in single brand retail was

permitted to the extent of 51%

DIPP had put up a discussion

paper proposing FDI in multi-brand

retail

Union Cabinet approved

51% FDI in multi-brand retail

Increasing the FDI limit in single

brand retail to 100%

However the implementation was

deferred, for evolving a broader

consensus on the subject

January

DIPP notified the

decision to allow 100%

FDI in Single brand

retail

September

Union Cabinet approves

the FDI limit in Multi

brand retail of 51%

*DIPP: Department of Industrial Policy and Promotion

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The Policy - Single Brand Retail Trading

EARLIER NOW

FDI in single brand retail trading is permitted

up to 100% with Government approval

Products to be sold should be of a „Single

Brand‟ only

30% sourcing is to be done from micro and

small industries (investment in Plant and

Machinery not exceeding US $ 1mm)

This condition will ensure that SME sector,

including artisans, craftsman, handicraft and

cottage industry gets the benefits of

liberalization

For Single Brand Retail Trading (SBRT)

sector – only 51% FDI permitted – subject

to approvals and conditions such as:

Products should be of a „Single

Brand‟ only

Products to be under the same brand

in one or more countries if are sold

outside India

„Single Brand‟ products should be

branded during manufacturing

The foreign investor should be the

owner of the brand

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EARLIER

FDI in Multi Brand Retail Trading was not

allowed

FDI in Multi Brand Retail Trade is permitted up

to 51%, subject to following conditions:

Outlets to be set up - only in cities with a

population of more than 1m (within a 10km

range)*

Minimum investment by the foreign investor -

US $100mm and at least 30% of the

procurement of manufactured / processed

products shall be sourced from 'small

industries‟ (investment in Plant and Machinery

not exceeding US $1million)

Sourcing requirements will be checked

together for first five years – after that on a

annual basis

Retail trading by means of e-commerce – not

permissible

At least 50% of total FDI brought in shall be

invested in „back-end infrastructure‟** within

three years of the induction of FDI

NOW

The Policy - Multi Brand Retail Trading

* States in favor of FDI in MBRT - Andhra Pradesh, Assam, Delhi, Haryana,

J&K, Maharashtra, Manipur, Rajasthan, Uttarakhand and Daman & Diu and

Dadra Nagar Haveli

** Back-end Infrastructure includes supply chain, logistics and warehousing but

not land and rentals

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SWOT Analysis of FDI in Retail

STRENGTHS

WEAKNESSES

OPPORTUNITIES

THREATS

• Retail is a $450bn Industry in

India

• Young and dynamic manpower

• Highest shop density in the world

• High growth rate in retail &

wholesale trade

• Presence of big industrial houses

with deep pockets

• High capital investment required

in the retail sector (real estate)

• Lack of trained and educated

work force

• Higher prices as compared to

local shops

• Will mainly cater to high-end

consumers placed in metros

• High employment generation in

the future

• Will enhance financial condition of

farmers

• Encourage foreign capital inflows

• Result in increasing supply-chain

efficiency

• Improve Logistics & Infrastructure

• Effect on the small retailers - local

Kirana stores (mom-pop stores)

• Long gestation period - Foreign

Retailers will take a while to adapt

to India and generate profits

• States not buying in so

efficiencies expected may not be

achieved

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Subsequent populist decisions are feared, such

that the foreign retailers may not be able to

achieve dominant market positions or buy / rent at

the right locations

Rough ride so far…..

It is not easy to be successful in a place where culture, tradition and food habits change

every 124 miles

Some of the largest and most prominent Indian business houses such as Reliance, Godrej,

RPG and the Future Group have all struggled in the Retail Industry in India1. These large

players have lost a significant amount of money and in fact one of the leaders in the space,

Subhiksha, which at one time had almost 1,600 outlets has shut down

India‟s image is one of a “fickle policy maker” with regulations being frequently changed,

rolled back and even retrospectively amended have made investors speculative

1In order to read a detailed report on the Indian Retail Industry please visit:

http://www.dinodiacapital.com/research.asp

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Hidden Opportunity despite the rough ride

A comparison of the Retail Industry in Emerging Markets shows that India actually has the

lowest organized retail sector amongst its peers and therefore is the biggest opportunity

India‟s closest peer in terms of size of population, China, has an organized retail market that

is almost 3x the size of the market in India. A country like Brazil which is less than a 1/6th

of India in terms of population has a organized retail market of almost 6x of that of India

and mostly homogeneous tastes across the country making it easy to standardize offerings

Indonesia which is the largest economy in Southeast Asia and often cited as replacing

India as the “I” in BRIC economies has displayed strong growth in 2011 and in the first half

of 2012 with significant growth in the Retail sector. It has only 1/5th of India’s population

and yet has a organized retail sector which is 5x of that of India

There are two ways to look at the above data. One is to see that there are plenty of

emerging markets where more capital could be deployed in retail, but the other is to see

the hidden opportunity in investing in the retail sector in India (the 2nd largest country in

the world in terms of population) where there is a white canvas and wide spaces and the

story of organized retail can be painted in whichever way the potential foreign entrants desire

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Global Experience of FDI in Retail

India

• FDI allowed 51% in Multi-brand & 100% in Single Brand

• Population 1,210m

• Share of organized retail 5-6%

• Top Retailer: Future Group

Brazil

• FDI allowed 100%

• Population 205.7m

• Share of organized retail 36%

• Top Retailer: Pao de Acucar

Russia

• FDI allowed 100%

• Population 143.1m

• Share of organized retail 33%

• Top Retailer: X5 Retail Group

China

• FDI allowed 100%, up from 49% in 1992

• Population 1,343m

• Share of organized retail 20%

• Top Retailer: Bailian Group Co Ltd

Indonesia

• FDI allowed 100% in 1998

• Population 242.3m

• Share of organized retail 30%

• Top Retailer: MatahariPutra Prima

Emerging Markets which allowed FDI in Retail with the share of

organized retail in the overall retail industry:

Source : Goldman Sachs, Technopak

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Find a Joint Venture Partner –

The maximum equity stake which a Foreign investor can

hold cannot be more than 51%, therefore it will have to

find an Indian partner to enter into a Joint Venture with

Look for space – It will have to look for a city with a

minimum population of 1 million as per the 2011 census.

India comprises of about 51 cities which meet the

condition. Further state government and FIPB

permissions will be required

Get it approved - All the regulatory approvals of FDI and

other applicable laws will have to be obtained, which will

be easier to do, given the presence of Indian partner

Steps to Establish Presence in India

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Proposed Business Model

Indian Partner

- To provide 49% stake in form of capital / infrastructure or leverage their network to establish presence

-They will also be able to navigate the political and legal hurdles as well as use their local knowledge and brand

Foreign Partner

- To provide capital of at least US $100mm

- They will bring technology, efficiency in supply chain management and global experiences from previous ventures

Outcome:

- There is a possibility of a mutually symbiotic relationship between the

Foreign and Indian Partner to jointly harness their capabilities and

create a world-class Retailer in India, which will have the unique

advantage of a being the first mover and establishing the benchmark of

excellence for the Industry

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The ride despite the speed breakers …

There is clearly an opportunity for the Domestic Giants, Kirana Stores and the Foreign

Retailers to co-exist in India

The Wal-Mart model, offers every-day low pricing, but are typically in far-off locations, have

a homogenous selection of products across their stores, typically need 150,000 sq feet of

space and require a car to get to. India is years away from when majority of its population

will have the ability to only shop at the Wal-Marts of the world. Competition will force the

Kirana Stores to lift their game, become more price competitive, have a better selection

of goods at lower prices and maintain proper records of customers (people will still shop

there for proximity, comfort of relationship and easy credit)

Foreigners will bring to India their expertise and efficiency in retailing, they will invest

capital in improving logistics and infrastructure in India (for example: Cold Storage

Logistics is still almost non-existent in India) and share technology and know-how with their

local Indian Partners, but will also be able to become profitable over a period of time as their

brands and presence increase across the country

Hopefully, the Domestic Giants will learn the best practices from their foreign counterparts

and just as in Brazil foreign retailers thrive but still a local player is the most dominant

(Pao de Acucar) India will see a much more inclusive and efficient Retail Industry

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On the whole, if India has to grow it needs capital, training

and innovation. Yes the short-term effects of the announced

reforms will be painful, but in the long-term if they will help

make Retail a more organized industry in India, provide

better quality goods at cheaper prices at convenient

locations, improve infrastructure and the supply chain

mechanism throughout the country, provide employment

and retail sector specific training to a large population it will

be a huge boon to the nation

Foreign Retailers who are looking to make a quick profit are better off investing elsewhere. But

those who are willing to be patient and make a more long-term bet on India, definitely have the

opportunity to “HIT THE BULLS EYE.” India is a virtually untapped and a huge growing market

in terms of the Organized Retail Industry ($450bn industry, with only 5-6% organized retail).

The foreign players who are willing to learn from their mistakes in other emerging markets and

early experiences in India, go through a careful partner selection process, understand the

political / legal / external hurdles and invest with a realistic time horizon truly have an

unique opportunity to create win-win situations for all stakeholders. Several other sectors have

seen foreign entrants with a successful and profitable model in India (Dominos, Citigroup,

Honda etc). Our view is that the FDI in Retail will unfold in a similar manner in the times to come!

The ride despite the speed breakers …

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Dinodia Capital Advisors

Dinodia Capital Advisors

Corporate Profile

Dinodia Capital Advisors is a Financial Consulting firm

based in New Delhi, India. It assists clients across all

industries grow, both organically and inorganically. The

firm helps clients Raise Capital. Execute Merger &

Acquisition opportunities. Restructure, Transform and

Turnaround businesses. Resolve challenging problems.

Take advantage of financial and strategic opportunities.

Balance investor expectations. DELIVER VALUE

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Dinodia Capital Advisors Service Offerings

Dinodia Capital Advisors Advice Clients on :

Mergers and AcquisitionWe help in conducting a robust scan

of the market and selecting the most

suitable buyer or seller

Capital RaisingWe advice clients on their capital

needs and find them the right

partner who brings more than just

capital

RestructuringWe advise on business

restructurings to help achieve

financial, strategic and operational

efficiency

India Entry StrategyWe help set up and incubate

businesses in India, acting as a

trusted advisors to facilitate the

India entry strategy

Organizational

TransformationWe work with companies to put

systems, processes and

people in place to help take

advantage of both organic and

inorganic synergies

TurnaroundsWe work closely with companies to

help devise and implement a

turnaround strategy by plugging the

deficiencies of management,

technology, capital or partnerships

Dinodia Capital Advisors Private Limited C-37, Connaught Place , New-Delhi 110001, Website - www.dinodiacapital.com

Tel No: +91 11 2341 7692, 2341 5272 ,Fax No: +91 11 4151 3666

Email: dinodiacapital@dinodiacapital.com

For Further Details, Contact :

Pankaj DinodiaChief Executive Officer

Email: pankaj.dinodia@dinodiacapital.com

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