IMPLICATIONS OF FDIIN - Accretive - Looking...
Transcript of IMPLICATIONS OF FDIIN - Accretive - Looking...
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IMPLICATIONSOF FDIIN
Retail is in focus and so is the entry of foreign brands and
investments in this industry in India. The liberalisation of
foreign direct investment policies has been a hot topic of
deliberation political!>' and amongst industry experts. In
this article, Vishnu Bagri unfolds the subject to outline
the current script and provide a critical assessment
Prior to January 2006, ForeignDirect Investment (FDI) in retail
trading was prohibited. On
January 24, 2006, the Union Cabinetapproved a major rationalisation of thepolicy on FDI. Amongst various measures
of rationalisation and simplification was
the partial opening up of the FDI route inthe retail sector. The Cabinet approved FDI
up to 51 per cent with prior government
approval for retail trade in 'single brand'products.
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The proposed liberalisation was
effected, thereafter, on 10February 2006,by
the Press Note 3 (2006series) issued by the
Department of Industry Policy andPromotion (DIPP) under Ministry of
Commerce and Industry.
Retail FOI: What is allowed
A 51per cent FDI is permitted in the retailtrade of 'single brand' products with prior
government approval. In other words,
foreign brand owners would need to fmd
an Indian partner to own the 49per cent of
the equity in the company and, thereafter,
it could spread its wings in the retail arena
in the country.
The approval procedureFDI would be allowed only with prior
approval of the government. Broadly, the
procedure is as follows:An application seeking permission of
the government for FDI in retail trade of
'single brand' products would need to bemade to the Secretariat for Industrial
Assistance (SIA) in the DIPP.
The application would specifically
indicate the product, product categories
which are proposed to be sold under a'single brand'.
The DIPP would first process the
applications to determine whether the
products proposed to be sold satisfy the
notified guidelines. It would, thereafter,send the same for consideration by the
Foreign Investment Promotion Board
(FIPB) for approval.Once the approval is obtained, the FDI
could be made in the retail trade company.
Any addition to the product, product
categories to be sold under 'single brand'would require a fresh approval of the
government.
Meaning of 'Single Brand'The government has not categorically
specified the meaning of 'single brand'.However, the press note does provide that
the retail trade of 'single brand' products
would be subject to the following conditions:
• Products to be sold should be of a
'single brand' only.• Products should be sold under the
same brand internationally.
• 'Single brand' product retailing would
cover only products which are
branded during manufacturing.
While the phrase 'single brand' has notbeen defined, a limited intention of the
government may be inferred from the
press release preceding this notification. It
provided that the Cabinet approval was"aimed at attracting investment, technol
ogy and best global practices, as also
catering to the demand of such branded
goods in India. This would imply that
foreign companies would be allowed to sell
goods sold internationally under a 'singlebrand', viz., Reebok, Nokia, Adidas.
Retailing of goods of multiple brands,
even if such products were produced by
the same manufacturer, would not beallowed".
A critical appreciationGoing a step further, we examine the
concept of 'single brand' and the associated conditions:
'Single brand' retail implies that a
retail store with foreign investment can
only sell one brand. But, what is a 'brand'?Brands could be classified as products and
services, or could be for single and
multiple products, or could be manufacturer brands and own-label brands.
Assume that a company owns two
leading international brands in the
footwear industry - say 'JI:. and 'R'. If the
corporate were to obtain permission toretail its brand in India with a local
partner, it would need to specify which of
the brands it would sell. A reading of the
government release indicates that 'JI:. and'R' would need separate approvals,
separate legal entities, and may be even
separate stores in which to operate inIndia.
However, it should be noted that the
retailers would be able to sell multiple
products under the same brand, e.g., aproduct range under brand 'JI:.. Further, it
appears that the same joint venture
partners could operate various brands, but
under separate legal entities.Now, taking an example of a large
departmental grocery chain, prima facie itappears that it would not be able to enter
India. These chains would, typically,source products and, thereafter, brand it
under their private labels. Since the
regulations require the products to bebranded at the manufacturing stage, this
model may not work. The regulationsappear to discourage own-label products
and appear to be tilted heavily towards the
foreign manufacturer brands. It would beworthwhile to mention here that there
A 51 per cent
FOI is permitted
in the retail trade
of 'single brand'
products with
prior government
approval.
June-July 20061 Retailer 191
1111111I111/1
A fair section of
the foreign brands
have been
operating in India
through the
franchising route.
It appears that
they would rather
choose to continue
doing so and wait
till further
liberalisation of
policies
IIIII II III 92 RetaileriJune-July 2006
may be possible structures using job work
arrangements subject to specific confirmation from the DIPP.
illustratively, take a company, 'MC',
which is a leading retail brand store for
baby-care products internationally: 'MC'
proposes to enter into a joint venture with
an Indian partner to setup similar brandstores in India. The joint venture proposes
to source the product range locally andlabel it as 'MC'. The labeling is also a
function performed by the supplier and is,therefore, in a literal sense branded during
the manufacturing stage. Would this
format be approved?
Taking the above example further,
presume that 'MC' also stores otherbranded products on a consignment basis.In effect, it is only retail trading in 'single
brand' products and is a consignment
agent for other branded products. Is thispermissible?
Another format, which, though not
discussed extensively, could be a model forconsideration. The format is a joint
venture between an Indian party and a
regional distributor of a branded product.For example, say a Singapore-based
regional distributor of a luxury brand
(manufactured in France) ties up with anIndian partner to open exclusive brand
outlets. It appears that such formatsshould receive an approval.
Existing foreign brands in IndiaA fair section of the foreign brands have
been operating in India through the
franchising route. This announcement
should not make a large big difference to
these players. It appears that they wouldrather choose to continue operating
through innovative franchising structuresand wait till further liberalisation, than to
enter into joint venture relationships
requiring exit options and reviews as
policy changes take place.
Localisation discouragedAs per the government's notification andthe situations discussed in the preceding
lines regarding FDI in retailing, thefollowing can be assumed:
That existing local brands may not beable to attract FDI investment for
furtherance of their brands.
Foreign companies may not be
permitted to source goods locally and thenretail them in India by using their brand
names (Le. the private or own-label
concept discussed earlier).That foreign retailers cannot experi
ment with new brands just for the Indian
consumer since permission would be
granted to only those brands that are soldinternationally:
Protection of joint venture
partner interestsThe arrangement between the foreigninvestor and the Indian partner needs
careful consideration. The marriage in theshort to medium term could be like the
memorable courtship period. But whatneeds to be analysed is the impact when
the government decides to furtherliberalise its regulations.
Moreover, from the foreign investor's
point of view, it is relevant to understandthe regulation which provides for
subsequent additional collaboration.
Upon a foreign company entering into acollaboration (technical or financial) with
an Indian partner, it is restricted from
subsequently entering into a similarventure with another partner without the
first partner's consent. The exit optionsand conflict of interest clauses need
attention from the perspective of the jointventure partners.
A start has been madeThe Indian government has finally taken a
step, though a small one, towards opening
up the retail sector to the foreign investment. There are various foreign brandswhich have welcomed this step and looked
at it as a good indication for the opportuni-
Upon a foreign
company enteringinto a collaboration
(technical or
financial) with an
Indian partner,
it is restricted
from subsequently
entering into a
similar venture
with another
partner without
the first partner's
consent
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ties to soon arrive.
Select leading luxury goods retailers
such as LVMH, Llardro Commercial ofSpain and high-end perfumes brand
Chanel SA have approached the govern
ment for permission to set up retail jointventures in India.
Further, certain media reports
indicate that the government may be
willing to take a liberal interpretation onthe 'single brand' criteria and that they are
also working on another alternative for
FDI in retail that would substantially
address the domestic concerns and yet give
the foreign players a boost to step-up theiroperations in India.
The first approval for FDI in retail was
recently granted by the Central govern
ment. As per the government releases, the
approval was granted for a joint venture
between Moja Shoes Private Limited andMauritius-based Tano India Private
Limited Fund - I. The joint venture,apparently, has been granted approval to
sell in India footwear, sportswear, boots,
slippers, sandals, athletic shoes and
apparels of the same brand. Thus, a 'single
brand' would go on to include all the goodsmanufactured under the brand.
This approval is also important for the
condition that the goods have to be
branded during the manufacturing stage.
Does this mean that the approval for FDI
would be granted only to the manufacturer
of such goods? This approval appears to
have an answer. The approval has been
granted to the above products of Nikebrand, and the joint venture or the joint
venture partners, we presume, are onlyretail traders and not the manufacturers
of such goods.
In conclusion, an initial policy
framework has been provided for, and for
any clarifications an application to theDIPP can always be made.
The author specialises in tax and
regulatory consulting. He can be
contacted at +91(80)41538287, or
Courtesy: Accretive Business
Consulting Private Limited
(The views expressed herein are not
necessarily those of the publishers.)I~1201M