Making India the most open economy in the world, Modi Government recently announced its second major reform in FDI soon after its radical changes announced in November last year.
The Government, since the beginning, has been taking steps to boost FDI in the country to create a suitable climate so that foreign investors feel confident in investing, along with fostering an economy that can create more jobs.
The FDI reforms announced on Monday (June 20, 2016) not only liberalised a host of important sectors – including defence, civil aviation, and pharma – but also reassured investors about India’s continuing reform drive. Investors have been on the edge since Raghuram Rajan decided not to seek a second term as Governor of the Reserve Bank of India.
Keeping in mind major steps being taken by India to dismantle the complex procedures and delays – which have been the bane of our system for so many decades now – Indiaretailing Bureau takes a look at the milestone decisions made with regard to the retail sector starting from 2006 to now which has made retail more lucrative for foreign investors.
A press note issued by DIPP in the year 2006 was prudent for the retail sector as it brought out various sector-specific guidelines for FDI. Prior to January 24, 2006, FDI was not authorised in retailing. However, most general players had been operating in the country with other entry routes, such as franchise agreements, strategic licensing agreements, manufacturing and wholly-owned subsidiaries, among others.
Highlights of Liberalisation in 2006:
FDI up to 100 per cent for cash and carry wholesale trading and export trading allowed under the automatic route: FDI in cash and carry wholesale trading was first permitted, to the extent of 100 per cent, under the Government approval route, in 1997. It was brought under the automatic route in 2006.
FDI up to 51 per cent with prior Government approval (i.e. FIPB) for retail trade of ‘single brand’ products.
FDI was not permitted in multi-brand retailing in India.
FDI in Multi-Brand Retail
Though no significant decisions were taken with respect to multi-brand retail or single brand retail this year, the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper in July 2010 seeking the opinions of all stakeholders on allowing FDI in multi-brand retail.
After the DIPP circulated a discussion paper, a six-member inter-ministerial panel took up the matter further. Organised retailers, industry chambers like CII and FICCI welcomed the move and the Consumer Affairs Ministry and Planning Commission gave the green signal for 49 per cent FDI in multi-brand retail.
But, the Micro, Small, and Medium Enterprises (MSME) Ministry and the Ministry of Finance cautioned the Government against further opening of the sector to FDI and no decision was taken then.
In the first step towards opening up of the retail trade in the country to foreign investors, the Government allowed 100 per cent FDI in single-brand retail, under the government approval route, in January 2012. It followed another decision that allowed foreign retailers to own up to 51 per cent in multi-brand retail, in September during the same year.
Both the announcements, however, came with its own riders.
Firstly, FDI up to 49 per cent was allowed under the automatic route, but beyond that, government approval was required. Secondly, the liberalisation was subject to certain conditions, such as products should be of a ‘single brand’ only and to be sold under the same brand internationally.
In respect of proposals involving FDI beyond 51 per cent, the mandatory sourcing of at least 30 per cent would have to be done from the domestic small and cottage industries which have a maximum investment in plant and machinery of $1 million (about Rs 5 crore).
Under multi-brand retail, conditions for investment required companies to invest at least 50 percent of the first US$100 million into ‘back-end infrastructure’ such as manufacturing, processing, packaging, distribution, logistics, design improvements, quality control, warehouses, storage, and agriculture market produce infrastructure and to source 30 per cent mandatory local sourcing from small industries only.
During November 2015, Modi announced Diwali bonanza to investors opening as many as 15 sectors. The crux of the reforms was to further ease, rationalise and simplify the process of foreign investments in the country and to put more and more FDI proposals on the automatic route instead of Government route where time and energy of the investors are wasted.
One of the most important sectors to be impacted by the policy change were single-brand retail. The reforms allowed global technology brands such as Apple or Sony to open fully-owned stores in India.
The rule that mandated single-brand retailers to locally procure 30 per cent of their goods sold in India over a span of five years remained; however, the new policy allowed the retailer to meet the norm from the time it opens the first store. Until now, the five-year deadline started from the date of receipt of foreign direct investment (FDI).
Additionally, the Government also allowed single-brand retailers with FDI to conduct online trading in any form. Several large foreign companies such as sportswear retailer Adidas AG and Swiss watch retailer Swatch SA have received permission to set up fully-owned stores in India while others like Nike Inc. are awaiting approval.
Just six months into 2015 and Government has announced various reforms and policies pertaining to FDI in retail and e-commerce.
100 per cent FDI in Marketplace Format of E-Commerce
Putting an end to the long-standing debate on the functioning of e-commerce in India, Government permitted 100 per cent FDI in the market place format of e-commerce retailing and also come up with the definition of a marketplace and inventory-led models of e-commerce in March this year. The policies further prevent these players from affecting prices on their website and the firms are also not permitted to sell more than 25 per cent of the sales affected through its marketplace from one vendor or their group companies.
Inventory-based model of e-commerce, adopted by e-grocers like Big Basket,has been kept out of the purview of 100 per cent FDI.
100 Per Cent FDI in Multi-Brand Processed Food Retailing
After years of vehemently opposing any foreign investment in multi-brand retail, the BJP-led Government sprung a surprise with an unexpected announcement in the Budget 2016 that paves the way for retailers such as Walmart and IKEA to sell multi-brand food products as long as they are sourced and manufactured within India. Such ventures, however, must seek approval from the Foreign Investment Promotion Board (FIPB).
The move is aimed at reducing wastage, helping farm diversification and encouraging global giants to produce locally rather than importing items.
Single-Brand Retail & Food Retail in E-Commerce
While one needs to wait for the final blueprint of the recent reforms, the announcement definitely indicates breather of three years to brands like Apple and LeEco, who want to set up shop in India. Under the recent decision, the Government has now decided to have no local sourcing norms up to three years and allow a relaxed sourcing regime for another five years for entities undertaking single-brand retail trading of products having state-of-the-art and cutting-edge technology. These companies which had sought a waiver from the 30 per cent mandatory local sourcing norm, will now have to take a call on whether they want to seek a waiver under the new norms of re-apply.
In the Union Budget, the Government allowed 100 per cent FDI in the marketing of food products made in India. The recent announcements extends it to e-commerce, with the likely beneficiaries being firms such as Bigbasket and Grofers, provided such items are produced, processed or manufactured in the country.