Impending liberalisation of foreign investment in the retail sector in India

Retailers who wish to expand their brand internationally sometimes decide to hold shares in the local master franchisee or developer company. So far in India it has not been possible for foreign parties to have any shareholding in a company in India which is involved in multi-brand product retail. Direct foreign investment so far has only been permitted in relation to “single brand” operations, where up to 51% of the shares can be held by the foreign brand owner. It is also possible for foreign companies to own up to 100% of the shares of a company involved in wholesale trading in India (even multi-brand) and there are successful examples of western brands who are doing so, such as Wal-Mart, Metro and Carrefour.

For years international companies have lobbied for liberalisation of the regulations restricting multi-brand retail operations but have met with massive resistance from local retailers and traders who feel threatened by the entry of foreign retailers. However the uncontrollable rise in food prices in India due to inefficiencies, wastage, lack of infrastructure and storage facilities has made the Indian Government seriously think about allowing foreign retailers in, on the basis that they also contribute significantly to the overall development of the retail sector and ensure lower prices for customers.  However, still concerned about the role of small business in preserving the fabric of the country, the Department of Industrial Policy and Promotion (DIPP) has recommended that such foreign retailers should be restricted to large cities with over a million population including capital cities of various states within India.

The “Committee of Secretaries” (the expert panel responding to the Government) has ,according to media reports, approved a proposal to allow 51% foreign direct investment in multi-brand retail but subject to some stringent conditions:

• investment must be at least US $100 million which will rule out all but the very largest;
• 50% of the investment must be channelled into building back-end infrastructure such as warehouses, cold storage facilities and more efficient supply chains; and
• 30% of supplies to the new retail business must be sourced from the micro, small and medium sized enterprises (MSME) sector in India.

The proposal is also reported to have had the backing of the Reserve Bank of India as it believes that foreign investment in the retail sector will reduce soaring inflation.

The current status of the proposal is that it still requires Cabinet approval. As regular readers of our updates on India will know this subject has a very long history and given the controversial nature of the issue and the lobbying interests involved on all sides there may well be further developments before anything is finalised. Furthermore, the Government of India has not formally released any official notification about the Committee of Secretaries’ proposal.

As will be seen from the conditions attached to it, this proposal is not of much relevance other than to the world’s very largest retailers, as it is aimed principally at large supermarket chains whom it is felt could help alleviate the immediate problems with the high cost of food in India and contribute to efficient supply chain development in the country.  If the Cabinet approves the idea of liberalisation of the multi-brand sector in this way, it is perhaps conceivable that the Government might later consider adopting a similar approach for other types of retailers, for example in the furniture or clothing sectors.

Of course it would always be open to “single brands” to approach the new supermarkets, as several Western brands are already doing within the largest Indian store groups, to develop ‘shop-in-shop’ arrangements, or other ways of offering their products inside them; quite apart from their freedom under the existing rules to enter into franchise arrangements on an arm’s-length basis, or take up to a 51% stake in such a local operator.

Please feel free to get in touch with Chris Wormald on any of the above issues.