Sop for Tesco opens FDI path for others

Written by fe Bureau | New Delhi | Updated: Dec 31 2013, 05:31am hrs
TescoTesco will be the first multi-brand global retailer to set shop in the country (Reuters)
With the Foreign Investment Promotion Board clearance for Tescos $110-million joint venture with Trent Hypermarket making a critical concession in terms of allowing foreign retailers to buy brownfield retail ventures in India as long as they also commit to investing in fresh greenfield stores within three years the stage is set for several other foreign retailers to enter into tie-ups with existing Indian organised retail chains.

While this concession was not forthcoming at the time Wal-Mart was negotiating with the commerce ministry this would have allowed the American retail giant to use Bhartis Easyday retail stores in the initial years the government appears to have changed its stance after no global retailer came forward to set up shop in India.

Tesco will be the first multi-brand global retailer to set shop in the country after the government in September 2012 allowed foreign retailers to invest in India in partnership with Indian firms subject to an equity cap of 51%. Wal-Mart was expected to be the first global retailer to set up front-end stores given it had a 50:50 joint venture with Sunil Mittals Bharti Enterprises in the cash-and-carry segment since 2007. However, in October the joint venture was called off.

On Monday, the FIPB cleared the UK retailers $110-million (Rs 684 crore) proposal, which includes picking up a 50% stake in Trent Hypermarket. The worlds third-largest retailer, Tesco already has a cash-and-carry venture in India. Since the investment is below Rs 1,200 crore, Tesco does not require any more regulatory approvals. Only foreign investments above Rs 1,200 crore require the approval of the Cabinet Committee on Economic Affairs after the FIPB nod.

Since the governments policy for foreign retailers comes attached with a string of conditions relating to back-end investment and sourcing from local small and medium enterprises, Tescos experience will be keenly watched by other global retail majors. The development would be seen as a big boost for the UPA government, which has been trying to convince foreign multi-brand retailers to invest in India. While several investments have been made in the single-brand segment, multi-brand retailers had so far not found the conditions attractive.

Tesco will initially use Trents existing 16 Star Bazaar stores but will, within three years, invest another $50 million in creating new facilities in Maharashtra and Karnataka. The joint venture firm would retail 15 product lines, which includes cereals, vegetables, fruit, wine and liquor (not consumed on the premises), ready-made garments and furniture, among others.

The British retailer currently supplies close to 80% of the products sold in Trents Star Bazaar hypermarkets. The size of the organised retail space in India is estimated at close to $40 billion.

Last year Tesco, which earns global revenues of 72 billion, had set up an Indian subsidiary to buy fresh and processed foods from the country to supply it globally which could help it trim costs and develop local expertise before opening shops here. At 370 million, sourcing from India accounts for 7% of Tescos total international sourcing.

Tesco may also set up outlets other than Star Bazaars such as Star Daily and Star Market. In FY13 Star Bazaar reported revenues of Rs 801 crore and a loss of Rs 72 crore. In 2008, Tesco tied up with Tatas Trent to provide back-end support to the Star Bazaar chain. Earlier in 2004, the Tesco Hindustan Service Centre, which employs 6,500 people, was set up in Bangalore.

In May, Tesco CEO Philip Clarke and Trent vice-chairman Noel Tata had met commerce and industry minister Anand Sharma to seek a few clarifications on the policy. The rules require that at least 50% of the first tranche of $100 million must be spent on back-end infrastructure within three years. Moreover, at least 30% of the manufactured and processed products needed to be sourced from small enterprises with a capital investment of up to $2 million; this was earlier $1 million. However, global retailers need the permission of state governments before they can operate.

Maharashtra and Karnataka, where the JV firm would initially start its operations in, are ruled by the Congress and have allowed investments by foreign retailers. Theoretically, the field would be open for Tesco to venture into other Congress-ruled states. However, the states ruled by the BJP are opposed to allowing global majors in multi-brand retail.