The Foreign Investment Promotion Board (FIPB) on Monday approved Swedish furniture maker Ikea’s R10,500-crore proposal to set up 25 stores in the country on the lines of its global model.
This means the multinational will be free to sell products apart from furniture in its store and also run its signature restaurants and cafes.
However, the proposal still needs to be cleared by the Cabinet Committee on Economic Affairs (CCEA) as required for all foreign investments over R1,200 crore.
Welcoming the FIPB approval, commerce and industry minister Anand Sharma said: “The decision of FIPB to recommend the Ikea case for investment was cleared, which is a positive development. The government is committed to play a constructive role in encouraging FDI especially in areas which create jobs and provide technological advancement. Globally, Ikea has a business model which integrates in its embrace SMEs and domestic industry, making them the part of global value chain.”
Sources said Sharma was keen that the FIPB cleared the proposal before he left for the World Economic Forum in Davos on Tuesday to send out a positive signal to investors.
In fact, it was Sharma who told the Express Group’s Idea Exchange programme for the first time that the government would clear Ikea’s proposal to set up stores on its global model. Sharma had said that he had approved the proposal and the matter would be officially cleared by the FIPB once Ikea provided the clarifications sought by the government. “Ikea’s proposal based on its global model, which includes cafeterias, will be approved. The company simply needs to clarify what its global model is because we had sought a clarification on why it was not there in their earlier proposal,” Sharma had explained on January 16.
Ikea, which reported revenues of 26 billion euros in 2011 and has 338 stores had sought a review of the decision that was taken by the FIPB in November wherein while approving its first tranche of investment worth R4,200 crore, the board had struck off 18 product categories of the 30 proposed and refused permission to the company for opening its signature cafes and restaurants in the stores.
The board had said it could not sell items such as home and
office-use products, textiles, apparel and fabric, electronic items, leather products, toys, books, and lifestyle and travel-related items. Ikea then approached the industry department, which forwarded the request to the FIPB seeking a review of its November 20, 2012, decision. Subsequently, the FIPB deliberated on the representation at its meeting on December 31, 2012, and sought clarifications from the company.
The government in September 2012 relaxed a provision requiring single-brand retailers to source at least 30% of their requirements from small and medium enterprises, modifying rules to say it was “preferable” rather than ‘mandatory. Ikea will operate in India through its wholly-owned subsidiary Ingka Holding Overseas BV and the investment of R10,500 crore will be the largest ever by a single-brand retailer in India.
For the government Ikea had almost become a test case since it decided to liberalise the cap of 51% foreign investment in single-brand retail to 100%. Though there are several companies which have set up shop in India in the single-brand category ever since it was allowed in 2006, Ikea had made it clear that it would enter the Indian market only once 100% foreign direct investment is allowed. Though the government last year allowed up to 51% foreign investment in multi-brand retail also, the number of caveats with which it has come into force may mean a long time before any real investments flow in. In that context investors were closely viewing Ikea’s fate.