The FDI Factor

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: The Indian retail market is undoubtedly one of the most attractive emerging market destination for investment. Foreign Direct Investment (‘FDI’) in retail was expressly prohibited in 1997 and was permitted later in 2006, in the form of single brand retailing with up to 51% foreign investment with prior government approval. As of today, FDI is also allowed to the extent of 100% through wholesale cash-and-carry model. Other forms in which FDI is present in India is ‘manufacturing and retailing’ and ‘multi-level marketing’ models.

As FDI is prohibited in multi-brand retail, lot of multi nationals have forayed in India through a franchise model or a wholesale cash-and-carry coupled with franchise model. The franchise model has been one of the most prevalent and successful formats of retailing in India. Global players like US-based Tommy Hilfiger, Netherlands-based SPAR International, Argos, Debenhams, Costa Coffee, Domino’s Pizza, Thank God it’s Friday, Ruby Tuesday’s, Subway, Mothercare and McDonald’s have become forerunners in India through the franchising route.

In a pure franchise model, the franchisor does not make any investment in the franchisee’s business. Under this model, the franchisor is entitled to get franchise fee for providing access to foreign brands and providing know-how on the methods of distribution, merchandising, packaging and promotion. However, there are other forms of franchise models which are prevalent in India such as management contracts, management franchise and joint venture arrangements which might involve some investment from the franchisor in terms of interiors, equipments etc.

Till the government does not open FDI in multi brand retail, it appears that the franchise route will continue to be one of the most favoured routes for foreign companies to establish their brands in India. The typical industry sectors witnessing the growth of the franchise model are IT education, followed by IT enabled services, business services, professional and vocational education, retailing, entertainment and healthcare.

The Indian government has not been inclined on opening FDI in retail. The rationale for not encouraging FDI in retail is mostly to protect the unorganised players.However, one cannot undermine the advantages which organised retail (with or without FDI) can extend to the economy in the form of increased employment opportunities, reduction in prices of goods, improvement in supply chain, reduction of wastages etc.