Back-end infra rule just for first tranche of FDI

Written by Kirtika Suneja | New Delhi | Updated: May 14 2013, 06:58am hrs
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Foreign retailers free to plan later investments: DIPP

Foreign multi-brand retailers like Walmart, Tesco and Carrefour can heave a sigh of relief. A department of industrial policy and promotion (DIPP) official told FE on Monday that the minimum investment requirement of 50% of the total FDI brought in to be invested in the back-end operations would be applicable only to the first tranche of investment. In all subsequent tranches, the companies will be free to invest in the front-end or back-end as per their business plan. The norm will apply to greenfield as well as brownfield retail ventures.

The DIPP clarification is significant since commerce and industry minister Anand Sharma had recently created a flutter with his statement that any existing investment by a foreign retailer in the back-end would not be taken into account if the retail firm ties up with an Indian firm to open even front-end retail stores. Though Sharma did not name any company, it was implicit that the reference was to companies like Bharti-Walmart, which has a 50:50 joint venture for cash-and-carry stores. The two firms have said since the government allowed foreign retail firms to buy up to 51% stake in front-end operations of Indian retail firms last year in September, they would explore the possibilities of coming together for front-end stores as well.

As confusion prevailed, the Tesco CEO met Sharma to seek clarifications, along with the head of the Indian partner, the Tata Group's Trent. Officials of Carrefour (which has back-end investments in the country) too have sought clarifications from the DIPP, before finalising its plans to open front-end stores.

The DIPP official said at least half of the total FDI brought in must be invested in back-end infrastructure within three years of the first tranche of FDI, where back-end infrastructure will include capital expenditure on all activities excluding that on front-end units. Back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, logistics and warehouses. For subsequent tranches, the condition will not apply. However, expenditure on land cost and rentals, if any, will not be counted for purposes of back-end infrastructure.

This means that if a firm ties up with an Indian player, it needs to bring in the minimum $100 million as its first tranche of investment. Of this, it needs to invest $50 million in back-end facilities.

Hereafter, it is free to plan its investments as it wants. This condition will also apply to existing firms like Bharti-Walmart which have existing investments in the back-end.

Analysts maintain that problems remain, holding back retailers from investing in the country. This does not seem to be a major relaxation as it is difficult for any company to invest this kind of money in back-end infrastructure in the first year. Moreover, there is no clear understanding on what back-end means, said Arvind Singhal, managing director, Technopak Advisors.

A consumer durable and IT retail firm will not need back-end investments like warehouses; so how do such global firms interested in entering India in partnership with Indian firms plan their investments, analysts queried.