Move helps company raise FDI without procedural hurdles

Fabindia has got the foreign investment promotion board?s (FIPB) clearance to induct up to 49.5% FDI in the company. This would allow the company to expand its business in the country without being restricted by the norm that foreign investment in the sector should only be by the owner of the brand. With less than 50% FDI, the company won?t lose its India tag and still get foreign funds.

As per rules notified in January 2012, 100% FDI is allowed in single-brand retail.

Lawyers familiar with retail-related FDI transactions say the new guidelines potentially prevent fast-growing Indian retail brands in sectors ranging from furniture to apparel from accessing funds from overseas financial investors, private equity players, and perhaps even from foreign single-brand retail companies.

In its request to the board, Fabindia said that it would increase FDI in the company from current 38% to 49.5% to keep it just under 50%, crossing which would have made it ?foreign-owned? but not by the owner of the brand, as is required. The US venture capital fund owned by ex-World Bank president James Wolfensohn, along with Louis Vuitton?s L-Capital and Delaware-based fund JLB Canton are invested in the company.

Recently, Premji Invest, the investment fund owned by Wipro chairman Azim Premji, acquired a 7% stake in Fabindia for R100-125 crore, valuing the company at over R1,500 crore.

Regarding Fabindia?s case, the department of industrial policy and promotion (DIPP) has accorded its approval without insisting on the condition that the brand has to be foreign-owned, since by keeping FDI component at 49%, the company is ?Indian-owned?.

?The proposal is recommended for approval, subject to condition that the brand will continue to be owned by Fab India Overseas (the Indian company) and at no stage resident shareholding of the brand-owning company be divested to non-resident entities,? DIPP said in a note to the finance ministry.

Lawyers are crying foul over the difficult situation where a foreign brand can be brought to India in a wholly-owned Indian subsidiary that can be capitalised to any extent while an Indian brand cannot have access to private equity. ?Indian brands cannot be forced to do to capital-rationing,? said Saroj Jha, partner Delhi-based law firm SRGR.