Foreign investors violating FDI rules by using their test-marketing licences for doing large-scale retail business and even for product manufacturing, could be in for trouble. The government is planning to come out with strict norms to check these violations, most rampant in the retail sector.

As per the current norms, foreign companies first seek permission to test-market their products in the country and later apply for licences for retailing and/or setting up of manufacturing facilities.

According to a Department of Industrial Policy and Promotion (DIPP) official, under the new norms companies seeking test-marketing permission would also have to simultaneously set up manufacturing facilities or seek proper retail licence as the case may be. Such companies would have to submit detailed manufacturing and investment plans to the DIPP before they are accorded permission to test-market products. Such companies would also have to report the progress of their manufacturing plans every six months to DIPP.

The government has found large-scale violations by many firms that surreptitiously enter the retailing/manufacturing space under the garb of a test-marketing licence.

This practice is mostly found in the retail sector. While FDI in multi-brand is not permitted, 100% FDI is allowed in cash-and-carry trade and 51% in single brand retail. Another widely prevalent form of FDI rule violation is that of companies importing products and selling them in the retail market using their test-marketing licences.

Under the new policy being finalized, companies would be given only two years to test-market their products beyond which no extensions would be granted. Currently companies seek repeated extension but never set up production units or seek proper retail licence.

?It has been noticed that many companies, which had obtained test-marketing rights, have returned to the FIPB again seeking extension of the period. We have discovered that there are instances where such companies enter into the prohibited areas of retail trade by getting such extensions,? a DIPP official said.

The official said the department has now been decided to come up with a comprehensive policy on the subject rather than a case-by-case approach.

Once the new policy is in place, commitments would be sought from companies seeking permission for test marketing and they would have to lay down milestones for setting up manufacturing facilities.