A key provision in the rules governing foreign investment in India?s multi-brand retail sector is set to be deleted, clearing the decks for wholesalers like Bharti-Walmart and Trent-Tesco to sell en masse to their own retail outlets. The provision ? which prevented cash & carry operators from becoming de facto multi-brand retailers by selling exclusively to their own retail businesses ? is expected to be removed at next month?s biannual review of foreign direct investment (FDI) policy.
In India, FDI is allowed up to 100% in cash & carry outlets, limited to 51% in single-brand retail and barred in multi-brand retail. The current rule limits cash & carry operators? sales to their own retail outlets to a quarter of their annual sales, preventing them from becoming multi-brand retailers with foreign shareholding through the back door. For instance, Trent-Tesco, a cash & carry joint venture between the Tata Group and Tesco of UK, cannot sell more than 25% to Trent, a multi-brand retailer from the Tata Group. Similarly, Bharti-Walmart, an equal partnership between Bharti Group and Walmart, cannot sell more than a quarter to Easy Day, Bharti?s retail business.
With a committee of secretaries recommending conditional permission for foreign investment in multi-brand retail, the government feels it is logical to remove such restrictions. ?It is only a matter of time before the proposal to allow FDI in multi-brand retail goes to the Cabinet for final approval,? an official said.
?The restriction on selling to group companies hurts the profitability of both companies. Further, this policy is prescriptive in nature. The removal of internal consumption condition would clear the confusion surrounding group procurement of goods for retail,? said Saroj Jha, partner of Delhi-based SRGR law firm. He added that such restrictions will become redundant once the FDI in retail is allowed.