Single-brand retail: Easier sourcing rule soon for big-ticket FDI

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Published: January 23, 2019 2:05:37 AM

India’s FDI policy has introduced a rather odd distinction between multi-brand and single-brand retailing; now, the policymakers are singling out the biggies in single-brand retailing from the rest of the pack.

Single-brand retail: Easier sourcing rule soon for big-ticket FDI

India’s FDI policy has introduced a rather odd distinction between multi-brand and single-brand retailing; now, the policymakers are singling out the biggies in single-brand retailing from the rest of the pack.

The government is weighing a proposal to make it easier for large foreign investors to set up single-brand retail stores by allowing them more time to comply with the 30% mandatory domestic sourcing rule, a source privy to the matter told FE.

It is exploring an idea to count the annual incremental procurement that foreign companies will do in India for their global operations as part of their local sourcing obligations even beyond the existing rule of initial five years. However, for a company to be eligible to avail of the concession, the minimum foreign direct investment (FDI) has to be above $200-$250 million within the first 2-3 years, said the source.

The proposal, if approved, would distinguish small foreign investors from the larger ones and add to existing array of regulations governing various aspects of FDI in retail trade. It would, however, incentivise large foreign investors like iPhone maker Apple, that are eyeing a bigger slice of the Indian market. Even Ikea and H&M that have been seeking a relief in the sourcing rule could benefit.

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“The proposal is currently at a discussion stage. The government is yet to make a decision,” said the source. Senior DIPP officials couldn’t immediately be contacted for comments.

In January last year, the government allowed up to 100% FDI in single-brand retail via automatic route, scrapping the need to seek its approval beyond 49%.
Currently, after the completion of the five-year period (beginning April 1 of the year of the opening of the first store by a retailer), the entity is required to meet the 30% sourcing norms directly from its India operations on an annual basis. They are not allowed to set off annual incremental procurement from India for their global operations against the domestic sourcing requirement after five years.

Incremental sourcing means the increase in value of such global sourcing from India for a single brand (in rupee terms) in a particular financial year over the preceding fiscal by the foreign entities, either directly or through their group companies.

Trading has been the fifth biggest source of FDI for India, having accounted for roughly 5% ($20.2 billion) of cumulative FDI between April 2000 and June 2018.
Before 2017, the Modi government had already announced two big rounds of relaxations in the FDI regime, first in November 2015 and then in June 2016, easing rules in over a dozen sectors ranging from real estate, pharmaceuticals, food marketing, aviation, defence to e-commerce and banking.

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