Single Brand Retail: Recent relaxation enough or local sourcing still in the way of more FDI investments?

Published: March 5, 2018 3:27:01 PM

The Department of Industrial Policy & Promotion started the new year by amending the existing Consolidated Foreign Direct Investment Policy 2017 (FDI Policy)- to allow 100% FDI in the single brand retail trading sector under the automatic route and liberalize local sourcing norms.

retail, fdi, fdi in retail, brand retail, single brand retail, FDI investments, foreign investment, FDI Policy, DIPP, foreign retail, single brand retail trading, industryThe amendment has evoked mixed reactions in the retail trading sector. (Reuters Photo)

To add further steam to the Government’s policy of promoting ease of doing business in India and relaxing foreign investment norms, the Department of Industrial Policy & Promotion (DIPP) started the new year by amending the existing Consolidated Foreign Direct Investment Policy 2017 (FDI Policy)- to allow 100% FDI in the single brand retail trading (SBRT) sector under the automatic route and liberalize local sourcing norms.

Although 100% FDI was already permitted in SBRT, only up to 49% was allowed through the so-called automatic route and any investment above this threshold required prior government approval. While this relaxation would remove all entry barriers for foreign retail companies to set shop in India, the amendment has also tried to ease local sourcing norms for foreign single-brand retailers. Though, the existing local sourcing norms- under which SBRT entities having foreign investment in excess of 51% are required to source at least 30% of the value of the purchased goods from India are still applicable, these entities are now exempted from meeting the 30% target for local sourcing by their Indian units for an initial period of five years, if this is already being done by them for their international operations. Thus, these SBRT entities are permitted to set off their ‘incremental sourcing’ of goods from India, for their global operations during this initial five-year phase, commencing on 1 April of the year in which the first store was opened in India. After completion of this five-year period, the SBRT entity shall be required to meet the 30% sourcing norms directly towards its Indian operations, on an annual basis. The additional conditions prescribed under the FDI Policy, in relation to foreign investment in SBRT, like, products sold to be of a single brand, products sold to be branded during manufacturing, etc, continue to exist.

This amendment will make it easier for foreign brand owners to incorporate wholly owned subsidiaries in India to undertake SBRT, without tying up with any local Indian partner. This will also enable them to exercise greater control over their business in India. This would provide a much-needed fillip to the apparel industry as several global brands presently source products from India for their international operations. If such brands increase their sourcing for global operations from India, such increased sourcing can be offset against the local sourcing requirements. Though the entry barriers for foreign single-brand retail entities have been relaxed, it appears that concerns regarding the local sourcing norms have not been adequately addressed by the DIPP. After much debate and deliberations on the issue, many expected further relaxation from the local sourcing norms. Additionally, the expectation of liberalization in multi-brand retail trading also looms large and no notification regarding the same seems to have disappointed many industry players.

Despite much anticipation, the DIPP did not clarify the meaning of “state-of- the-art” and “cutting-edge technology”. Entities engaged in SBRT having “state-of- the-art” and “cutting-edge technology” and where local sourcing is not possible are exempted from the local sourcing requirements (discussed above) for a period of three years from the opening of the first store in India. The assessment of whether a product would be in the nature of “state-of- the-art” and “cutting-edge technology” where local sourcing is not possible, remains subject to the discretion of the Government. Unless certain clear guidelines are specified, this assessment would remain subject to interpretation and would, in turn, fail to attract multi-national technology based companies to invest in India.

While the amendment is a welcome move, in sync with the Government’s idea of making India a global investment hub, it still does not adequately address the concerns of the SBRT sector and leaves the retail industry wanting for more. Thus, the question still prevails whether the Government, in trying to protect local sourcing norms, has done too little to attract foreign single-brand retailers. The amendment has evoked mixed reactions in the retail trading sector. It remains to be seen whether global single-brand retailers would accelerate their entry plans in India based on the relaxations introduced by the amendment to the FDI Policy.

By Arindam Sarkar, Partner & Shourya Sengupta, Associate Khaitan & Co.

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