FDI in retail: Still room for more clarity and liberalisation

Published: February 22, 2018 6:24 AM

While the retail industry has welcomed FDI reforms introduced by the government—this should accelerate growth and attract foreign investments—there are certain ambiguities that warrant the attention of the government

FDI,  FDI regulations, FDI policies, B2B e-commerce platform, Indian manufactured food products, e-commerce entities, single brand retail trading In order to make such investments more commercially viable, the government may consider permitting such companies to sell non-food products to a certain limit, perhaps as a prescribed percentage of their total turnover.

In January, the government announced certain policy reforms from an FDI perspective, inter alia, for the single-brand retail trading sector. According to the same, 100% FDI shall be permitted under the automatic route (without any prior approval) for entities engaged in single-brand retail trading activities, significantly easing the process for global retailers to set up shop in the country. Further, certain relaxation has been proposed with respect to the mandatory local sourcing norms, whereby such companies are now permitted to set-off incremental sourcing from India towards global operations against the local sourcing requirements, for the first five years of operations in India. While the liberalised policy announcements were welcomed by both global retailers and Indian consumers, some ambiguity still remains with respect to the FDI regulations governing the sector.

For instance, with respect to the mandatory local sourcing norms for single-brand retail trading entities, requiring at least 30% of total purchases to be sourced from India, while the intent is evidently to promote manufacturing within the country, some groups may find it difficult to practically implement the same. For example, consider a multinational group ABC which owns multiple single-brands, some of which extensively source from India, and some of which propose to set up purely trading operations in India, as Indian manufactured goods may not be suitable for various reasons such as quality and volume constraints, etc. The FDI regulations may prescribe an overall group-wise local sourcing requirement, in order to enable such groups to gain flexibility and offer them the opportunity to invest in India, thus also enabling Indian consumers to have access to all their single-brands.

Further, in 2016, mandatory local sourcing norms were exempt for the first three years of operations in the country, for single-brand retail trading entities trading in products having state-of-the-art or cutting-edge technology, or where local sourcing is not possible. While a committee has been set up to determine whether single-brand retail trading entities are eligible for such relaxations, there is some ambiguity around what is meant by “where local sourcing is not possible.” Providing examples around the same would provide some much-needed clarity for companies facing challenges sourcing locally on account of quality or volume-related constraints, etc.

As far as food processing is concerned, the government has permitted 100% FDI (with prior approval) for retail trading (including through e-commerce) of food products manufactured or processed in India. While the move was aimed at improving food processing yields and reducing wastages, there has been some resistance displayed by the industry on account of not being permitted to sell non-food products. In order to make such investments more commercially viable, the government may consider permitting such companies to sell non-food products to a certain limit, perhaps as a prescribed percentage of their total turnover.

It would also be interesting to draw a comparison between the FDI policies for single-brand retail trading and wholesale trading of food products manufactured in India vis-a-vis single-brand retail trading and wholesale trading of other products. FDI for companies trading in food products under such models would mandate 100% local sourcing, while also requiring prior government approval. On the other hand, FDI for companies engaged in single-brand retail trading of any other products would only mandate 30% local sourcing, while wholesale trading would not require any mandatory local sourcing, with both these trading formats not requiring prior government approval for infusing FDI.

Accordingly, for companies adopting such business models, the FDI policy is, in fact, more stringent for Indian manufactured food products, which would appear to be against the intent of the original liberalisation. The government may accordingly consider permitting such companies to be covered under the existing FDI regulations for single-brand retail trading and wholesale trading, respectively. Coming to the multi-brand retail segment, the extent of FDI permitted is currently restricted to 51%, with several stringent conditions attached thereto (such as a minimum investment of $100 million and mandatory local sourcing norms). Increasing the permitted FDI stake, and providing similar relaxations to the local sourcing norms as was announced for single-brand retail trading may lead to an increase in multi-brand retail investments, and go a long way in improving the share of organised retail in the country, while also enabling the latest technology to be made available in India.

Finally, while 100% FDI has been permitted under the automatic route for setting-up of a B2B e-commerce platform, one of the conditions attached thereto is that not more than 25% of the value of sales should be effected through one vendor or their group companies (on a financial year basis). While this restriction is aimed at discouraging e-commerce entities in having control over a major portion of sales effected via their platform, and thus to reduce the impact of deep discounts and predatory pricing which threaten the domestic brick-and-mortar retail industry, there could be some practical issues in implementing such a condition, as it is dependent on total sales ultimately effected through the platform.

Consider an e-commerce platform XYZ having multiple independent vendors, each offering less than 25% of the total products offered for sale on the platform. While the intent of the FDI condition is being met, a situation could arise where one such vendor constitutes more than 25% of the total sales ultimately effected vide the platform. This could be on account of multiple factors such as consumers preferring products offered by certain vendors and so on. The government may consider replacing this condition with a minimum number of independent sellers coupled with a maximum percentage of products (in value terms) that can be offered for sale by each vendor, in order to make the same more practically implementable, both by regulators and e-commerce entities.

Further, the FDI regime may consider permitting e-commerce entities to adopt a hybrid of the marketplace and inventory models, whereby such entities would be permitted to maintain inventory up to a certain extent, such as a percentage of the previous year’s turnover. This would likely promote investment in supply chain facilities such as warehousing and distribution centres, which could ultimately lead to employment generation and increased customer satisfaction. While the retail industry has welcomed the FDI reforms introduced by the government—which should accelerate growth and attract foreign investments—there are certain ambiguities that warrant the attention of the government. Addressing such issues could lead to further growth in foreign investment inflows, generate employment, and inculcate global best practices and technologies, which would help elevate the Indian retail sector.

(Vidur Kanodia, senior consultant at EY, contributed to this article.)

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