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Allowing FDI in retail continues to stir up passions & threatens to be the biggest issue in the Indian parliament & political landscape in the next couple of months. The major issue is permission of FDI in Multi Brand Retail (MBR) which I wrote about in my last article.

In this article I will cover Single brand retail (SBR), which likely to be a bigger success in India than MBR, India being a consuming economy. Historically India has been a net consumer of products and with the recent growth in our economy the trend of consuming is back. Most of the international brands bet big on the Indian market.

The SBR model is also likely to bring in growth in the franchise model, which has not really taken off in India till now.

FDI in SBR was allowed up to 51% since 10^th February’ 2006. On 10^th January’ 2012 (Amendment dated 20^th September’ 2012) a permission to allow 100% in SBR has been granted, subject to the following:

1. All investment proposals would be reviewed by Department of Industrial Policy & promotion (DIPP) & considered for final approval by the Foreign Investment Promotion board (FIPB).
2. All products sold should be of a single brand only. The products under SBR should have been branded during manufacturing process itself. Further the brand in India should be in use in other countries too.
3. All proposals where the investment would cross 51% should have at least have a 30% Indian content sources from‘small industries / village & cottage industries, artisans & craftsmen. For the sake of clarity the 30% would be the value of the good sold and small industries would be businesses with an investment less than 1 Million US Dollars.
4. Only one Non-Resident entity would be permitted to undertake the SMR in India.

 

I have written about various pros & cons of liberalization of FDI in retail sector in the previous article. While most of the applicable comments would be relevant here too, I see the following additional benefits as below:

1. Investment cycle into India is likely to benefit more with SBR as compared to MBR. This can be attributed to the fact that many sectors like fashion, FMCG, healthcare, Home furnishings, Consumer electronics have global majors who have a policy of not holding less than 100% in any business they set up worldwide. As in the very public case of IKEA & on a more personal level within our firm, the feedback of an American Apparel major as well as a eye care major, the companies had made it very clear that they would invest in India only when they can own their business 100% without a need for a local partnership.
2. Franchise as a practice should rise bringing in higher investments, better development of tier II & tier III cities in India.
3. Considering the vast potential of the Indian economy, investments would rise in the small scale sector. Certain fashion & home furnishing brands might integrate Indian designs and techniques to qualify for a 30% local content. If this condition is not diluted, Indian products could debut in a high fashion make over in the International markets too.

Since the announcement of the liberalization policy the following brands have applied & secured a permission to operate SBR license in India with the below mentioned investments:

 

S. No.	Brand Name	FIPB Permission	Investment (In Rs Cr)
1.	Pavers England	November 2’ 2012	98.26
2.	Brooks Brothers	November 2’ 2012	6.22
3.	Damiani	November 2’ 2012	0.35

 

Besides the above projects already approved, we have the approval pending for IKEA. This is a proposed investment of Rs 10,200 Crores making it the largest investment proposal received till now. IKEA could change the FDI landscape in India & could be the beginning of large ticket investments in SBR in India.

As written in the first part of the article, a very significant concern could be caused due to the potential misuse of the Free trade agreements, India has signed with it’s neighboring countries such as Sri Lanka, Pakistan, Bangladesh & Nepal. International brands have the ability to mass produce very cheap goods in low cost destinations such as China, Indonesia, Vietnam etc. Such cheap goods could flood the Indian markets and ruin the competitiveness of Indian industries in areas where the SB Retailers sell in the Indian market. Current FDI policy & free trade norms do not protect this area and a clear definition is definitely required.

The next parliament session in India commences on 22^nd November’ 2012. We all expect a turbulent session where the fate of the current government would hang upon how the voting for a trust bill ( as is widely expected ) goes through. We don’t expect SBR to undergo any policy change irrespective of the political consensus & outcome on the retail FDI policies. The fate of MBR however hangs in balance till the current government is able to clear these MBR proposals in the parliament.

No matter what happens in the coming two months, the retail scenario in India has changed forever & we would see a new cycle of growth & boom in the coming decade in retail.

Gautam Khurana
India Law Offices
office@indialawoffices.com

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