FDI in Multi-Brand Retail Necessary and Not Evil

Saurya Bhattacharya of Amarchand Mangaldas discusses the evolution of foreign direct investment in retail trading with a view to argue in favour of the need for allowing foreign direct investment in multi-brand retail..“As the purse is emptied, the heart is filled” – Victor Hugo. .Even as the domestic markets nosedive once again, we are in the midst of a growing chorus of experts expressing their concerns of an impending double dip recession. A necessary corollary of such fears is dampened investor appetite. As far as India is concerned, this is as true for domestic business promoters as it is for foreign investors..While there are no two views from an Indian policy perspective on its intent to invite foreign direct investment (FDI) into the country, traditionally there have existed sectors that have been deemed too sensitive for involvement of foreign players, be it prohibited sectors like real estate business and lottery business or restricted sectors like retail trading and insurance..Over the last year or so, there have been noticeable movements at various levels in the government, scrutinising the various pros and cons of further liberalising the regulatory framework governing foreign direct investment in multi-brand retail trading. On this point, there are divergent voices, both within the governmental set up as well as in civil society. Herein below, we propose to trace the evolution of foreign direct investment in retail trading with a view to argue in favour of the need for allowing foreign direct investment in multi-brand retail..Evolution of the Regime.“Study the past, if you would define the future” – Confucius .The Indian regulators have traditionally taken a conservative approach towards allowing foreign players into the trading sector. It was only in 1997 that FDI in cash and carry wholesale trading was first permitted. While it was opened up to 100 percent itself, the same was mandatorily under the government approval route. At this stage, retail trading was not permitted at all..There was no provided definition for “wholesale trading”, indicating a possible nervousness in regulation building itself, and it came upon the Hon’ble Delhi High Court to explore the contours of wholesale trading and retail trading in the case of Federation of Associations vs. Union of India (2005 (79) DRJ 426)..Only in the year 2006 did FDI in cash and carry wholesale trading come under the automatic route..Today, in its current avatar under the Consolidated Foreign Direct Investment Policy of April 1, 2011 (FDI Policy), issued by the Department of Industrial Policy and Promotion (DIPP), “cash and carry wholesale trading/wholesale trading” itself has been defined following the lead provided by the Hon’ble Delhi High Court in 2005..It was also in 2006 that the DIPP brought out Press Note 3 of the 2006 series, providing the guidelines for FDI in retail trade of ‘single brand’ products. The FDI participation was capped at 51 percent, subject to prior approval from the government. The application itself would go through a bi-layered system of vetting within the government, whereunder the DIPP would first process the application to determine whether the products proposed to be sold satisfied the notified guidelines before being considered by the Foreign Investment Promotion Board. The objective of opening up the retail segment (single brand) to foreign participation was stated to be in the interest of attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. These reasons continue to remain in the current FDI Policy, as do the three riders to foreign direct investment in “single brand retail”:.(i) Products to be sold should be of a ‘single brand’ only..(ii) Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India..(iii) ‘Single brand’ product-retailing would cover only products which are branded during manufacturing..Foreign Direct Investment in multi-brand retail continues to remain out of bounds for a foreign investor as Chapter 5 of the current FDI Policy, which lists the prohibited sectors, is topped off by “retail trading (except single brand product retailing)”..Indian Realities.“We used to build civilizations. Now we build shopping malls.” – William McGuire Bryson.India has rapidly developed since 1991, even if in spurts. As a result, today the government has the unenviable task of looking after many diverse interest groups. As already stated, over the past year or more, the government has been closely looking at the prospects of opening up (at least partially) multi-brand retail to foreign investments. Given its possible politically and economically sensitive nature, a discussion paper was released by the DIPP last year inviting comments from all stakeholders. This paper in itself placed reliance on multiple studies, including the recommendations in the mid term appraisal of the Tenth Plan and the widely known ICRIER study. It also referred to case studies in other countries like Thailand, Russia and, most crucially, China. This discussion paper sought to formulate responses to a number of tricky issues – from the fundamental (e.g. Should FDI in multi-brand retail be permitted? If so, should a cap on investment be imposed? If so, what should this cap be?) to the more complex (e.g. To ensure that the integrity if the public distribution system is not weakened and buffer stock is maintained at the desired level, should government reserve the right of first procurement for a part of the season or put in place a mechanism to collect a certain amount of levy from private traders in case the level of buffer stock falls below a certain level?).While a Committee of Secretaries within the government was constituted in the first quarter of this calendar year, in the FDI Policy, no changes came through with respect to FDI in multi-brand retail. The delay may be attributed to the government’s disinclination to rush in with a policy which, if half baked, could lead to furore across the country. The trepidations relating foreign players, widely known, include:.(i) In general, predatory pricing by such foreign investors could directly affect the sustainability of the standalone neighbourhood retail store;.(ii) In food retail, farmers (the producers right at the tip of the back end chain) being left at the mercy of the foreign investors; and.(iii) For manufactured items, the possibility that foreign retailers would import items (especially electronic items) at cheaper rates and render the Indian manufacturers uncompetitive..Concerns of this nature are understandable in a country like India where unorganised retail is the second largest bread winner. Over the last year it has appeared that the government is in favour of opening up FDI in multi-brand retail, because of some the obvious benefits that it brings to the table, including:.(i) Boosting not just fund flow into the economy but also India’s GDP;.(ii) Increasing healthy competition in the market;.(iii) Enhanced employment opportunities; and.(iv) Specifically in the sector of food retail, technology and infrastructure to ensure better storage of farm produce and improved supply chain. This is of particular significance in a country where the public distribution is infamous for its leakages while tonnes of farm produce get spoiled due to inadequate storage facilities..As a result, the government has been assessing the various options that are available to it to introduce a shift in policy for multi-brand retail in the most foolproof manner possible..Stirring the Regulatory Broth.“If all the economists were laid end to end, they’d never reach a conclusion” – George Bernard Shaw .The government must be lauded for its efforts to take on board all views and suggestions to chart the way forward, especially during the course of the last fifteen odd months. However, it must also be noted that with the various proposals that have been reported from time to time in news reports, a perception of uncertainty has been created about the steps that the government intends to take going forward. Some illustrations of this are:.(i) Operating Locations: If reports are to be believed, the idea of allowing foreign players to enter only select cities was mooted and till very recently two models were heard of:.(a) Entry into the six major metros only; or.(b) Entry into all cities with a population of at least one million (this number being not less than 35)..It now appears that a third model specifically covering only state capitals is finding more favour with the Committee of Secretaries..(ii) FDI Cap: Various Ministries have reportedly conveyed their views on to what extent FDI in multi-brand retail could be allowed. Reportedly, these include recommendations of ‘nil’, 18 percent, 49 percent and 51 percent. One can only assume that when the Economic Outlook of 2011-12 states:.There is a clear case for permitting 49 per cent direct FDI in all sectors except where FDI is prohibited..it is recommending that at least 49 percent should be permitted in all sectors except prohibited sectors and if multi-brand retail is opened up to foreign participation, the cap should be at least 49 percent..(iii) Legislations and Regulators: Adding to the confusion are reports, from last year and this, of the following possible legal developments that relate to the retail sector:.(a) Creation of a committee that will specifically review all investments in sensitive sectors like retail and telecom;.(b) Creation of a regulator that will act as a watchdog for the retail sector; and.(c) Promulgation of Shopping Mall Regulation Act to protect the interests of the local standalone retail shops..(iv) Other Riders: News reports seem to indicate that there are other riders in the pipeline that will ensure only serious foreign investors look at India. For instance:.(a) Setting of a minimum investment threshold;.(b) Mandatory and dedicated investment in backend infrastructure development;.(c) Requirement to source part of the products from local producers; and.(d) Powers conferred upon the state government to take necessary steps to protect local traders..Overall, the regulatory pot for FDI in multi-brand retail is still boiling..Way Forward.“I hope to stand firm enough to not go backward, and yet not go forward fast enough to wreck the country’s cause” – Abraham Lincoln.News reports on how various sections of the government are dealing with a particular issue should always be taken with a pinch of salt. Indeed, it is nobody’s case that the government liberalise FDI in multi-brand retail in haste at the cost of the local mom-n-pop store or the Indian farmer – both, in ways, icons of Indian culture..However, it is argued that the debate should not be read as a clash between ruthless foreign players and helpless Indian traders. Rather, the concerns about Big Retail are actually those over the perceived ability of organised retail (who may well be domestic players) to out-manoeuvre the unorganised sector; the two most significantly differentiated by their access to finances..It is certainly the government’s responsibility to address the concerns of the Indian trading fraternity. But as we move towards the opening up of multi-brand retail in the coming days, it should be nobody’s case that foreign investment itself in this sector is against Indian interests. In fact, in a global marketplace where purse strings are possibly going to get tightened once again, just the opposite may be argued. Hence, it is hoped that the government will move steadily and certainly towards not just opening up multi-brand retail to foreign players as a matter of letter but also create a regulatory environment that appears investor friendly..Saurya Bhattacharya is a Senior Associate at Amarchand & Mangaldas & Suresh A. Shroff & Co.