The clarifications on FDI in Multi-Brand Retail are a mixed bag – Amarchand Partner Kalpataru Tripathy

The clarifications on FDI in Multi-Brand Retail are a mixed bag – Amarchand Partner Kalpataru Tripathy

Pallavi Saluja

The clarifications issued by the Government on mandatory sourcing and back-end investment in infrastructure in the FDI Policy on multi-brand retail last week has gotten a mixed reaction, says Amarchand Mangaldas Partner Kalpataru Tripathy.

The Department of Industrial Policy and Promotion (DIPP), in its clarifications issued on June 6, 2013, said that the multi-brand retail store set up by a multi brand retail entity will have to be ‘company owned and company operated’ and that a franchisee model will not be permissible.

The DIPP clarified that the 30 percent of their processed goods, (not including fresh produce) sourced through SME shall be sold only through front-end stores and not wholesale outlets.

The clarification also states that,

Entire investment in back-end infrastructure has to be an additionality. The entity can invest only in Greenfield assets and it will not be possible to acquire supply/chain/backend assets or stakes from an existing entity.

It further states that 50% of the investments brought in, must be invested in back-end infrastructure, and any amount spent in acquiring front-end retail stores would not be counted towards back-end infrastructure.

The DIPP also clarified that the wholesale trading/ cash & carry trading cannot be considered to be providing back-end infrastructure. Any FDI in multi-brand retail will require fresh investment in back-end infrastructure.

Interestingly, the Government has allowed investment towards back-end infrastructure to be made across all states irrespective of the fact whether FDI in multi-brand retail is allowed in that state or not.

The Cabinet had cleared the proposal to allow 51 percent FDI in multi-brand retail in November 2011. However, due to strong opposition from political parties, the Cabinet had delayed implementing it. The decision to allow FDI in multi brand retail was finally notified on September 20, 2012 with a few riders including the condition that individual States would be free to take their own decisions in regard to implementation of the policy.

So far the Government has not received any application for investment in multi-brand retail by foreign retailers and it is not yet clear if these clarifications will further delay the entry of global retailers.

Bar & Bench spoke with Amarchand Mangaldas Partner Kalpataru Tripathy on these clarifications. Excerpts: 

Bar & Bench: What are your thoughts on the clarification? Does it boost the interest of foreign investors or create more hurdles for foreign investors? 

Kalpataru Tripathy: I would expect a kind of mixed reaction initially. The clarification is positive, insofar as it makes the policy a lot clearer. At the same time it is also a bit negative at first glance since it seems a bit more cumbersome. However, the overall reaction should be positive, as foreign investors always, and should, welcome clarity on policies, even if there are restrictive things in it.

B&B: The Clarification provides that the entire investment in back-end infrastructure has to be an additionality and the entity can invest only in Greenfield assets and it will not be possible to acquire assets or stakes from an existing entity. What is the thought process of the government for putting these riders? How will these impact foreign retailers? 

KT: Frankly speaking, I don’t think I really understand the intention of the government behind not allowing acquisition of existing assets, or for that matter acquisition of stakes in existing companies having such assets.

If the government is of the view that pure green field projects can only generate (new) employment, I would say that it is equally important to protect the existing employment. Seeing the government’s positive steps for last couple of years in this direction, few Indian players may have created assets in this area, and may be looking forward to a genuine partnership with larger players. There is nothing wrong in such partnerships, and consolidation is not always a negative thing.

Having said that, I would expect that such conditions may possibly get a bit liberalised a couple of years down the line.

B&B: Another stipulation that foreign retailers might find hard to meet is that 30% sourcing through SMEs has to be sold through the front-end stores and not through its cash-and-carry business. What are your thoughts?

KT: I don’t think this will be seen as a hurdle. Any way, 30% of the items sourced through SSIs have to be sold over the counter. I guess, it effectively means around 9-10% of your total sales, since 30% of total procurement would have to be sourced from SSIs. I find nothing wrong in this condition, and don’t think it should be seen as a hurdle.

Yes, I think government should redefine SSIs keeping in mind the present situation, and also revise this from time to time.

B&B: What is your view on the clarification regarding the state government’s role to impose additional conditionalities on foreign retailers? 

KT: This in my view could be a bit of worry, as uniform policy across the country should be a genuine expectation of any investor. Furthermore, from a customer’s or end consumer’s point of view also this may be disturbing. People staying in bordering areas of States would have better choices than others.

Also, such a condition today makes it very difficult for an investor to plan a business model for the whole of India, as it does not have the certainty today as to which State will add what conditions. So, making a nationwide plan would be very difficult, and add to the uncertainities of overall profitability expectation. So, investors are more likely to take a pause here, wait and see.

B&B: Foreign companies are allowed to invest in back-end infrastructure in any State, including the ones that are currently opposed to FDI in multi-brand retail but the franchisee model is not permissible. How will this affect foreign investors? 

KT: This, in my view, is intended more as an incentive to those States who are still opposing to FDI in retail. Not allowing a franchisee model would not affect the investors further, as they have already been denied any brown field projects for back-end infrastructure ie they have to go for only green field on their own.

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