Retail sector is highly capital intensive and FDI can provide much required capital Conversation with Hardeep Sachdeva

The Government on September 20, 2012 cleared a long pending proposal, allowing 51 percent foreign direct investment (FDI) in multi-brand retail, subject to specific conditions. With this move, India will throw open its retail sector to foreign giants like Wal-Mart and Carrefour..However, the government has allowed FDI in multi-brand retail on the condition that individual States would be free to take their own decisions in regard to implementation of the policy. Therefore, retail sales outlets may be set up in those States/Union Territories, which have agreed, or agree in future, to allow FDI in multi-brand retail under this policy..So far the States of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana, Manipur and the Union Territory of Daman & Diu and Dadra and Nagar Haveli, have agreed to implement this policy..The decision to allow FDI in multi-brand retail has come with some riders. Retail sales outlets can be set up only in cities with a population of more than 10 lakh as per the 2011 Census. In States/ Union Territories not having cities with population of more than 10 lakh, retail sales outlets may be set up in the cities of their choice, preferably the largest city..Other conditions include a minimum FDI amount of US $ 100 million with a mandate that at least 50% of the total FDI be invested in ‘back-end infrastructure’ within three years of the first tranche of FDI..This ‘back-end infrastructure’ will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc..Another tricky condition is at least 30% of the value of procurement of manufactured processed products purchased shall be sourced from Indian ‘small industries’ (defined as firms with investment up to $1 million in plant and machinery)..Surprisingly, the government has not allowed companies with FDI to sell their products online in India. The notification clearly states, “Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multibrand retail trading.” This specific exclusion may impact the plans of local e-commerce firms seeking strategic investment from foreign investors through the FDI route..Though this notification merely reiterates the existing policy, which only allows FDI in business-to-business e-commerce and not in business-to-consumer..In another interesting development, Advocate M.L. Sharma has challenged the FDI notification in the Supreme Court. The notification has been challenged on the ground that it had been issued without having a source of law and without Parliamentary approval, reports Hindu..Bar & Bench spoke to AZB Partner Hardeep Sachdeva on this latest development in the retail sector.Bar & Bench: Do you think this is a breakthrough in the retail segment?.Hardeep Sachdeva: This is certainly an important step towards liberalization of FDI into multi brand retail sector. Historically, the Government has opened certain sectors with conditions and gradually removed such conditions after analysing its impact on the economy and also after allowing the economy and the Indian companies/ citizens to prepare itself/ themselves for it..Bar & Bench: What will be the impact on the retail sector in specific and the Indian economy in general?.Hardeep Sachdeva: The retail sector is highly capital intensive and FDI can provide much required capital for the same. The FDI will also bring-in the technical knowledge in building the logistic and supply chain. I would have recommended a threshold on each store size to overcome any perceived threat to local mom and pop shops (eg. Each such store to have at-least 10,000 or 15,000 sq. ft. of area and there aren’t even 0.1% of mom and pop shops with such store size)..Bar & Bench: There are some apprehensions on how this policy will be implemented due to the given riders. What are your thoughts?.Hardeep Sachdeva: The policy, albeit conditional, still leaves enough room for companies looking to deploy quality capital and invests in Indian economy (by complying with local sourcing conditions). There are not very many precedents for a country wide roll out for any company in any sector and therefore in multi brand retail, stores can start their operations from the States which permits FDI and thereafter spread into others..Bar & Bench: An entity establishing retail stores across India will have to face enormous licensing obligations in each State of operation. Do you think this will act as a deterrent to foreign investors?.Hardeep Sachdeva: Every company requires obtaining licenses and approvals for its business and operations. This ground alone cannot be a deterrent to a serious foreign multi brand retail company looking to enter India..Bar & Bench: Do you feel that the requirement of 30% local sourcing for retailers can be tricky? .Hardeep Sachdeva: This condition requires more clarity as of now and therefore can certainly pose challenges for compliance..Bar & Bench: The Government has specifically excluded e-commerce firms from its decision to allow up to 51% FDI in multi-brand retail. What is the rationale for this decision and what will be the impact?.Hardeep Sachdeva: This came as a big surprise, since there is no valid reason for not allowing FDI in e-commerce. First of all most of the e-commerce companies in India are set-up by young entrepreneurs, who are in dire need of capital investments into their companies for its sustenance. Additionally, it does not make any logic to allow a foreign company to set-up a physical store in a State but not allow the same company to sell its products through website within the same State. Any checks and controls can be set-up even for e-commerce business companies to operate, sell and deliver within a State. The Government should immediately re-look its decision and must synchronize this..Bar & Bench: What are your views on the decision of the government to let individual States decide on whether they want to allow setting up of such stores?.Hardeep Sachdeva: I think it is a good decision to allow a State to take its decision, at-least from a political perspective since the Government while opening up the much needed FDI into this sector kept opposition parties at bay to take their own respective decision in a State they are ruling. Nonetheless, there seems a PIL filed in the Supreme Court of India against this press note and we have yet to see the outcome of same..Bar & Bench: Will all these recent economic reforms boost the confidence of the investors?.Hardeep Sachdeva: Most certainly, after all debates on telecom licenses cancellation, coal mining licenses debacles and wide spread corruption. This will reflect the commitment of the Government to reforms in India.