India recently formulated its policy permitting foreign direct investment (FDI) in multi-brand retail trading (MBRT). On November 24 2011, the Union Cabinet approved the proposal of the Department of Industrial Policy & Promotion (DIPP) to permit up to 51% FDI in MBRT subject to conditions imposed by the Government of India. After consultation with stakeholders, the Government issued a press release on September 14 2012 and DIPP issued a press note thereafter, listing conditions that foreign investors would need to comply with, to invest in MBRT in India (MBRT conditions). On June 6 2013 DIPP issued clarifications to address queries raised by prospective investors on the MBRT Conditions.
Key MBRT conditions
State government discretion
A key MBRT condition is that multi-brand retail outlets can only be set up in those states, which agree to allow FDI in MBRT. So far, the States of Andhra Pradesh, Assam, Delhi, Haryana, Himachal Pradesh, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan and Uttarakhand and the Union Territories of Daman & Diu and Dadra and Nagar Haveli have approved FDI in MBRT. A foreign investor proposing to invest in MBRT in other states can seek specific consent from the relevant State Government.
The policy is so framed because the Constitution of India categorizes "trade and commerce within the State" as a state subject. State Governments have also been given the discretion to prescribe additional conditions to regulate MBRT stores set up in their jurisdiction.
The foreign investor must infuse a minimum of $100 million in the entity, which will engage in MBRT in India (MBRT entity).
Minimum extent of investment: At least 50% of the total FDI into the MBRT entity must be invested in backend infrastructure within three years from the first tranche of FDI. "Backend infrastructure" includes capital expenditure on all activities (excluding that on front-end units, land cost and rentals) such as investment made towards processing, manufacturing, distribution, quality control, packaging, logistics, warehouse, agriculture market produce infrastructure etc.
Greenfield investment: Investment by the MBRT entity in backend infrastructure must be in greenfield assets only i.e. not through acquisition of supply chain/backend assets or stakes from an existing entity; or use of backend facilities of any existing wholesale trading/cash and carry wholesale trading arrangement in India.
The front-end stores of the MBRT entity must be company owned and company operated only – the MBRT entity cannot adopt a franchisee model. The front-end stores must be set up as new stores and not through acquisition of existing retail stores.
Sourcing from small industries
At least 30% of the value of the manufactured or processed products purchased by the MBRT entity must be sourced from Indian "small industry" units which have a total investment in plant and machinery not exceeding $1 million as certified by the District Industries Centre. Procurement of fresh produce is not covered by this MBRT Condition since it wouldn't qualify as a "manufactured or processed product".
Multi-brand retail stores can be set up only in cities with a population of more than 1 million (determined by the 2011 census). The MBRT entity does have the flexibility to invest in backend infrastructure anywhere in India, including in states that have not approved of FDI in MBRT.
The MBRT entity cannot engage in retail trading by e-commerce or any form of distribution, including undertaking cash & carry wholesale trading. MBRT and cash & carry wholesale trading businesses must be undertaken through different entities.
Every application seeking approval for FDI in MBRT will first be scrutinized by DIPP before being considered by the Foreign Investment Promotion Board for Government approval.
Foreign investors intending to infuse funds in MBRT in India are likely to view some conditions as being restrictive, in particular the mandate to make only greenfield investments. Further, foreign retailers cannot augment their existing arrangements in India (for instance, an existing cash & carry wholesale trading setup) to meet the MBRT Conditions.
Additionally the requirement for MBRT entities to only undertake retail trade presents practical difficulties as there is no fool-proof method to determine if goods purchased from the MBRT entity are for personal consumption.
The uncertainty regarding the manner in which the ruling Government in a State may exercise the discretionary power conferred upon it also causes apprehension.
Intent and way forward
Although the MBRT policy does present some challenges, its intent is to improve India's backend infrastructure, which is expected to significantly reduce post-harvest losses and enable farmers to obtain a remunerative price for their produce. The Government also believes that supply chain efficiencies, technological upgrades and improvement in product quality resulting from FDI in MBRT will lower prices.
Currently the policy is being heavily debated and time will tell whether foreign investors would be willing to make investments into the Indian retail space notwithstanding the challenges that the MBRT conditions pose.
Disclaimer: This article is not in the nature of legal advice and refers to applicable law as of June 26 2013.