Implications of FDI in retail

Retail is in focus and so is the entry of foreign brands and investments in this industry in India. The liberalisation of foreign direct investment policies has been a hot topic of deliberation politically and amongst industry experts. In this article, Vishnu Bagri unfolds the subject to outline the current script and provide a critical assessment Prior to January 2006, Foreign Direct Investment (FDI) in retail trading was prohibited. On January 24, 2006, the Union Cabinet approved a major rationalisation of the policy on FDI. Amongst various measures of rationalisation and simplification was the partial opening up of the FDI route in the retail sector. The Cabinet approved FDI up to 51 per cent with prior government approval for retail trade in 'single brand' products. The proposed liberalisation was effected, thereafter, on 10 February 2006, by the Press Note 3 (2006 series) issued by the Department of Industry Policy and Promotion (DIPP) under Ministry of Commerce and Industry. Retail FDI: What is allowed A 51 per cent FDI is permitted in the retail trade of 'single brand' products with prior government approval. In other words, foreign brand owners would need to find an Indian partner to own the 49 per cent of the equity in the company and, thereafter, it could spread its wings in the retail arena in the country. The approval procedure FDI would be allowed only with prior approval of the government. Broadly, the procedure is as follows: An application seeking permission of the government for FDI in retail trade of 'single brand' products would need to be made to the Secretariat for Industrial Assistance (SIA) in the DIPP. The application would specifically indicate the product, product categories which are proposed to be sold under a 'single brand'. The DIPP would first process the applications to determine whether the products proposed to be sold satisfy the notified guidelines. It would, thereafter, send the same for consideration by the Foreign Investment Promotion Board (FIPB) for approval. Once the approval is obtained, the FDI could be made in the retail trade company. Any addition to the product, product categories to be sold under 'single brand' would require a fresh approval of the government. Meaning of 'Single Brand' The government has not categorically specified the meaning of 'single brand'. However, the press note does provide that the retail trade of 'single brand' products would be subject to the following conditions: Products to be sold should be of a 'single brand' only. Products should be sold under the same brand internationally. 'Single brand' product retailing would cover only products which are branded during manufacturing. While the phrase 'single brand' has not been defined, a limited intention of the government may be inferred from the press release preceding this notification. It provided that the Cabinet approval was "aimed at attracting investment, technology and best global practices, as also catering to the demand of such branded goods in India. This would imply that foreign companies would be allowed to sell goods sold internationally under a 'single brand', viz., Reebok, Nokia, Adidas. Retailing of goods of multiple brands, even if such products were produced by the same manufacturer, would not be allowed". A critical appreciation Going a step further, we examine the concept of 'single brand' and the associated conditions: 'Single brand' retail implies that a retail store with foreign investment can only sell one brand. But, what is a 'brand'? Brands could be classified as products and services, or could be for single and multiple products, or could be manufacturer brands and own-label brands. Assume that a company owns two leading international brands in the footwear industry - say 'A' and 'R'. If the corporate were to obtain permission to retail its brand in India with a local partner, it would need to specify which of the brands it would sell. A reading of the government release indicates that 'A' and 'R' would need separate approvals, separate legal entities, and may be even separate stores in which to operate in India. However, it should be noted that the retailers would be able to sell multiple products under the same brand, e.g., a product range under brand 'A'. Further, it appears that the same joint venture partners could operate various brands, but under separate legal entities. Now, taking an example of a large departmental grocery chain, prima facie it appears that it would not be able to enter India. These chains would, typically, source products and, thereafter, brand it under their private labels. Since the regulations require the products to be branded at the manufacturing stage, this model may not work. The regulations appear to discourage own-label products and appear to be tilted heavily towards the foreign manufacturer brands. It would be worthwhile to mention here that there may be possible structures using job work arrangements subject to specific confirmation from the DIPP. Illustratively, take a company, 'MC', which is a leading retail brand store for baby-care products internationally. 'MC' proposes to enter into a joint venture with an Indian partner to setup similar brand stores in India. The joint venture proposes to source the product range locally and label it as 'MC'. The labeling is also a function performed by the supplier and is, therefore, in a literal sense branded during the manufacturing stage. Would this format be approved? Taking the above example further, presume that 'MC' also stores other branded products on a consignment basis. In effect, it is only retail trading in 'single brand' products and is a consignment agent for other branded products. Is this permissible? Another format, which, though not discussed extensively, could be a model for consideration. The format is a joint venture between an Indian party and a regional distributor of a branded product. For example, say a Singapore-based regional distributor of a luxury brand (manufactured in France) ties up with an Indian partner to open exclusive brand outlets. It appears that such formats should receive an approval. Existing foreign brands in India A fair section of the foreign brands have been operating in India through the franchising route. This announcement should not make a large big difference to these players. It appears that they would rather choose to continue operating through innovative franchising structures and wait till further liberalisation, than to enter into joint venture relationships requiring exit options and reviews as policy changes take place. Localisation discouraged As per the government's notification and the situations discussed in the preceding lines regarding FDI in retailing, the following can be assumed: That existing local brands may not be able to attract FDI investment for furtherance of their brands. Foreign companies may not be permitted to source goods locally and then retail them in India by using their brand names (i.e. the private or own-label concept discussed earlier). That foreign retailers cannot experiment with new brands just for the Indian consumer since permission would be granted to only those brands that are sold internationally. Protection of joint venture partner interests The arrangement between the foreign investor and the Indian partner needs careful consideration. The marriage in the short to medium term could be like the memorable courtship period. But what needs to be analysed is the impact when the government decides to further liberalise its regulations. Moreover, from the foreign investor's point of view, it is relevant to understand the regulation which provides for subsequent additional collaboration. Upon a foreign company entering into a collaboration (technical or financial) with an Indian partner, it is restricted from subsequently entering into a similar venture with another partner without the first partner's consent. The exit options and conflict of interest clauses need attention from the perspective of the joint venture partners. A start has been made The Indian government has finally taken a step, though a small one, towards opening up the retail sector to the foreign investment. There are various foreign brands which have welcomed this step and looked at it as a good indication for the opportunities to soon arrive. Select leading luxury goods retailers such as LVMH, Llardro Commercial of Spain and high-end perfumes brand Chanel SA have approached the government for permission to set up retail joint ventures in India. Further, certain media reports indicate that the government may be willing to take a liberal interpretation on the 'single brand' criteria and that they are also working on another alternative for FDI in retail that would substantially address the domestic concerns and yet give the foreign players a boost to step-up their operations in India. The first approval for FDI in retail was recently granted by the Central government. As per the government releases, the approval was granted for a joint venture between Moja Shoes Private Limited and Mauritius-based Tano India Private Limited Fund - I. The joint venture, apparently, has been granted approval to sell in India footwear, sportswear, boots, slippers, sandals, athletic shoes and apparels of the same brand. Thus, a 'single brand' would go on to include all the goods manufactured under the brand. This approval is also important for the condition that the goods have to be branded during the manufacturing stage. Does this mean that the approval for FDI would be granted only to the manufacturer of such goods? This approval appears to have an answer. The approval has been granted to the above products of Nike brand, and the joint venture or the joint venture partners, we presume, are only retail traders and not the manufacturers of such goods. In conclusion, an initial policy framework has been provided for, and for any clarifications an application to the DIPP can always be made.