Single brand retail trade:Emergence over decades

By Mr Abhishek Bansal, Head-Transaction and Forex Laws Advisory in Corporate Professionals

Emanated from World Trade Convention, wholesale and retail trading has been contracted among the member countries of World Trade Organization by entering in General Agreement on Trade in Services (‘GATS’) in the year 1995. India, being a signatory of GATS, has permitted Foreign Direct Investment (‘FDI’) in retail trade, which progressively liberalized over a period of time. These developments created an environment conducive for modern retailing and tend to attract foreign investors in our country.

Background of liberalization on FDI in the trading sector

The liberalization on FDI in the trading sector is chronologically represented as follows:

Imposition of conditionalities on single brand retail trade

The stipulations may sometime create a major roadblock for the foreign investors desiring to invest in the Indian markets. However, the non-imposition of same may probably swipe the domestic players out of the picture, adversely affecting the unorganized and traditional retail sector which provide livelihood to a larger section of Indian society.

Thus, the Government continues to permit FDI in single-brand retail trading subject to certain conditions vide press note 1 (2018 series).

Analyzing each stipulation along with the possible rationale and/or issues thereof:

1. The product proposed to be sold under this regime should pertain only to a single brand. This condition seeks to permit only serious market players which have an established brand so that people of India are able to avail the benefits of foreign brands within the home country. However, the Government is silent on the retailing of sub-brands under the ambit of a single brand and the benchmark to distinguish between a sub-brand and separate brand, thereby making it a grey area. For eg. Oriflame, in addition to selling its product, is also involved in selling its sub-brands, like The One, Optimals, etc.

2. Only the products which are branded during manufacturing and has a global presence are permitted to be sold to the consumers directly and not the one which falsely depicts the characteristics of a particular brand.

3. Entities infusing FDI beyond 51% are required to adhere to 30% sourcing norms from India. This condition shall attain the twin benefits, one to curb the fear of overtaking the Indian market by multinational players and second to promote the small sectors. In order to ensure check on the company, the quantum of domestic sourcing shall undergo certification by the company and verification by statutory auditor. Considering the capacity of the suppliers in India, the procurement requirement shall be relaxed in the manner to be met as an average of five years’ total value of the goods purchased, beginning from 1^st April of the year of opening of first store and thereafter, it shall be met on annual basis (‘Average Rule’). The relaxation has been provided upon the concerns showed by the Apple Inc. upon rejection of its application for seeking exemption from the sourcing requirements.

4. For the purpose of carrying retail trading through e-commerce, the entity is mandated to operate through brick and mortar stores. Considering the ease associated with interned and vast reach of e-commerce sector, the physical presence of the entity is required in the domestic market for de-jure control over the retail trading in India. However, since the no. and location of such stores has not been clarified, the object of this stipulation shall be required to be revisited.

5. A new provision has been introduced which has permitted an entity engaged in single-brand retail trading to set off incremental sourcing of goods from India for global operations during the initial period of 5 years, which shall commence on 1^st April of the year of the opening of the first store.

Recent ventures in the Indian Markets

During the period of past 6 months, approximately 25 proposals have been approved for undertaking single brand retail trade in India, which includes Amazon Retail India Pvt. Ltd, Grofers India Private Limited, Supermarket Grocery Supplies Private Limited, Urban Ladder Home Décor Solution Private Limited, Blueair India Private Limited, Bally International AG, Acer India Pvt. Ltd., MTR Foods Private Limited, etc. with an approximately FDI inflow of 1000 million USD.

The statistics representing the ingress of foreign players in Indian markets denote that our markets have immense potential.

FDI statistics

Considering the ‘Statement on sector-wise FDI equity inflows’ from April, 2000 to September, 2017, the retail trading sector received a total of USD 1098.81 million which contributes to 0.31% of the total FDI equity inflows and positioned at no. 37 in the sector-wise list. Further considering the liberalization of 100% percent FDI in single brand under automatic route, the FDI in the sector is anticipated to ascend drastically.

Conclusion

Though, there are various issues that need to be addressed, but the liberalization of FDI to the extent of 100% under the automatic route and permission to set off the incremental sourcing is a revolutionary step taken by the Government towards ease of doing business in India.