In the past few months there have been mixed messages for foreign retailers wanting to invest in India. The government announced changes to open up the market to foreign investment but following vociferous protests, the government u-turned and whilst the market has opened up to foreign ownership of single brand retailers there are still challenges for foreign retailers who wish to enter the Indian retail market.

To view the article in full, please see below:



Full Article

In the past few months there have been mixed messages for foreign retailers wanting to invest in India. The government announced changes to open up the market to foreign investment but following vociferous protests, the government u-turned and whilst the market has opened up to foreign ownership of single brand retailers there are still challenges for foreign retailers who wish to enter the Indian retail market.

Previous position

Prior to January 10 2012, both single and multi-brand foreign retailers who wished to open in India faced a number of large hurdles. Multi-brand foreign retailers such as Tesco were (and still are) prohibited from having a direct foreign investment into the Indian market, even in partnership with an Indian partner.

However, if a foreign single brand retailer (such as Marks and Spencer) wanted to develop a presence in the Indian market it was able to do so but had to do so with an Indian partner. Foreign direct investment in India was prohibited in retail trade generally but there was an exception; if a foreign retailer was a single brand retailer it could enter into a partnership with an Indian partner and hold up to 51% of the investment. Whilst some retailers such as Marks and Spencer and Zara took advantage of this structure, a reluctance to enter into such a partnership may be a factor in explaining why, in the three and a half years since a 51% investment was allowed in single brand retail trading, India received only Rs196 crore (£25.2 million) foreign direct investment into single brand retail stores.

Current position

On January 10 2012, India's Department of Industrial Policy and Promotion, Ministry of Commerce and Industry (DIPP) revised its position on single brand retail trading.

Under this new position, a 100% foreign direct investment can be made in a single brand retailer in India subject to a successful application to the Indian Government and adherence to the following terms and conditions:

  • the products to be sold by that retailer should be of a 'Single Brand' only
  • the products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India
  • 'Single Brand' product-retail trading should cover only products which are branded during manufacturing
  • the foreign investor should be the owner of the brand, and
  • in respect of proposals involving foreign direct investment beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian 'small industries/ village and cottage industries, artisans and craftsmen'.

It is this last condition that has led to doubts as to the extent that foreign retailers will take advantage of the relaxation for single brand retailers.

'Small industries' are defined as industries which have a total investment in plant and machinery not exceeding US $1 million. That valuation refers to the value at the time of installation, without providing for depreciation.

What do the changes mean for foreign retailers looking to expand into India?

For major retailers, the 30% sourcing condition provides a major hurdle to market entry as they may face difficulties in sourcing local products that meet the rigorous international standards usually required. However, the sheer size and projected growth of this developing market provides a powerful incentive for retailers to overcome this issue. The US India Business Council has noted that single-brand retail in India is currently worth $7 billion and could to grow to over $25 billion within 5 years.

Multi-brand retailers, such as Wal-Mart and Tesco, hoping that this liberalisation may soon lead to further reforms paving their entry into the market, are likely to be disappointed. The government initially announced wider changes to open up the multi-channel retail market as well, but in December 2011, after wide scale protest as to the possible economic and cultural impact that relaxation may have, the government was forced into a retreat on its plans to open up the multi-brand market to foreign direct investment only two weeks after the initial announcement.

It is suggested that the single brand retail trading relaxation has not been met with the same hostility as the single brand market is less likely to compete with local retailers. Furthermore, the addition of the 30% sourcing condition may have allayed fears of retailers sourcing goods internationally to the detriment of Indian manufacturing.

As such, the status quo remains and multi-brand retailers are still prohibited from foreign direct investment into the market, even in partnership. It should be noted, however, that 100% foreign direct investment is allowed for cash & carry wholesale trading which some retailers may see as a method of establishing an initial presence in India.

Other issues in entering the Indian retail market

Whilst the changes allow foreign direct investment into single brand retailers, retailers should also be mindful of further hurdles when entering the Indian market. Most notably, a proposal to replace central and state taxes such as excise, customs, service tax, sales tax and VAT with a uniform country-wide value-added tax on all goods and services has yet to be rolled out.

Consequently, foreign retailers will need to keep an eye on all the relevant developments in India and not just this latest liberalisation in foreign direct investment before a decision is made to enter this market.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 20/01/2012.