Changing scenarios in retail trade in India

By Gautam Khaitan and Arihant Jain, OP Khaitan & Co
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The retail industry is one of India’s most dynamic and fast paced industries. With several big players entering the market, India has emerged as the fifth most favoured destination for international retailers, outpacing the UAE, Russia, Indonesia and Saudi Arabia, and is among the top 30 emerging markets for retail. However, India’s retail sector is highly fragmented being run mostly by unorganized retailers while organized retail is at its nascent stage.

Gautam Khaitan Managing Partner OP Khaitan & Co
Gautam Khaitan
Managing Partner
OP Khaitan & Co

Indian corporate bigwigs such as Tata, Godrej, Reliance, ITC, Bharti, Mahindra, Wadia Group and Raheja are already involved the retail sector, while global players such as Walmart, Costco Wholesale Corp, Tesco, Carrefour, Metro, GAP, JC Penney, H&M, Karstadt Quelle and Sears/Kmart are expanding their presence.

Multi-brand retail in India is largely an unorganized sector which is generally dominated by neighbourhood “kirana stores”. Political parties and traders are concerned that these stores would be affected by the entry of global retailers.

From 2000 to 2010, Indian retail attracted about US$1.8 billion in foreign direct investment (FDI) – a mere 1.5% of total FDI into India. FDI in retail trade was prohibited except for trading in single-brand products, subject to a 51% cap and conditions specified under the policy.

In July 2012, Walmart and its Indian joint venture partner Bharti Enterprises came under scrutiny when a public interest suit alleged that Bharti-Walmart illegally carried out multi-brand retail trade despite being permitted only to carry out wholesale cash-and-carry, or wholesale trade in the country. Further, the Bharti-Walmart deal is also undergoing a global investigation for alleged corrupt practices.

Past year’s reforms

Single-brand retail: In December 2011, the Indian government removed the 51% cap on FDI into single-brand retail outlets, and opened the market fully to foreign investors by permitting 100% foreign investment in this area, subject to conditions related to sourcing, brand ownership, etc.

After representations by many single-brand retailers, including IKEA, the government relaxed such conditions in September 2012. Now, it is mandatory that 30% of the sourcing be done locally from India but merely a “good faith” effort on the part of the investor seems to satisfy the other requirements.

Multi-brand retail: In September 2012, the government also introduced its multi-brand retail policy, containing proposals such as: (1) states will have special powers including the power to permit FDI in multi-brand retail in the state; (2) retail outlets will be set up in urban agglomerations with population of 1 million or more; (3) at least 50% of FDI is to be used in “back-end infrastructure”.

Pursuant to the new policy, the government is likely to allow global supermarkets such as Walmart, Tesco and Carrefour to set up deep discount stores in India, but with a few conditions.

There has been a lot of resentment towards the policy since its introduction. The notification relating to the policy was challenged in the Supreme Court on the grounds that it had been issued without having a source of law and without parliamentary approval. The Supreme Court after hearing the arguments and submissions of both sides, held that the policy cannot be stayed and at most it can be said to be irregular.

The court adjourned the matter to January 2013. In the meantime, legislative amendments were placed before both houses of parliament in the winter session and got majority approval.

What’s next?

While the policy is expected to please the market and demonstrate the central government’s aim to create a more conducive investment environment, a lot will depend on the policy’s acceptance by the states.

Arihant Jain Junior Partner OP Khaitan & Co
Arihant Jain
Junior Partner
OP Khaitan & Co

One emerging issue is the blanket prohibition on FDI in e-commerce. Another relates to proposals such as IKEA’s proposals to sell food or open cafés in its planned stores (violating FDI policy on food retailing), to mail newsletters to customers and to sell off old furniture. The FDI norms permit retail trade of core products of a single brand of an investor. IKEA’s proposals fell into 30 product categories and the Foreign Investment Promotion Board (FIPB) allowed only 18.

In addition to IKEA, the FIPB has approved proposals for FDI in single-brand retail from companies including B Braun (Singapore), Pfizer (Mumbai), Damiani (through a 51:49 joint venture with Mehta), Pavers (England); and Brooks Brothers (US).

In July 2012, the government rejected the proposal of Zara to open Massimo Dutti format stores on the ground that an investor must own the brand which it proposes to bring to India. Walmart is also halted due to investigations of alleged malpractices.

In spite of general criticism by the opposition and local traders for FDI in multi-brand retail, the government looks forward to receive proposals from foreign retailers for setting up retail stores in India.

OP Khaitan & Co is a 40-lawyer law firm, based in New Delhi. Gautam Khaitan is the firm’s managing partner and Arihant Jain is a junior partner.

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