Floodgates open for foreign investors

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The Indian government has lifted investment caps in retail, broadcasting, civil aviation and power trading exchanges, permitting greater foreign participation. We highlight details of each policy change below.

Multibrand_supermarketMulti-brand retail trading

The Department of Industrial Policy and Promotion (DIPP) has permitted 51% foreign direct investment (FDI) in multi-brand retail trading through press note 5 of 2012. The FDI policy does not define the term “multi-brand”. Simply put, multi-brand retail trading refers to the sale of multiple brands under one roof to retail customers for personal consumption.

The proposal to allow FDI in multi-brand retail trading dates back to July 2010, when the DIPP published a discussion paper on FDI in multi-brand retail. A proposal to allow FDI in multi-brand retail was approved by the Cabinet Committee on Economic Affairs in November 2011. However, due to adverse political reaction, the proposal was kept on hold.

FDI in multi-brand retail trading is subject to the following conditions:

  1. Multi-brand retail sales outlets can only be set up in states or union territories which have allowed it or agree to allow it in future, subject to compliance with state laws and regulations.
  2. Multi-brand retail sales outlets can only be set up in cities with a population of at least 1 million (including an area of 10 kilometres around the municipal or urban agglomeration limits of such cities), in line with the 2011 census.
  3. Foreign investors must invest at least US$100 million in an entity engaged in multi-brand retail trading.
  4. At least 50% of the total FDI brought in must be invested in back-end infrastructure within three years of first receiving FDI. This includes investment in processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehousing, agricultural produce market infrastructure, etc. Expenditure on front-end units, land cost and rentals, if any, will not be included.
  5. The entity engaged in multi-brand retail trading must source at least 30% of its purchases of manufactured or processed products from “small industries”. Small industries are those whose total investment in plant and machinery does not exceed US$1 million. This condition initially applies to the average total value of goods purchased for the five years from 1 April of the year during which the first tranche of FDI is received. Thereafter, this requirement must be complied with on an annual basis.
  6. The government retains the first right to procure agricultural products.
  7. Multi-brand retail trading through e-commerce is not permissible.

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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.

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