FDI in retail: proposal, rollback and road ahead

By Suchitra Chitale and Maitry Kakade, Chitale & Chitale Partners
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In an ambitious move to respond to demands of the recent times, the Union cabinet on 25 November gave its approval to foreign direct investment (FDI) in multi-brand retail trading (MBRT) and increased the existing FDI cap in single-brand retail trading (SBRT). The announcement of the proposed opening up led to huge protests.

Due to mounting political pressure, in what is considered to be a regressive step, the government on 7 December announced a partial rollback of the proposed policy and suspended its decision to implement the changes.

Suchitra Chitale Managing partner Chitale & Chitale Partners
Suchitra Chitale
Managing partner
Chitale & Chitale
Partners

The rollback pertains to only MBRT and the government is still mulling over the proposal with respect to SBRT. The policy announcement and subsequent events have attracted wide attention from all corners, partly because the retail sector is one of biggest employers in India, second only to agriculture.

Liberalization of FDI in retail has met with stiff resistance right since its inception in India. SBRT was opened to FDI for the first time in 2006. Under the existing policy, FDI up to 51% is permitted in SBRT under the Foreign Investment Promotion Board (FIPB) approval route, subject to certain conditions. The existing policy does not permit FDI in multi-brand retailing.

Multi-brand retail trading

The policy proposal sought to permit FDI in MBRT to the extent of 51% under the approval route. The proposal had certain inbuilt mechanisms to safeguard the interests of domestic retailers which included, among others, restrictions on retail locations, minimum level of investment and development of “back-end infrastructure”.

The proposal required the foreign investor to bring in a minimum of US$100 million as FDI. To remove inefficiencies in the supply chain and reduce post-harvest losses, at least 50% of the total FDI brought in was to be invested in back-end infrastructure, which included capital expenditure on activities such as processing, manufacturing and logistics.

Under the proposal, retail sales locations could be set up only in cities having a population of more than 1 million and at least 30% of manufactured products were required to be sourced from “small industries”.

Single-brand retail trading

The proposal endeavoured to raise the permissible FDI cap in SBRT from 51% to 100% under the approval route, subject to the following conditions: (a) products must be of a “single brand” only; (b) products must be sold under the same brand internationally; (c) the foreign investor must be the owner of the retail brand; and (d) only products which are branded at the time of manufacturing would be covered.

It was also proposed that with respect to investments involving FDI beyond 51%, the condition of at least 30% sourcing from small industries would apply, as in the case of MBRT.

Appraising the proposal

Increasing the FDI cap for SBRT would certainly be a step in the right direction. The move, which would give full control and ownership rights to foreign investors, could go a long way in stepping up FDI penetration in the retail sector in India. However doubts remain about the smooth roll-out of the policy as implementation of the requirement of 30% sourcing from small industries is not expected be trouble-free.

Maitry Kakade Associate Chitale & Chitale Partners
Maitry Kakade
Associate
Chitale & Chitale
Partners

As far as MBRT is concerned, the policy has been put on hold. The policy had the potential not only to promote healthy competition but also to generate employment in the organized retail sector. The policy could have played a crucial role in reducing supply chain efficiencies, developing back-end infrastructure and containing food inflation.

To allay stakeholders’ fears, the policy could have provided for absorption of a given percentage of workers from the existing retail sector into the proposed organized retail sector. Some form of incentives for those running mom-and-pop stores might have gone a long way in quietening the protests from stakeholders that were seen after the announcement of the policy.

It is clear that FDI in retail, if not regulated properly, could have serious social consequences in the form of job displacement, elimination of age-old mom-and-pop stores and establishment of monopoly positions. However, stalling the process of liberalization of FDI is not the solution to the problem.

In line with international best practices, the retail sector should be opened in India in a phased manner. As suggested by the Federation of Indian Chambers of Commerce and Industry, FDI up to 49% only could be allowed in MBRT initially. In addition, the social safeguards integrated into the policy could be further fine-tuned to address the interests of the various stakeholders involved.

Suchitra Chitale is the managing partner of Chitale & Chitale Partners, a full-service law firm based in New Delhi. Maitry Kakade is an associate with the firm.

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