India’s policy on foreign direct investment permits such fund flows into the country under either the automatic or approval routes. Under the latter route prior approval from the Government of India is required for any foreign investment in an Indian company involved in a retail business.
The FDI policy classifies retail trade as either single brand retail trading (SBRT), involving such companies as Marks & Spencer, Ikea, Uniqlo, Nike and Apple or multi brand retail trading (MBRT), covering the likes of Walmart, Carrefour and Tesco. Traditionally, there have been restrictions on fund flows involving both SBRT and MBRT under the FDI policy.
Prior to January 2018, India allowed 49% of FDI in SBRT under the automatic route and government approval was required for fund flows beyond that level, which could rise to 100%. With a view of liberalizing the policy, the government decided, effective January 2018, to allow 100% of FDI in SBRT under the automatic route without the need for any approval.
The policy for FDI in SBRT has laid down the following requirements:
- Products to be sold should be of a single brand, which are branded during manufacturing.
- Products should be sold under the same brand internationally i.e., they should be made available under the same brand in one or more countries other than India.
- SBRT covers only products of a non-resident entity, be it the owner of the brand or otherwise, for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking SBRT and the brand owner.
- In respect of proposals involving foreign investment beyond 51%, sourcing of 30% of the value of goods purchased, will be done in India.
- Such an Indian entity is also allowed to sell through an e-commerce platform.
Although the government started allowing foreign investment in SBRT just a few years ago, most overseas brands are still sold in India through local franchises and distributors. For example, Genesis Luxury Fashion, a marketing and distribution company of Reliance Group, has brought several global iconic brands, such as Bottega Veneta, Giorgio Armani, Hugo Boss, Emporio Armani, Jimmy Choo, Paul Smith, Tumi, Burberry and others, in India.
Due to restrictions and various conditions for retail trading under the FDI policy, foreign companies were finding it more convenient to enter India through the franchise route. Under a franchise or distribution agreement, a global retailer partners with an Indian company. The Indian company pays a fee to the brand owner and invests in marketing and launching the brand in India. It is not uncommon for the brand owner to invest in the Indian retailer to expand its brand footprint into the Indian retail sector rather than expecting to receive either brand fees or royalties. In the recent past, Gap, Aeropostale and Ipanema, are some other brand-name companies that have entered India through franchise agreements.
Post-January 2018, Indian entities of global retailers, with FDI of more than 51%, such as Apple, have been exempted from the requirement of local sourcing for up to three years from the commencement of the business if it is undertaking SBRT of products, involving the use of “state-of-the-art” and “cutting-edge” technologies, and where local sourcing is not possible. This requirement of local sourcing was challenging for entities trading in high-technology products. There are brand-owners engaged in manufacturing and trading of products made with materials not sourced in India due to various factors and constraints. A committee the government formed for the purpose will determine if a product qualifies as having “state-of-the-art” and “cutting-edge” technology.
There is no explanation of what constitutes “state-of-the-art” and “cutting edge”, which creates ambiguity. The only leeway available is for a period of three years, after which the SBRT entity would be required to meet the 30% sourcing standard. All these factors pose challenges for the foreign investor engaged in the trading of such products.
Apart from franchise model, one way of getting around the standard requirement for mandatory sourcing is to keep FDI at up to 51% and find a local partner for the remaining 49%. Under this structure, the local sourcing requirement does not apply to the Indian entity in which investment comes from a foreign brand-owner.
As far as MBRT is concerned, FDI is limited to 51%, with prior government approval. No automatic FDI route is available for MBRT. Moreover, retail trading in any form through an e-commerce platform will not be permissible for companies with FDI in MBRT. In the past, the Indian government frowned upon creative joint-venture models to circumvent majority foreign ownership in MBRT.
Another significant issue related to retail trading over whether a sub-brand constitutes a single brand also needs clarification. For example, Marks & Spencer sells goods under sub-brands, such as M&S Women, Autograph, etc., under the M&S Parent brand. So, it is important from the perspective of restrictions under the FDI policy whether the sub-brands can be treated as a single brand or will fall under MBRT.
All in all, there are certain key areas such as sourcing norms in cases of high-tech products retailers, as well as the question of sub-brands, that need to be addressed. Until then, owners of foreign brands would prefer the franchise or distribution route to sell their products in India.