Foreign direct investment (FDI) in the single brand retail trading (SBRT) sector was expected to gain traction owing to a comparatively relaxed framework introduced last year. The revised regime permitted 100% FDI under the automatic route (earlier, it required approval for investments exceeding 49%) and allowed entities to offset incremental sourcing for its global operations from India against the mandatory 30% local sourcing requirement.
However, the amended policy may have failed to achieve the desired objective because it falls short of addressing certain practical concerns and ambiguities.
The revised norms do little to allay the concerns of players engaged in segments in which it may not be practically possible (owing to quality, technology, volume or other constraints) to comply with local sourcing norms.
The policy does exempt compliance for the first three years for products having state of the art or cutting edge technology, and where local sourcing is not possible; a committee will determine whether entities are eligible for such exemptions. However, in the absence of a well-defined formula and given the lack of precedents, potential investors remain uncertain if they are eligible for exemption.
The policy remains silent on the scope of single brand and the treatment of sub-brands. While there is no formal notification, the Department of Industrial Policy and Promotion (DIPP) has in the past stated that single brand retailers will be able to retail their sub-brands along with their flagship brands, so long as the sub-brand products bear the logo of the primary brand as well.
However, this appears to be in contrast with the information provided on the portal of Invest India, a non-profit venture under the DIPP, which states that a separate entity is required to be set up to retail a sub-brand, effectively treating sub-brands as multiple brands (in which case different sectoral conditions and investment limits apply).
This uncertainty is also reflected in practice. For instance, in 2013, the Department of Economic Affairs sent a reference to the DIPP to issue a clarification in connection with the brands, such as Autograph, and M&S Woman, retailed by Marks & Spencer, which had approval for only the parent brand. Since no action was initiated by the regulators, the implicit understanding was that such brands were treated as a single brand.
From a review of the list of proposals approved by the government until 2016, it appears that foreign investors have mostly procured approvals solely for the parent brand. For instance, H&M and Nike have not procured separate approvals for their sub-brands, Divided and Air Jordan respectively. Certain investors have, however, chosen to steer clear of the confusion and have retailed brands owned by the same entity through separate entities with separate SBRT approvals, for example Only, Jack & Jones and Vero Moda, all owned by Bestseller.
Though not formalized, it appears that brands which have a distinct market presence independent of the parent brand or entity are treated as multiple brands, irrespective of their ownership. However, in the absence of a distinct test for determining the scope of single brand, there is potential for regulatory arbitrariness.
The regulator has in the past displayed unease with SBRT entities retailing their products through the shop-in-shop (SIS) model.
It has even issued certain SBRT approvals explicitly requiring the investee entities not to undertake any SIS activities, to ensure that the products are retailed through exclusive stand-alone stores and not to sell in such stores any unbranded products, or products of a different brand. Given that SBRT entities would continue to retail a single brand even through the SIS model, the intent of such a restriction is not evident.
The SBRT policy has attempted to create a balance between protecting domestic interests and opening up of the economy, but the government has struggled to find the sweet spot. While a one size fits all policy may not be possible, a clearer framework that settles the ambiguities that come from practical challenges is needed to attract sizeable foreign investment in this sector.
Vishwanath Pratap Singh is a partner and Srabanee Ghosh is a senior associate at L&L Partners. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.
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