Single-brand retail trade and regulatory overreach

By Aparna Mittal and Hina Doon, Luthra & Luthra Law Offices
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The policy relating to foreign direct investment (FDI) in single-brand retail trade (SBRT) has the avowed objective of “attracting investments in marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices”. Recent statistics from the Department of Industrial Policy and Promotion (DIPP) indicate that the policy may have fallen short of its desired agenda.

Aparna Mittal
Aparna Mittal

From 2006 to January 2015, the SBRT sector in India attracted only about US$275 million in FDI, despite being gradually liberalized, albeit with a few hiccups along the way. This may have largely been due to the strict – and often vacillating – interpretation that the policy has received from the regulatory authorities, particularly in the recent past. Instances of regulatory overreach, which often are at variance with commercial realities, have impacted investor interest by creating unintended ambiguities and hurdles in the implementation of the SBRT policy.

Highlighted below are a few instances of regulatory overreach, which are not borne out from the text of the policy and are at variance with its more liberal intent.

Three examples

Hina Doon
Hina Doon

Most significantly, in certain recent precedents, it appears that the regulator is not amenable to allowing an Indian company, having FDI and undertaking SBRT, to also undertake wholesale activities (which is on the 100% automatic route), though related to a single brand. To elaborate, if a new retail player wants to foray into India, and set up a wholly owned subsidiary dealing in only a single brand, this restriction implies that the company cannot, while engaging in direct retail activities, supply goods on a wholesale basis to other intermediaries (and consequently, may need to set up a separate Indian company to undertake the wholesale business, albeit in the relation to the same single brand).

While the rationale for such a restriction is not entirely clear, it appears to be based on the tenet that the policies relating to FDI in wholesale and SBRT are significantly different, or perhaps that if allowed, it will blur the distinction between wholesale and retail business being undertaken through the same company. This view is not borne out by the text of the FDI policy or the settled principles of interpretation of the policy. Moreover, it is not entirely clear why an Indian company having FDI should not be permitted to engage in more than one regulated sector, so long as it complies with the conditions applicable to each such sector, and in case of two sectoral caps, the more stringent one.

In the recent past, there also appears to be growing regulatory discomfort with investee companies retailing their products through shops within larger stores and this appears to have largely been premised on the assumption that this would be a conduit for engaging in multi-brand retail activities (which is governed by a different set of conditions under the FDI policy). This concern may be misplaced inasmuch as the retail of products by the investee company, albeit through a “shop-in-shop”, would still constitute SBRT (as the investee company will only be retailing the products of a single brand).

Instead of a restriction on operating shop-in-shops, the intent of the regulators may be better served by formulating an illustrative list of measures that the SBRT companies would need to comply with while operating through the shop-in-shop route, such as having clear demarcation of space or sub-premises, having independent or separate billing points, clear segregation of employees, etc.

Recently, the DIPP has also clarified that the conditions relating to FDI in SBRT would also be applicable to Indian brands. This again appears to be problematic, as one of the conditions of the FDI policy requires the foreign investor license rights to the brand, which may end up scuttling investment avenues for domestic brands. There appears to be no clear rationale for this, particularly since purely financial investors may not be able to comply with this requirement.

Conclusion

The instances illustrated above indicate that while the regulators have attempted to respond to legitimate policy concerns, by conceptualizing the issue in overly simplistic terms divorced from the underlying commercial realities, they may have stymied the growth potential of the SBRT sector in India.

Given the recent positive impetus of the government to promote India as an investment destination, a more balanced and facilitative approach – based on a nuanced understanding of bona fide commercial and business requirements – is the need of the hour!

Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. Aparna Mittal is a partner and Hina Doon is a senior associate, with the M&A practice of the firm. The views of the authors are personal. This article is intended for general informational purposes only and is not a substitute for legal advice.

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