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2013-08-06

India Relaxes FDI Rules
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For multi-brand retailers, market entry should be more enticing.

Some of the contentious riders pertain to investment in back-end infrastructure, mandatory sourcing from small-scale industries and establishment of retail stores only in cities having population of one million or more.

On back-end infrastructure, the government is planning to highlight the condition of creating “additional” infrastructure. “The main reason why the government opened up the sector to FDI is only to create additional and state-of-art back-end infrastructure such as cold storage chains, this is because the back-end facilities now are not enough and the existing players will get an easy exit route if foreign retailers buy them out, leading to a real estate business of sorts,” a senior official told Business Standard.

The policy on 30 percent mandatory procurement from micro, small and medium enterprises (MSMEs) will also change. The government will relax the condition that once the 30 percent threshold is met, it can continue sourcing from the same supplier even if the total investment exceeds $1 million, keeping in mind quality consistency. The cap might now be changed to $2 million for three years, the official added.

Under the changed guidelines, that 50 percent investment will be restricted only to the first tranche of $100 million, the mandatory initial investment amount, while subsequent investments into back-end will depend on the retailer.

However, the government did not clarify another point that had led to confusion among retailers — on whether such investment in back-end was to be made for new infrastructure or in existing back-end infra (back-end infra refers to packaging, logistics, storage and warehousing, among others).

“The government spoke to foreign retailers recently and must have understood their concerns. But today’s changes are meant for food and grocery retail. I think the recent RBI notification which allowed foreign companies to invest in holding companies which in turn can invest in a downstream subsidiary is a much better way to get foreign investors in furniture, electronic retail and so on. There are no state-specific restrictions, no back-end restrictions there,” was the reaction of Kishore Biyani, chief and founder of the Future Group.

Our Thoughts

The Cabinet Committee on Economic Affairs will keep up negotiations and tweaking rules until it becomes attractive enough for major players to jump in.

The restrictions in place currently are to protect local retailers and multinationals that have already setup shop, but could be bought out by bigger players.

The government’s effort to entice large food and grocery retail is an important step to bettering the supply chain infrastructure, necessary for sustained growth in India.

There is a clear market demand for goods and services these retailers can offer, but without an effective supply chain in place, it’s a difficult proposition.