FDI in multi-brand retail: Reading between the fuzzy lines

Multi-brand retailing has been the hot bed of political strife in the recent past and not without good reason. One needs to weigh enormous amounts of investment into the country (including in infrastructure) against livelihoods of farmers, protection to local retailers and monopolization of or dominance over essential day-to-day products.

Through Press Note 5 (2012 Series) the Department of Industrial Policy and Promotion (DIPP), Government of India laid down the new guidelines permitting foreign investment in multi-brand retailing. This was consolidated into the FDI Policy Circular of 2013, issued by DIPP earlier this month. Pursuant to this policy foreign investment in multi-brand retailing (“MBRT”) shall be permitted in the following states being states that have assented to permit MBRT in accordance with the FDI Policy:

1. Andhra Pradesh
2. Assam
3. Delhi
4. Haryana
5. Jammu and Kashmir
6. Maharashtra
7. Manipur
8. Rajasthan
9. Uttarakhand
10. Daman and Diu, Dadra Nagar Haveli.

Thus the coverage of the policy is less than half the geographic area of India.

Item (viii) of paragraph 6.2.16.5 (1) provides that this policy is only an “enabling policy”. The State Governments/Union Territories would be free to take their own decisions in regard to implementation of the policy. Therefore, retail sales outlets may be set up in those States/Union Territories that have agreed, or may agree in future, to allow FDI in MBRT under this policy.

MBRT policy has three aspects to it: (a) the opening of the retail sales outlets; (b) sourcing of retail products and (c) the back end infrastructure. While the policy is very clear as to requiring the permission of State Governments / Union Territories for setting up of “retail sales outlets”, it leaves a significant grey area as to the development of infrastructure and sourcing of retail products in the non assenting states.

The policy imposes certain conditions. However, it is not clear which of these conditions States would be free to exclude, derogate from or further tighten while adopting the FDI Policy relating to MBRT?

One-time conditions

1. Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.
2. At least 50% of total FDI investment shall be allocated towards ‘backend infrastructure’ within 3 years of the first tranche of FDI.

[Note: Back-end infrastructure includes capital expenditure on all activities, excluding that on front-end units, such as investment in processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Back end infrastructure shall not include expenditure on land cost and rentals, if any. ]

On-going compliance

• Setting up of retail units

1. Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.
2. In States/ Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The locations of such outlets will be restricted to conforming areas, as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.

• Sourcing

1. Minimum 30% of the value of procurement of manufactured/ processed products purchased shall be sourced from Indian ‘small industries’ which have a total investment in plant & machinery not exceeding US $ 1 million (calculated at the time of installation, without providing for depreciation). This is an ongoing requirement, in that if such valuation is exceeded, the industry shall not qualify as a ‘small industry’ for this purpose.
2. This procurement requirement would have to be met, in the first instance, as an average of five years‟ total value of the manufactured/ processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis.
3. The definition of “small unit” under the policy may not at all times be congruent with the definition of small enterprises under the SSI Policy of the Indian Government.

• Agriculture Products

1. Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.
2. Government will have the first right to procurement of agricultural products.

Points to Ponder

Does a reading of the MBRT policy lead to the conclusion that State Governments / Union Territories are only free to decide whether or not a foreign chain may set up a retail outlet in that geographic area – leaving all other aspects under the purview of the Government of India? The language is currently ambiguous.

Will the corporates that have set up retail outlets in the assenting States / Union Territories be free to source as well set up infrastructure facilities in other States. Or would the permitting States enforce conditions on setting up of back-end infrastructure / sourcing of materials from that very State. Would assenting States enter into some sort of inter se arrangement in this regard?

Most of the States mentioned in the Policy have Congress led government, which is also in power at the Centre. Will these States change their stand upon a change in governments in the relevant States?

E-commerce players, in any event, have no respite. FDI in e-commerce is allowed only in B2B scenarios. The policy clarifies that retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading.

A Peculiar Stand

MBRT is a singular case of the Central Government acceding power to the State Governments to choose whether or not a central foreign investment policy should apply to the States. It sends a mixed signal to business houses desiring to make investments. This policy indicates weak political and legislative intent and makes this entire policy a fuzzy – ‘play it by the ear’ policy statement.

It would be interesting to see how the actual implementation of this policy pans out in future. As to what free choice in implementation of policy directives the States / Union Territories adopt will also be intriguing. In the final analysis, the policy seems too vague and politically dependent to attract any immediate investments.