Multi Brand Retailing: A few clarifications

You will recall my post titled FDI in Multi Brand Retailing: Reading between the fuzzy lines. In the last week, the Department of Industrial Policy and Promotion (DIPP) has brought out certain clarifications in relation to the hotly debated policy on FDI into multi brand retailing.

On the issue relating to sourcing, the government has clarified that sourcing pertains only to manufactured and processed goods and that it applies only in relation to front-end stores. Further, the term ‘small industry’ has been explained.

As regards back end infrastructure, it is now clear that acquisition is not an option and the retail entity would necessarily have to invest into green-field assets. Similarly, front-end stores would need to be additional units and acquisition of existing stores is not permitted.

Back-end infrastructure in non-FDI permitting States would also be counted as compliance with the conditions for FDI in MBRT under the FDI Policy Circular. Additionally, existing investments by investors into infrastructure or service companies will not be accumulated or be counted towards investment in back-end infrastructure.

The wholesaling entity and the retailing entity should be different units. The entity carrying on ‘cash and carry business’ will not be allowed to enter into retailing even where all conditions for FDI are satisfied. No franchising would be allowed. All front end stores would have to be MBRT company owned and company operated only.

Clarification in relation to State Policy

Any amendment in the FDI policy itself would fall under the domain of the Central Government. However, the investor would be required to comply with State laws/ regulations. One would think such a clarification should give foreign investors some relief.

However, immediately thereafter another clarification provides that FDI policy in MBRT is subject to the applicable State/Union Territory laws/ regulations. The State Governments have the prerogative of imposing additional conditions accordingly. This brings us back to square one. What is the framework within which State / Union Territory Governments can impose additional conditions? Do the States have unfettered discretion in imposing conditions? The clarifications would seem to suggest so.

On a separate but related note, Himachal Pradesh has now joined the States that have adopted the MBRT FDI policy. This has been notified by way of Press Note 1 of 2013.

What’s next?

One of the most important aspects on which clarity is awaited and has not yet been provided is ‘sourcing restrictions among group companies’. Interestingly the term ‘group companies’ has been defined by Press Note 2 of 2013 issued by DIPP on June 3, 2013.

The other clarifications that are pending are in relation to:

• Requirement of 50% investment in ‘backend infrastructure’ within three years of the first tranche of FDI; and
• Requirement of 30% sourcing from ‘small industry’. Whether sourcing from such ‘small industry’ can be allowed towards fulfillment of this conditionality, if it outgrows, and if so, till what period?

The full text of the clarifications can be found here.

Despite all the clarifications received so far, with the discretion given to State Governments, investors would continue to be wary of making investments in MBRT sector in India.