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ocus FDI possibilities In India

IMPLICATIONS
OF FDIIN

Retail is in focus and so is the entry of foreign brands and


investments in this industry in India. The liberalisation of
foreign direct investment policies has been a hot topic of
deliberation political!>' and amongst industry experts. In
this article, Vishnu Bagri unfolds the subject to outline
the current script and provide a critical assessment

The proposed liberalisation was


Direct Investment (FDI) in retail effected, thereafter, on 10February 2006,by
Priortrading
to January 2006, Foreign
was prohibited. On the Press Note 3 (2006series) issued by the
January 24, 2006, the Union Cabinet Department of Industry Policy and
approved a major rationalisation of the Promotion (DIPP) under Ministry of
policy on FDI. Amongst various measures Commerce and Industry.
of rationalisation and simplification was
the partial opening up of the FDI route in Retail FOI: What is allowed
the retail sector. The Cabinet approved FDI A 51per cent FDI is permitted in the retail
up to 51 per cent with prior government trade of 'single brand' products with prior
approval for retail trade in 'single brand' government approval. In other words,
products. foreign brand owners would need to fmd

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an Indian partner to own the 49per cent of catering to the demand of such branded
the equity in the company and, thereafter, goods in India. This would imply that
it could spread its wings in the retail arena foreign companies would be allowed to sell
in the country. goods sold internationally under a 'single
brand', viz., Reebok, Nokia, Adidas.
The approval procedure Retailing of goods of multiple brands,
FDI would be allowed only with prior even if such products were produced by
the same manufacturer, would not be
approval of the government. Broadly, the
allowed". A 51 per cent
procedure is as follows:
An application seeking permission of
the government for FDI in retail trade of A critical appreciation FOI is permitted
'single brand' products would need to be Going a step further, we examine the
made to the Secretariat for Industrial concept of 'single brand' and the associ- in the retail trade
Assistance (SIA) in the DIPP. ated conditions:
The application would specifically 'Single brand' retail implies that a
indicate the product, product categories retail store with foreign investment can
of 'single brand'
which are proposed to be sold under a only sell one brand. But, what is a 'brand'?
'single brand'. Brands could be classified as products and products with
The DIPP would first process the services, or could be for single and
applications to determine whether the multiple products, or could be manufac-
turer brands and own-label brands.
prior government
products proposed to be sold satisfy the
notified guidelines. It would, thereafter, Assume that a company owns two
send the same for consideration by the leading international brands in the approval.
Foreign Investment Promotion Board footwear industry - say 'JI:. and 'R'. If the
(FIPB) for approval. corporate were to obtain permission to
Once the approval is obtained, the FDI retail its brand in India with a local
could be made in the retail trade company. partner, it would need to specify which of
Any addition to the product, product the brands it would sell. A reading of the
categories to be sold under 'single brand' government release indicates that 'JI:. and
would require a fresh approval of the 'R' would need separate approvals,
government. separate legal entities, and may be even
separate stores in which to operate in
Meaning of 'Single Brand' India.
The government has not categorically However, it should be noted that the
specified the meaning of 'single brand'. retailers would be able to sell multiple
However, the press note does provide that products under the same brand, e.g., a
the retail trade of 'single brand' products product range under brand 'JI:.. Further, it
would be subject to the following condi- appears that the same joint venture
tions: partners could operate various brands, but
• Products to be sold should be of a under separate legal entities.
'single brand' only. Now, taking an example of a large
• Products should be sold under the departmental grocery chain, prima facie it
same brand internationally. appears that it would not be able to enter
• 'Single brand' product retailing would India. These chains would, typically,
cover only products which are source products and, thereafter, brand it
branded during manufacturing. under their private labels. Since the
While the phrase 'single brand' has not regulations require the products to be
been defined, a limited intention of the branded at the manufacturing stage, this
government may be inferred from the model may not work. The regulations
press release preceding this notification. It appear to discourage own-label products
provided that the Cabinet approval was and appear to be tilted heavily towards the
"aimed at attracting investment, technol- foreign manufacturer brands. It would be
ogy and best global practices, as also worthwhile to mention here that there

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June-July 20061 Retailer 191


may be possible structures using job work enter into joint venture relationships
arrangements subject to specific confir- requiring exit options and reviews as
mation from the DIPP. policy changes take place.
A fair section of illustratively, take a company, 'MC',
which is a leading retail brand store for Localisation discouraged
baby-care products internationally: 'MC' As per the government's notification and
the foreign brands proposes to enter into a joint venture with the situations discussed in the preceding
an Indian partner to setup similar brand lines regarding FDI in retailing, the
have been stores in India. The joint venture proposes following can be assumed:
to source the product range locally and That existing local brands may not be
operating in India label it as 'MC'. The labeling is also a able to attract FDI investment for
function performed by the supplier and is, furtherance of their brands.
through the therefore, in a literal sense branded during Foreign companies may not be
the manufacturing stage. Would this permitted to source goods locally and then
franchising route. format be approved? retail them in India by using their brand
Taking the above example further, names (Le. the private or own-label
presume that 'MC' also stores other concept discussed earlier).
It appears that branded products on a consignment basis. That foreign retailers cannot experi-
In effect, it is only retail trading in 'single ment with new brands just for the Indian
they would rather brand' products and is a consignment consumer since permission would be
agent for other branded products. Is this granted to only those brands that are sold
choose to continue permissible? internationally:
Another format, which, though not
doing so and wait discussed extensively, could be a model for Protection of joint venture
consideration. The format is a joint
partner interests
till further venture between an Indian party and a
The arrangement between the foreign
regional distributor of a branded product.
investor and the Indian partner needs
liberalisation of For example, say a Singapore-based
careful consideration. The marriage in the
regional distributor of a luxury brand
short to medium term could be like the
(manufactured in France) ties up with an
policies Indian partner to open exclusive brand
memorable courtship period. But what
needs to be analysed is the impact when
outlets. It appears that such formats
the government decides to further
should receive an approval.
liberalise its regulations.
Moreover, from the foreign investor's
Existing foreign brands in India point of view, it is relevant to understand
A fair section of the foreign brands have the regulation which provides for
been operating in India through the subsequent additional collaboration.
franchising route. This announcement Upon a foreign company entering into a
should not make a large big difference to collaboration (technical or financial) with
these players. It appears that they would an Indian partner, it is restricted from
rather choose to continue operating subsequently entering into a similar
through innovative franchising structures venture with another partner without the
and wait till further liberalisation, than to first partner's consent. The exit options
and conflict of interest clauses need
attention from the perspective of the joint
venture partners.

A start has been made


The Indian government has finally taken a
step, though a small one, towards opening
up the retail sector to the foreign invest-
ment. There are various foreign brands
which have welcomed this step and looked
at it as a good indication for the opportuni-

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ties to soon arrive. of such goods? This approval appears to
Select leading luxury goods retailers have an answer. The approval has been
such as LVMH, Llardro Commercial of granted to the above products of Nike
Spain and high-end perfumes brand brand, and the joint venture or the joint
Chanel SA have approached the govern- venture partners, we presume, are only
Upon a foreign ment for permission to set up retail joint retail traders and not the manufacturers
ventures in India. of such goods.
company entering Further, certain media reports In conclusion, an initial policy
indicate that the government may be framework has been provided for, and for
into a collaboration willing to take a liberal interpretation on any clarifications an application to the
the 'single brand' criteria and that they are DIPP can always be made.

(technical or also working on another alternative for


FDI in retail that would substantially
address the domestic concerns and yet give
financial) with an the foreign players a boost to step-up their
operations in India.
Indian partner, The first approval for FDI in retail was
recently granted by the Central govern-
it is restricted ment. As per the government releases, the
approval was granted for a joint venture
from subsequently between Moja Shoes Private Limited and
Mauritius-based Tano India Private

entering into a Limited Fund - I. The joint venture,


apparently, has been granted approval to
similar venture sell in India footwear, sportswear, boots, The author specialises in tax and
slippers, sandals, athletic shoes and regulatory consulting. He can be
apparels of the same brand. Thus, a 'single
with another brand' would go on to include all the goods
contacted at +91(80) 41538287, or
vishnu@accretiveglobal.com
manufactured under the brand. Courtesy: Accretive Business
partner without This approval is also important for the Consulting Private Limited
condition that the goods have to be (The views expressed herein are not
the first partner's branded during the manufacturing stage. necessarily those of the publishers.)
Does this mean that the approval for FDI I~1
201M

consent would be granted only to the manufacturer

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