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Foreign Direct Investment in Retail Sector in India

30-NOV-2015 17:18

    In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.

    Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.

    Types of Retail Industry

    Organised retailing means all trading activities undertaken by licensed retailers i.e. , those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.

    Unorganised retailing, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors/ Patri wala, etc.

    FDI Policy in India:

    FDI defined as investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. In simple words, FDI means the capital inflows from abroad i.e. invested in or to enhance the production capacity of the economy.

    The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).

    The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be required.

    FDI Policy with Regard to Retailing in India

    I. FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.

    II. FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‘Single Brand’ products, subject to Press Note 3 (2006 Series).

    III. FDI is not permitted in Multi Brand Retailing in India yet.

    Entry Options for Foreign Players prior to FDI Policy

    Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players had been operating in the country.  Some entrance routes used by investors have been explained below:-

    A. Franchise Agreements

    It is an easiest way to come in the Indian market. In franchising and commission agents’ services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world.  Apart from quick food bondage identical to Pizza Hut, players such as addidas, Reebok, Amazon as good as bennet and coleman, have entered Indian marketplace by this route.

    B. Cash And Carry Wholesale Trading

    These is 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.

    C. Strategic Licensing Agreements

    Some foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd

    D. Manufacturing and Wholly Owned Subsidiaries.

    The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.

    FDI in Single Brand Retail

    The Government has not defined the meaning of “Single Brand” anywhere neither in any of its circulars nor any notifications.

    In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions which is given below:

    (a) Only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed),

    (b) Products should be sold under the same brand internationally,

    (c) Single-brand product retail would only cover products which are branded during manufacturing and

    (d) Any addition to product categories to be sold under “single-brand” would require fresh approval from the government.

    FDI in Multi Brand Retail

    The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof.
    In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce

    Need of FDI:

    I. Domestic capital is inadequate for economic growth of the country;

    II. Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development;

    III. Foreign capital usually brings it with other scarce productive factors like technical knowhow, business expertise and information about latest business trends at global level.

    Benefits of FDI

    I. Improves foreign exchange position of the country;

    II. Employment generation and increase in production ;

    III. Help in capital formation by bringing fresh capital;

    IV. Helps in transfer of new technologies, management skills, intellectual property

    V. Increases competition within the local market and this brings higher efficiencies

    VI. Helps in increasing exports;

    VII. Increases tax revenues

    Criticism of FDI

    I. Domestic companies fear that they may lose their ownership to overseas company

    II. Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business;

    III. Large giants of the world try to monopolies and take over the highly profitable sectors;

    IV. Such foreign companies invest more in machinery and intellectual property than in wages of the local people;

    V. Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company;

    FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

    • Lottery Business

    • Gambling and Betting

    • Business of Chit Fund

    • Nidhi Company

    • Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations)

    • Housing and Real Estate business (except development of townships, construction of residen-tial/commercial premises, roads or bridges to the extent specified in notification

    • Trading in Transferable Development Rights (TDRs).

    • Manufacture of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

    Conclusion

    The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail is at a very initial stage.  The FDI in retail industry is likely to create around 10 million jobs in the span of 10 years. Retail sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 12% GDP of India.  Retail industry can improve the condition of agriculture sector because when goods are purchased by these retailers directly from the farmers, will reduce the price of vegetables and other commodities as well. Now it’s the requirements of the time that India should allow FDI in all segments of the retailing in India.

    In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.
    Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.
    Types of Retail Industry
    • Organised retailing means all trading activities undertaken by licensed retailers i.e. , those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.
    • Unorganised retailing, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors/ Patri wala, etc.
    FDI Policy in India:
    FDI defined as investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. In simple words, FDI means the capital inflows from abroad i.e. invested in or to enhance the production capacity of the economy.
    The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).
    The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be required.
    FDI Policy with Regard to Retailing in India
    I. FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.
    II. FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‘Single Brand’ products, subject to Press Note 3 (2006 Series).
    III. FDI is not permitted in Multi Brand Retailing in India yet.
    Entry Options for Foreign Players prior to FDI Policy
    Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players had been operating in the country.  Some entrance routes used by investors have been explained below:-
    A. Franchise Agreements
    It is an easiest way to come in the Indian market. In franchising and commission agents’ services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world.  Apart from quick food bondage identical to Pizza Hut, players such as addidas, Reebok, Amazon as good as bennet and coleman, have entered Indian marketplace by this route.
    B. Cash And Carry Wholesale Trading
    These is 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.
    C.   Strategic Licensing Agreements
    Some foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd
    D. Manufacturing and Wholly Owned Subsidiaries.
    The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.
    FDI in Single Brand Retail
    The Government has not defined the meaning of “Single Brand” anywhere neither in any of its circulars nor any notifications.
    In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions which is given below:
    (a) Only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed),
    (b) Products should be sold under the same brand internationally,
    (c) Single-brand product retail would only cover products which are branded during manufacturing and
    (d) Any addition to product categories to be sold under “single-brand” would require fresh approval from the government.
    FDI in Multi Brand Retail
    The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof.
    In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce   
    Need of FDI:
    I. Domestic capital is inadequate for economic growth of the country;
    II. Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development;
    III. Foreign capital usually brings it with other scarce productive factors like technical knowhow, business expertise and information about latest business trends at global level.
    Benefits of FDI
    I. Improves foreign exchange position of the country;
    II. Employment generation and increase in production ;
    III. Help in capital formation by bringing fresh capital;
    IV. Helps in transfer of new technologies, management skills, intellectual property
    V. Increases competition within the local market and this brings higher efficiencies
    VI. Helps in increasing exports;
    VII. Increases tax revenues
    Criticism of FDI
    I. Domestic companies fear that they may lose their ownership to overseas company
    II. Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business;
    III. Large giants of the world try to monopolies and take over the highly profitable sectors;
    IV. Such foreign companies invest more in machinery and intellectual property than in wages of the local people;
    V. Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company;
     FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:
    • Lottery Business
    • Gambling and Betting
    • Business of Chit Fund
    • Nidhi Company
    • Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations)
    • Housing and Real Estate business (except development of townships, construction of residen-tial/commercial premises, roads or bridges to the extent specified in notification
    • Trading in Transferable Development Rights (TDRs).
    • Manufacture of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
    Conclusion
    The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail is at a very initial stage.  The FDI in retail industry is likely to create around 10 million jobs in the span of 10 years. Retail sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 12% GDP of India.  Retail industry can improve the condition of agriculture sector because when goods are purchased by these retailers directly from the farmers, will reduce the price of vegetables and other commodities as well. Now it’s the requirements of the time that India should allow FDI in all segments of the retailing in India.

    DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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