A STUDY OF FOREIGN DIRECT INVESTMENT (FDI) IN MULTI-BRAND RETAIL WITH IMPLICATION

Abstract

Liberalization, Privatization and Globalization (LPG) led a structural and economic reforms throughout the world, especially in underdeveloped countries like India. Globalization broadened the linkages of national economies into a worldwide market for goods and services especially capital. The most prominent phase of globalization is the rapid integration of production and financial markets. Foreign direct investment (FDI) has been one of the core features of globalization. In order to develop and modernize the economy, India adopted various reforms such as encompassing deregulation, demonopolization, privatization and private participation in the provision of infrastructure, and the reduction and simplification of tariffs. The main criterion behind these reforms is to attract FDI. Retailing in India is one of the pillars of its economy and accounts for 14 to 15 % of its GDP. In November 2011, India's central government announced retail reforms for both multi-brand stores and single-brand stores which paved the way for retail innovation and competition with multi-brand retailers such as Wal-Mart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike, and Apple. In this paper the present study attempts to discuss the issues and implications of FDI in Multi-brand Retail on Indian Economy. Implications of FDI in multi-brand retail sector discussed outweigh the issues related to the new FDI policy reforms

Key words: FDI, globalization, retail.

IntroductionRetailing encompasses all the business activities that involves in selling goods and services to end users for their personal, family, or household use. Retail is the lastlink in the distribution channel as it deals directly to the consumers by connecting them to the manufacturer. Indian retail industry has been ranked as the fifth most promisingnation for investment with the segregation of organised & unorganised retailing. According to a study by Booz & Co and RAI Indian market is majorly dominated by theunorganised sector & organised sector accounts for 8% of the total retail landscape. Over the last few years Indian retail sector has witnessed a tremendous growth as traditional markets are making path for new formats such as malls, departmental stores, hypermarkets, supermarkets, discount stores and speciality stores. With the growing market demand due to the change in demographic profile of the consumer and their taste and preferences the Indian retail industry is expected to grow 9% in 2012-16, with organised retail growing at 24%. According to the India Retail Report 2013 (IRIS

Research), the Indian retail market is estimated to exceed US$ 750 billion by 2015, which shows strong prospects for foreign players to explore Indian market. With the Indian big business houses like Pantaloons, Aditya Birla group, RPG, etc and the global players like Adidas, KFC, Zara, Levis, etc the organized retailing looking for ahigher share in the growing pie of the retail market in India.

FDI is an important source of investment in Indiaexpecting from multinationals to create ample ofopportunities for growth, jobs and research &development. In order to attract investment from foreigninvestors, economic policy was introduced in the year1991, since then many changes have been taken place toincrease foreign participation. Until 2011, the IndianCentral Government denied FDI in multi-brand retail &single-brand retail was limited to 51percent. In late 2012,the Government of India approved a FDI policy which allowed global retailers to own up to 51percent in multibrandretail & 100 percent in single brand retail. It isexpected that the organised retail will now have full accessto over 200 million urban consumers in India (approx.47percent) of which are below the age of 30 with highlevels of consumption.

RESEARCH OBJECTIVE Research objective are following 1. To study the government policy relating to multi-brand retailing.

2. To find out effectiveness of multi-brand retailing in india.

Research Methodology:The kind Research being conducted here is ANALYTICAL RESEARCH, as it most suits thepurpose of the Research paper. In this Research the facts & the information as so gained fromvarious secondary sources have been used to make an analysis of the current multi brand retailSector & FDI with the driving forces behind these situations. That is analyzing the data &extracting the relevant important data to complete the paper & make it relevant to the presentscenario of FDI in multi brand retailing. The data for the present study is collected from thesecondary sources are news papers, reference books, magazines.

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RETAIL SECTOR :- Retailing is defined as a set of all activities involved in selling goods or services directly to the final consumer for their personal, non-business use by the way of shops, market, door-to-door selling, and mail-order or over the internet where the buyer intends to consume the product. “Retail” means a sale for final consumption compared to a sale for further sale or processing. The phenomena of retailing involves a direct interface with the customer and the coordination of business activities from end to end- from the concept or design stage of a product , to its delivery and post-delivery service to the customer.

The Indian retail industry is generally divided into organized and unorganized retailing:

Organized retailingOrganized retailing refers to TRADING activities undertaken by licensed retailers, those who have registered for sales tax, income tax, etc. These include corporate-backed hypermarkets and retail chains, and also privately-owned large retail businesses.

Unorganized retailingUnorganized retailing refers to the traditional forms of low-cost retailing, for example, local kirana shops, owner-operated general stores, paan/beedi shops, convenience stores, hand cart and street vendors, etc.

Evolution of Indian retail industry:- The era of rural retail industry could be categorized into two formats: weekly MARKETS and village fairs. Primarily weekly formats catered to the daily necessities of villagers. Village fairs were larger in size with a wide variety of goods sold from food, clothing, cosmetics and small consumer durables. The traditional era saw the emergence of the neighborhood Kirana store to cater to convenience of the Indian consumers. The era of government support saw indigenous franchise model of store chains run by Khadi & Village Industries Commission. The KVIC has a countrywide chain of 7000 plus stores in India. This period also witnessed the emergence of shopping centers with car parking facility. The Modern era has a host of small and large formats with exclusive outlets showcasing a complete range of products. The department stores and shopping malls targeting to provide a complete destination experience for all segments of the society. The hyper and super markets are consistently trying to provide the customer with the 3 Vs. (Value, Variety and Volume).The evolution of retailing can be diagrammatically explained below

Growth of Indian Retail Sector The overall retail market in India is like to reach RS 47 trillion (US$ 792.84 billion) by FY 2017, presenting a strong potential for foreign retailers planning to enter India. India is the 5the most favorable destination for international retailers. Of the total Indian retail market,8% is made up by the organized retail segment. This confirms that India is at an early stage ofevolution in the organised retail space and has a huge growth potential This segment is estimated to grow at a rate of almost 30% by 2016 and hence at a much faster pace than the overall retail market which is forecast to grow by 16% in the same period. Retailing in India is one of the business enterprises to its economy and accounts for 14 to 15 % of its GDP and contributes to 8 per cent of the total employment.. The Indian retail market, currently estimated at around US$ 490 billion, is project to grow at a compound annual growth rate of 6% to reach US$ 865 billion by 2023. India is one of the fastest growing retail markets in the world, with 1.2 billion people. India is the fourth largest economy as far as purchasing power is concerned just behind, USA, Japan and China. Even though 25 percent of the population lives below the poverty line, India has a large and growing middle-income group of over 300 million, making it a strong emerging market.

Until 2011, the Indian central government did not allow foreign direct investment in multi brand retail. This prevented foreign groups from any ownership in supermarkets, convenience stores or other retail outlets. In late 2012, the government of india introduced a foreign direct investment

policy which allows foreign retailers to own up to 51% in multi brand retail and 100% single brand retail.

FDI :Foreign direct investmentFDI is investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. It is cross border investment, where foreign assets are invested into the organizations of the domestic market excluding the investment in stock. Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing.

Foreign Direct Investment (FDI) is an advanced strategy for companies that wish to operate on a global basis with an entrenched footprint. It refers to investment to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. Entry through FDI for corporate results in footprint which gives a degree of influence/control over the management of the enterprise relative to the structure created. It usually involves transfer of management skills, technology, systems, processes and expertise. For a country it is a sturdy and till date desirable source of capital inflows as opposed to FII flows which include ‘hot money’. FDI being a feature of capital control are generally applicable in countries professing capital control and the regulation varies from country to country

FDI Policy in India

FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a notification, which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.

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 can come into India in two ways: a. Direct route/Automatic route: It does not require prior approval either of Reserve Bank of India (RBI) or government. b. Government route: Government route means that investment in the capital of resident entities by non-resident entities can be made only with the prior approval from Foreign Investment Promotion Board (FIPB).

Entry Options For Foreign Players prior to FDI Policy

Some of entrance routes  used for FDI are discussed below:-

1. Franchise Agreements 

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 Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.

2. Cash And Carry Wholesale Trading

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.

3. Strategic Licensing Agreements 

Some foreign brands give exclusive licenses 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

4. 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 limits in various sectors are

FDI Policy with Regard to Retailing in India

As part of the economic liberalization process set in place by the Industrial Policy of 1991, the Indian government has opened the retail sector to FDI slowly through a series of steps

1995 – World Trade Organization’s general agreement on trade in services, which include both wholesale and retailing services, came into effect

1997 – FDI in cash and carry (wholesale) with 100% rights allowed under the government approval route

2006 – FDI in cash and carry (wholesale) brought under the automatic route Up-to 51% investment in a single- brand retail outlet permitted 2011 – 100% FDI in single –brand retail permitted 2012, Sep – 51% FDI in multi- brand retail permitted

Types of FDI retailing in indiaThere are

1)Fdi in single brand retailingsingle-brand retail generally refers to the selling of goods under a single brand

name. FDI in ‘Single brand’ retail implies that a retail store with foreign investment can only

sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in

India, those retail outlets could only sell products under the Adidas brand and not the Reebok

brand, for which separate permission is required. If granted permission, Adidas could sell

products under the Reebok brand in separate outlets.

Up to 100% FDI is permissible in single-brand retail, subject to the Foreign Investment Promotion Board (FIPB) sanctions and conditions mentioned that are: Only single-brand products are sold (i.e. sale of multi-brand goods is not allowed, even ifproduced by the same manufacturer) Products are sold under the same brand internationally Single-brand products include only those identified during manufacturing Any additional product categories to be sold under single-brand retail must first receiveadditional government approval

2) FDI in Multi Brand RetailingThe marketing of two or more similar and competing products, by the same firm under different and unrelated brands is called as multi-brand retailing. In other words, Multi-brand retail means selling different brand products under a single roof.

FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. Opening up FDI in multi-brand retail will means that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous ‟kirana‟ store.

Restrictions on 51% FDI IN multiple-BRAND RETAIL:

India permitted 51% FDI in Multi-brand retail trading. With some conditions, they are as follows:

1. There should be a minimum investment of US $ 100 million by the foreign investor. 2. 50% investment is to be in backend infrastructure development. Backend infrastructure includes activities like processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, warehousing etc. 3. 30% of all raw materials have to be procured from India’s small and medium industries, which have a total investment in plant & machinery not exceeding US $ 1.00 million 4. The permission to set up malls should be given to only those cities with a minimum population of 10 lakhs as per 2011 census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities.5. The government has the first right to procure material from farmers. 6. Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.

7. Retail trading by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading.

6. Products should be sold under same brand internationally. 7. Foreign investors should be the owner of the brand.

8. The above policy is an enabling policy only and the State Governments/Union Territories would be free to take their own decisions in regard to implementation of the policy.

Clarifications on FDI IN multiple-BRAND RETAIL:

Post the release of 2013 circular 1the Department of Industrial Policy and Promotion (DIPP) has brought out certain clarifications on FDI policy into MBRT are as follows .

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 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.

Comparision of multi brand and single brand retail

The major objections to FDI in Multi brand retail are:

Foreign retailers will kill local industry leading to closure of small retail shops across the country and endanger livelihood of 40 million people and indirectly pressure on domestic suppliers to cut costs.

Closure of independent retail will lead to massive job losses.

FDI may lead to unfair competition and ultimately result in large-scale exit of incumbent domestic retailers.

Single foreign entity may become a dominant player, because of unlimited capital and expertise.

Farmers may be given remunerative prices initially, but eventually they will be at the mercy of big retailers and try to procure at lowest possible rates.

Big players like wall mart will lower prices to dump goods, get competition out of way and will become monopoly.

Small and medium enterprises will become victims of predatory pricing policies of multinational retailers.

It will disintegrate established supply chains by encouraging monopolies of global retailers.

Imports will inundate the market and kill local small industries just asthey did in America, again resulting loss of employment.

Prices may come down initially, but once the global retail giants acquirecontrol over both ends of the market they will start dictating terms --procurement and marketing. Thus both producers and consumers willlose ultimately.

Arguments For FDI in MBRTThe effect of branded retailing can already be seen with the Bharti-Wal-Mart collaboration, which has joined forces with state governments to open training and development centers in Amritsar, Delhi and Bangalore, preparing local youth for jobs in retail. Training is entirely free and more than 5,600 local youth have already been trained. Retail jobs don’t require higher education or highly specialized abilities.

» Vastly reduces/eliminates the role of multiple intermediaries thereby helping farmers to get better prices for their produce

» Entry of new players will increase competition both for procuring goods as also for selling to the consumer. Consumers benefit through lower prices and this in turn will help fight inflation.

» Worldwide large and small retailers are seen to co-exist. Competition in fact, forces the traders and other retail outlets to upgrade and become more efficient, thereby providing better services to consumers and better remuneration to the producers. Consumers also benefit from the

» imposition of better quality and safety standards by the retailers.

» Both farmers and local small and medium enterprises will gain access to larger market -- not just domestic but international market along with better technology and branding.

» The economy would see infusion of large amount of foreign investment which is needed both for its technology and management practices but also to help narrow the current account deficit.

» Creates large scale quality employment both in the front end retail as also in the supply chain than displace people engaged in small stores.

» Better revenue collection for the government.

» Better ambience and shopping experience for the consumers.

FINDINGS 1. The government policies are effective in multi-brand retail.

2. Multi-brand is effective in retail through one roof more brand items selling.

3. Single brand retail is only one brand selling and multi-brand retail is selling alternative brands in one roof so it is effective.

4. Easy to sell and easy to purchase goods at one place.

ConclusionToday each and every nation is trying to liberalize its economic policies in order to attract FDI to enhance a substantial level ofeconomic and social development. The Indian retail sector is in a boom period and attracting global retail giants due to its marketopportunities. It can be observed from the above analysis that an entry of the global players in retailing leads to inflow of latest

technical know-how, establishment of well integrated supply chains, availability of quality products at cheaper prices toconsumers, the development of SSIs and SMEs, creation of more jobs, interest free capital, benefits to farmers, control inflationand contributes for capital formation to increase nation’s GDP. Taking into consideration, above necessities, FDI in retailingcannot be avoided in India.In nutshell FDI should be encouraged with strict, feasible and mutually beneficial regulations. If done in the right manner, it can prove to be a boon and not a curse. Then Surely FDI lead to the integration of Indian economy with the global ecomomy.