1111111111111111 i?ocus FDI possibilities In India

IMPLICATIONSOF 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

Prior to January 2006, ForeignDirect Investment (FDI) in retail

trading was prohibited. On

January 24, 2006, the Union Cabinetapproved a major rationalisation of thepolicy on FDI. Amongst various measures

of rationalisation and simplification was

the partial opening up of the FDI route inthe retail sector. The Cabinet approved FDI

up to 51 per cent with prior government

approval for retail trade in 'single brand'products.

111111I11111 90 RetaileriJune-July 2006

The proposed liberalisation was

effected, thereafter, on 10February 2006,by

the Press Note 3 (2006series) issued by the

Department of Industry Policy andPromotion (DIPP) under Ministry of

Commerce and Industry.

Retail FOI: What is allowed

A 51per cent FDI is permitted in the retailtrade of 'single brand' products with prior

government approval. In other words,

foreign brand owners would need to fmd

an Indian partner to own the 49per cent of

the equity in the company and, thereafter,

it could spread its wings in the retail arena

in the country.

The approval procedureFDI would be allowed only with prior

approval of the government. Broadly, the

procedure is as follows:An application seeking permission of

the government for FDI in retail trade of

'single brand' products would need to bemade to the Secretariat for Industrial

Assistance (SIA) in the DIPP.

The application would specifically

indicate the product, product categories

which are proposed to be sold under a'single brand'.

The DIPP would first process the

applications to determine whether the

products proposed to be sold satisfy the

notified guidelines. It would, thereafter,send the same for consideration by the

Foreign Investment Promotion Board

(FIPB) for approval.Once the approval is obtained, the FDI

could be made in the retail trade company.

Any addition to the product, product

categories to be sold under 'single brand'would require a fresh approval of the

government.

Meaning of 'Single Brand'The government has not categorically

specified the meaning of 'single brand'.However, the press note does provide that

the retail trade of 'single brand' products

would be subject to the following condi­tions:

• Products to be sold should be of a

'single brand' only.• Products should be sold under the

same brand internationally.

• 'Single brand' product retailing would

cover only products which are

branded during manufacturing.

While the phrase 'single brand' has notbeen defined, a limited intention of the

government may be inferred from the

press release preceding this notification. It

provided that the Cabinet approval was"aimed at attracting investment, technol­

ogy and best global practices, as also

catering to the demand of such branded

goods in India. This would imply that

foreign companies would be allowed to sell

goods sold internationally under a 'singlebrand', viz., Reebok, Nokia, Adidas.

Retailing of goods of multiple brands,

even if such products were produced by

the same manufacturer, would not beallowed".

A critical appreciationGoing a step further, we examine the

concept of 'single brand' and the associ­ated conditions:

'Single brand' retail implies that a

retail store with foreign investment can

only sell one brand. But, what is a 'brand'?Brands could be classified as products and

services, or could be for single and

multiple products, or could be manufac­turer brands and own-label brands.

Assume that a company owns two

leading international brands in the

footwear industry - say 'JI:. and 'R'. If the

corporate were to obtain permission toretail its brand in India with a local

partner, it would need to specify which of

the brands it would sell. A reading of the

government release indicates that 'JI:. and'R' would need separate approvals,

separate legal entities, and may be even

separate stores in which to operate inIndia.

However, it should be noted that the

retailers would be able to sell multiple

products under the same brand, e.g., aproduct range under brand 'JI:.. Further, it

appears that the same joint venture

partners could operate various brands, but

under separate legal entities.Now, taking an example of a large

departmental grocery chain, prima facie itappears that it would not be able to enter

India. These chains would, typically,source products and, thereafter, brand it

under their private labels. Since the

regulations require the products to bebranded at the manufacturing stage, this

model may not work. The regulationsappear to discourage own-label products

and appear to be tilted heavily towards the

foreign manufacturer brands. It would beworthwhile to mention here that there

A 51 per cent

FOI is permitted

in the retail trade

of 'single brand'

products with

prior government

approval.

June-July 20061 Retailer 191

1111111I111/1

A fair section of

the foreign brands

have been

operating in India

through the

franchising route.

It appears that

they would rather

choose to continue

doing so and wait

till further

liberalisation of

policies

IIIII II III 92 RetaileriJune-July 2006

may be possible structures using job work

arrangements subject to specific confir­mation from the DIPP.

illustratively, take a company, 'MC',

which is a leading retail brand store for

baby-care products internationally: 'MC'

proposes to enter into a joint venture with

an Indian partner to setup similar brandstores in India. The joint venture proposes

to source the product range locally andlabel it as 'MC'. The labeling is also a

function performed by the supplier and is,therefore, in a literal sense branded during

the manufacturing stage. Would this

format be approved?

Taking the above example further,

presume that 'MC' also stores otherbranded products on a consignment basis.In effect, it is only retail trading in 'single

brand' products and is a consignment

agent for other branded products. Is thispermissible?

Another format, which, though not

discussed extensively, could be a model forconsideration. The format is a joint

venture between an Indian party and a

regional distributor of a branded product.For example, say a Singapore-based

regional distributor of a luxury brand

(manufactured in France) ties up with anIndian partner to open exclusive brand

outlets. It appears that such formatsshould receive an approval.

Existing foreign brands in IndiaA fair section of the foreign brands have

been operating in India through the

franchising route. This announcement

should not make a large big difference to

these players. It appears that they wouldrather choose to continue operating

through innovative franchising structuresand wait till further liberalisation, than to

enter into joint venture relationships

requiring exit options and reviews as

policy changes take place.

Localisation discouragedAs per the government's notification andthe situations discussed in the preceding

lines regarding FDI in retailing, thefollowing can be assumed:

That existing local brands may not beable to attract FDI investment for

furtherance of their brands.

Foreign companies may not be

permitted to source goods locally and thenretail them in India by using their brand

names (Le. the private or own-label

concept discussed earlier).That foreign retailers cannot experi­

ment with new brands just for the Indian

consumer since permission would be

granted to only those brands that are soldinternationally:

Protection of joint venture

partner interestsThe arrangement between the foreigninvestor and the Indian partner needs

careful consideration. The marriage in theshort to medium term could be like the

memorable courtship period. But whatneeds to be analysed is the impact when

the government decides to furtherliberalise its regulations.

Moreover, from the foreign investor's

point of view, it is relevant to understandthe regulation which provides for

subsequent additional collaboration.

Upon a foreign company entering into acollaboration (technical or financial) with

an Indian partner, it is restricted from

subsequently entering into a similarventure with another partner without the

first partner's consent. The exit optionsand conflict of interest clauses need

attention from the perspective of the jointventure partners.

A start has been madeThe Indian government has finally taken a

step, though a small one, towards opening

up the retail sector to the foreign invest­ment. There are various foreign brandswhich have welcomed this step and looked

at it as a good indication for the opportuni-

Upon a foreign

company enteringinto a collaboration

(technical or

financial) with an

Indian partner,

it is restricted

from subsequently

entering into a

similar venture

with another

partner without

the first partner's

consent

III 111111 94 RetaileriJune-July 2006

ties to soon arrive.

Select leading luxury goods retailers

such as LVMH, Llardro Commercial ofSpain and high-end perfumes brand

Chanel SA have approached the govern­

ment for permission to set up retail jointventures in India.

Further, certain media reports

indicate that the government may be

willing to take a liberal interpretation onthe 'single brand' criteria and that they are

also working on another alternative for

FDI in retail that would substantially

address the domestic concerns and yet give

the foreign players a boost to step-up theiroperations in India.

The first approval for FDI in retail was

recently granted by the Central govern­

ment. As per the government releases, the

approval was granted for a joint venture

between Moja Shoes Private Limited andMauritius-based Tano India Private

Limited Fund - I. The joint venture,apparently, has been granted approval to

sell in India footwear, sportswear, boots,

slippers, sandals, athletic shoes and

apparels of the same brand. Thus, a 'single

brand' would go on to include all the goodsmanufactured under the brand.

This approval is also important for the

condition that the goods have to be

branded during the manufacturing stage.

Does this mean that the approval for FDI

would be granted only to the manufacturer

of such goods? This approval appears to

have an answer. The approval has been

granted to the above products of Nikebrand, and the joint venture or the joint

venture partners, we presume, are onlyretail traders and not the manufacturers

of such goods.

In conclusion, an initial policy

framework has been provided for, and for

any clarifications an application to theDIPP can always be made.

The author specialises in tax and

regulatory consulting. He can be

contacted at +91(80)41538287, or

vishnu@accretiveglobal.com

Courtesy: Accretive Business

Consulting Private Limited

(The views expressed herein are not

necessarily those of the publishers.)I~1201M