FDI in Retail- Legal Changes and
Challenges
Seminar on the Implications of Opening of
FDI in Indian Retail
P X V L AW PA R T N E R S
INTRODUCTION
•
Indian retail structure accounts for 22%
(twenty two percent) of the country’s GDP and
contributes to 8% of the total employment
•
Sector has shown a 6.4% growth since 1998
•
Only a small percentage of the market is
organized retail- high growth potential
•
Retail market is expected to grow rapidly
•
India is the world’s fourth most attractive
destination for retail investment
•
Government expects significant capital inflow,
improvement in productivity and supply chain
and greater utilization of Indian goods in
imports
2
3
100% FDI
permitted in
single brand
retail under the
approval route
51% FDI
permitted in
multi-brand
retail under the
approval route
Multi-brand
retail
implementation
stopped under
political
pressure
2012
FDI in cash
and carry
brought
under
automatic
route. 51%
FDI in single
brand
permitted
under the
approval
route
2011
FDI
permitted in
wholesale
cash and
carry under
approval
route
2006
No FDI in
retail
1997
1990s
GRADUAL LIBERALIZATION OF THE
RETAIL SECTOR
Multi-brand
Retail
reinstated
Amendment
s to the
rules in
relation to
single
brand retail
INDIA’s FDI REGIME
•
Governing Legislation- Foreign Exchange
Management Act, 1999 (FEMA)
•
Foreign Exchange Management (Transfer or
Issue of Securities to Persons Resident Outside
•
India), Regulations 2000
Notifications of the Department of Industrial
•
Policy and Promotion (DIPP)
Notifications of the Reserve Bank of India (RBI)
•
•
Consolidated FDI Policy (published once a year)
Investment can be in equity shares or
FDI
Automatic
Route
Approval
Route
compulsorily convertible preference shares or
debentures
•
•
Subject to minimum valuation (DCF)
Investment permitted in private companies,
partnerships, LLPs, Project offices and liaison
offices
4
RBI
Foreign
Investment
Promotion
Board (FIPB)
WHOLE SALE CASH AND CARRY
•
FDI permitted under the automatic route
•
Whether a transaction is a wholesale trade or not would depend on the
type of customers to whom the sale is made and not the size and
•
volume of the sale
Sale of goods to retailers, industrial, commercial and other users and
•
not for personal consumption
List of valid buyers include holders of sales tax/ VAT licenses; holders
of trade licenses indicating that the person is engaged in commercial
activities; holders of permits/ licenses for undertaking retail trade etc.
•
•
Record of transactions to be maintained on a daily basis
Whole sale sales to group companies to not exceed 25% of the total
turnover
5
SINGLE BRAND RETAIL
•
•
•
Press Note 4 of 2012
FDI upto 100% permitted with FIPB approval
Products should be sold under single brand name
only and under the same brand internationally, i.e.
in one or more countries other than India. Any
additional brand would require separate FIPB
approval.
Derivative brands/sub-brands may be considered
under a single application.
Covers only products which are branded during
manufacturing
Only one non-resident entity is permitted to
undertake single brand retail trading- the entity
must demonstrate that it is either the owner of the
brand or has a legally binding agreement with the
owner of the brand
•
•
•
6
SINGLE BRAND RETAIL
•
In case the foreign participation exceeds 30%, the company must ensure that 30% of the value of
the manufactured/ processed products purchased shall be sourced from India, preferably,
MSMES, village and cottage industries, artisans and craftsmen (“local procurement requirement”)
•
The local procurement requirement must be met as an average of 5 years’ total value of goods
produced, beginning April 1 of the year during which the first tranche of FDI is producedthereafter required to be complied on an annual basis
•
Onus of compliance is with the entity carrying out retail trading- self certification
•
Changes brought about in 2012 regulations
7
Sr. No
2011 Regulation
2012 Regulation
1.
Foreign investor should be the owner of
the brand
Foreign investor to be owner of the
brand/ have an agreement with the
brand owners
2.
30% sourcing from small industries,
village industries mandatory
30% sourcing from MSMEs, village
industries preferable
3.
30% local procurement requirement to
be met immediately
To be met in 5 years
Multi Brand Retail- PN 5 of 2012
•
51% FDI permitted subject to FIPB approval
infrastructure etc. Land costs and rentals are
•
Enabling policy- Retail only in States which
not included in back-end infrastructure
permit multi-brand retail- states may impose
•
additional conditions- so far no additional
conditions have been notified
Local procurement requirement- 30%, to be
met over 5 years
•
Government will have first right of refusal over
•
Minimum FDI amount US$ 100 million
•
Only in cities with population of more than 1
•
Self certification and compliance
million, or the largest city of the state/union
•
Retail trading in e-commerce not permitted
territory
•
At least 50% FDI to be invested in “back-end”
infrastructure, i.e. processing, manufacturing,
distribution, design improvement, quality
control, packaging, logistics, storage, warehousing, agricultural market produce
8
agricultural products
THE COMPETITION ACT – IMPACT
•
The Competition Act was legislated in
2002- purpose of preventing anti
competitive practices
Merger control provisions notified in
2011
Competition Commission of India
("CCI”) - responsible for the
enforcement of the Competition Act in
India.
Combinations (acquisitions, mergers
and amalgamations, transfer of assets)
above certain turnover and asset based
thresholds require pre-merger filings
“Trigger event”- 30 days of either
execution of the agreement or approval
of the acquisition by the board of
directors
210 day wait period
•
•
•
•
•
9
THE COMPETITION ACT
Thresholds
Operations
In India
Non Group
Group
Total value of assets more than US$ Total value of assets of more than
330 million or turnover of US $ 1 US $ 1.35 billion or turnover more
billion.
than US $ 4 billion
Aggregate value of assets more Aggregate value of assets more
than USD 750 million (including US than USD 3 billion (including at least
In India or Outside India
10
$ 165 million in India) or turnover US $ 168.75 million in India) or
more than USD 2250 million turnover more than USD ( billion
(including at least US $ 500 million n (including US $ 500 million in India).
India).
Challenges to FDI in Retail
•
Political opposition and possible local issues
•
FIPB approval process- time consuming
•
State specific policies, compliance nightmare
•
Requirement to deal with several regulatory authorities
•
Multi-fold indirect tax implications
•
Threshold of US $ 100 million in multi-brand retail, will discourage all but the largest
players- will also discourage private equity
•
Infrastructure gaps
•
Uneven economic development- requirement to pick and choose sites for new
projects
•
11
Funding the Indian joint venture partner
THANK YOU!!
12