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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

111111I11111 90 RetaileriJune-July 2006

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 procedure
FDI 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 be
made 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 condi-
tions:
• 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 not
been 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 'single
brand', viz., Reebok, Nokia, Adidas.
Retailing of goods of multiple brands,
even if such products were produced by
the same manufacturer, would not be
allowed". A 51 per cent
A critical appreciation FOI is permitted
Going a step further, we examine the
concept of 'single brand' and the associ- in the retail trade
ated conditions:
'Single brand' retail implies that a
retail store with foreign investment can
of 'single brand'
only sell one brand. But, what is a 'brand'?
Brands could be classified as products and products with
services, or could be for single and
multiple products, or could be manufac-
turer brands and own-label brands.
prior government
Assume that a company owns two
leading international brands in the approval.
footwear industry - say 'JI:. and 'R'. If the
corporate were to obtain permission to
retail 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 in
India.
However, it should be noted that the
retailers would be able to sell multiple
products under the same brand, e.g., a
product 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 it
appears 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 be
branded at the manufacturing stage, this
model may not work. The regulations
appear to discourage own-label products
and appear to be tilted heavily towards the
foreign manufacturer brands. It would be
worthwhile to mention here that there
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June-July 20061 Retailer 191

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 confir-
mation 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 brand
stores in India. The joint venture proposes
to source the product range locally and
label 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 other
branded 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 this
permissible?
Another format, which, though not
discussed extensively, could be a model for
consideration. 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 an
Indian partner to open exclusive brand
outlets. It appears that such formats
should receive an approval.
Existing foreign brands in India
A 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 would
rather choose to continue operating
through innovative franchising structures
and wait till further liberalisation, than to
enter into joint venture relationships
requiring exit options and reviews as
policy changes take place.
Localisation discouraged
As per the government's notification and
the situations discussed in the preceding
lines regarding FDI in retailing, the
following can be assumed:
That existing local brands may not be
able to attract FDI investment for
furtherance of their brands.
Foreign companies may not be
permitted to source goods locally and then
retail 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 sold
internationally:
Protection of joint venture
partner interests
The arrangement between the foreign
investor and the Indian partner needs
careful consideration. The marriage in the
short to medium term could be like the
memorable courtship period. But what
needs to be analysed is the impact when
the government decides to further
liberalise its regulations.
Moreover, from the foreign investor's
point of view, it is relevant to understand
the regulation which provides for
subsequent additional collaboration.
Upon a foreign company entering into 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. 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-
 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,
slippers, sandals, athletic shoes and
apparels of the same brand. Thus, a 'single
with another brand' would go on to include all the goods
manufactured under the brand.
partner without This approval is also important for the
condition that the goods have to be
the first partner's branded during the manufacturing stage.
Does this mean that the approval for FDI
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~1
201M

consent would be granted only to the manufacturer

III 111111 94 RetaileriJune-July 2006