Franchising with the help of a local partner may be a foreign investor’s key to unlocking India’s retail market

The retail sector in India is heavily protected from direct foreign investment. This is especially so for multi-brand retail, despite recent moves to liberalize it. As a result, the most attractive market entry strategy for many foreign retailers is one which involves a third-party relationship.

Single-brand retailers face no restrictions on their ability to hold shares in an Indian company. Nevertheless, experience shows that direct investment in the Indian market is not for the faint-hearted or those with capital or resource restraints. Despite its great commercial promise, India can be a hostile environment for foreign retailers that are not “chaperoned” by an Indian partner. Local operators jealously guard their domestic market through a cocktail of legal, logistic, political and commercial devices, some of which can be kindly described as exceedingly robust and would generally not be permitted in markets such as the US and the EU.

There is no denying that some aspects of India’s retail market can create problems for US companies under the Foreign Corrupt Practices Act and British companies under the Bribery Act 2010. Add to that restrictions on the import of textiles and a judicial system that is slow, expensive and at times unpredictable and it may be easier to understand why few foreign retailers go it alone in India.

Franchise flurry

Highs and lows of joint ventures

Joint ventures are sometimes used by foreign retailers entering India. These can make it much easier for foreign retailers to exploit the Indian market if the local partner has the appropriate expertise, capital and connections. However, the bigger, wealthier and better connected the local partner, the more difficult it will be if the joint venture breaks down, and the reality is that retail joint ventures do not have a record of being particularly long lived in India.

Ending a joint venture can be a protracted, expensive and testing process, partly because of legal restrictions on the number of shares that can be held by foreign retailers, which unbalance the terms of the joint venture. Mismanagement, bribery and the laundering of “black” money through the joint venture may result in a range of criminal offences not only in India but also in the UK and the US, adding to the difficulties.

In 2011 the government proposed to allow large international supermarket chains and other multi-brand retailers to enter the Indian market without an Indian partner, but had to withdraw the proposal due to vigorous opposition from political parties, middle men involved in retail trade and small family businesses. As a result, direct investment in multi-brand retail remained prohibited for foreign retailers with the exception of wholesale cash-and-carry operations, until new measures were announced this month.

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Mark Abell is a partner at Field Fisher Waterhouse in London.