Foreign retailers should get set to drive into India

By Gautam Khurana, India Law Office

The retail juggernaut is ready to roll in India. After announcing that multi-brand retail (MBR) would be opened to foreign direct investment (FDI), the Congress government was virtually under siege. It was widely speculated that the government would have to roll back the approval to invest in MBR due to pressures from nearly all political opposition parties in India.

However after a series of general debates the government decided to let the country’s parliament decide the issue. Based on the debates and voting held on 5 and 7 December 2012, the parliament ratified the government’s decision government to go ahead with foreign investment in MBR.

Narrow victory

The Lok Sabha (directly elected representatives) voted 253 in favour, 218 against, 43 walked out and 31 were absent in a total house of 545.

Gautam Khurana
Gautam Khurana

Similarly the Rajya Sabha (indirect representatives) voted 123 in favour, 109 against, 9 walked out, 2 were absent and 1 abstained in a total house of 244.

These numbers show that the sentiment was nearly evenly pitched. India and its people have barely accepted foreign investment in MBR but with the parliament’s approval the new investment climate is here to stay and foreign investors can safely enter the Indian market without worrying that the new FDI policy will be reversed.

Outlook promising

The Indian economy is gearing up to welcome new kinds of foreign investment into retail. This round of investment should be benign for the economy as the investments that come in will not be short term or qualify as hot money. Consistent and long-term investment flows should lead to improvements in the farm supply chain, commercial real estate and technological standards.

In the short to medium term the exchange rate of India’s currency should also improve. Long-term benefits for the economy will depend on how well the country manages to restrict easy and cheap imports.

The Indian governments that manage investments and formulate policies for MBR in the times to come will have a golden chance to use the foreign capital to broaden the base of the country’s economy. They could also fail if they don’t have a clear policy on imports.

Correct signals

Walmart, potentially the largest investor for MBR, has been put under scrutiny for alleged lobbying. Lobbying is not legal in India and so the government is sending out a signal that it is serious about implementing an FDI policy in retail that benefits all.

In the area of single-brand retail, where investment restrictions have been eased, the prompt disposal of applications by the Foreign Investment Promotion Board (FIPB) has sent out the correct signals.

IKEA’s application ran into some controversy due to the definition of what activities it could carry out in India. IKEA wanted to include various facets of its business such as cafés within its stores, contending that it sought to ensure the shopping experience was same as in other parts of the world. The FIPB wanted IKEA to restrict itself to selling its products only.

With nearly a105 billion (US$1.95 billion) investment at stake the FIPB and the Ministry of Commerce and Industry made an exception and approved the application on the terms that IKEA sought. This has made it clear that the Indian government is keen to make FDI in retail a grand success.

With political, legal and administrative will strong, we all await a new glorious chapter of new investments into retail in the next three years.

Legal requirements

For companies that are interested in entering the retail arena in Indian, now is the time to look at the process of getting their business off the ground. India is a regulated market and various legal requirements must be complied with before the door to the Indian population will open.

The following is an indicative list of requirements for a foreign retailer to set up business in India: (1) shop and establishment licence; (2) trade licence; (3) central excise licence; (4) state excise licence; (5) value-added tax; (6) central sales tax; (7) service tax; (8) professional tax; (9) employees’ provident fund; (10) employees’ state insurance; (11) Ministry of Labour clearance; (12) municipal clearances; (13) weights and measurement clearance.

Further requirements – such as a drug licence for over-the-counter products, and Ministry of Health and local food commissioner clearance for dairy and meat products – would depend on the kind of products being sold and the city and state where retail outlets would be set up. A good law firm or an advisory service can help ensure a smooth passage into the Indian market.

The Indian economy is at an interesting crossroad. With the right political will and regulations, FDI in retail could script the next growth story for India.

Gautam Khurana is the managing partner at India Law Offices in New Delhi.

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