India’s retail mystique: the single-brand aspect

By Gautam Khurana, India Law Offices
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Allowing foreign direct investment (FDI) in retail continues to stir passions and threatens to be the biggest issue in the Indian parliament and political landscape in the next couple of months. The major issue is permission for FDI in multi-brand retail (MBR), which was the topic of my column last month.

Gautam Khurana, Managing partner, India Law Offices
Gautam Khurana
Managing partner
India Law Offices

This column covers single-brand retail (SBR), which likely to be a bigger success in India than MBR, as most international brands have bet big on the Indian market. Historically India has been a net consumer of products and with recent growth in the economy the trend of consuming is back.

The SBR model is also likely to bring in growth in the franchise model, which has languished in India till now.

FDI in SBR has been allowed up to 51% since February 2006. Since January this year, 100% FDI in SBR has been allowed, and liberalizing amendments to the requirements were made in September.

Current requirements

SBR is subject to the following:

(1) All investment proposals are reviewed by the Department of Industrial Policy and Promotion and considered for final approval by the Foreign Investment Promotion Board (FIPB).

(2) All products sold must be of a single brand, which should be in use in other countries too. The products must be branded during the manufacturing process.

(3) Where the proposed investment would exceed 51%, Indian products – preferably from small industries, village and cottage industries, artisans and craftsmen – must account for 30% of the value of goods purchased by the single-brand retailer.

(4) Only one non-resident entity can undertake the SBR in India.

Additional benefits

Various pros and cons of liberalization of FDI in the retail sector were discussed in my previous column, which focused on MBR. While most of the comments would be relevant here too, I see the following additional benefits:

• As compared to MBR, SBR is likely to bring more investment into India because global majors in many sectors – such as fashion, fast-moving consumer goods, healthcare, home furnishings and consumer electronics – have a policy of not working with local partners and not holding less than 100% in any business they set up worldwide. This was seen in the high-profile case of IKEA and has been our firm’s experience with a US apparel major as well as an eye care major.

• Franchising as a practice should rise, bringing in higher investments and promoting the development of second and third-tier Indian cities.

• Considering the vast potential of the Indian economy, investments could rise in small-scale sectors. Certain fashion and home furnishing brands might integrate Indian designs and techniques to qualify for 30% local content requirement. If this condition is not diluted, high-fashion Indian products could make their debut in international markets too.

Since the recent liberalization in FDI policy, four brands applied for and secured permission to operate a SBR licence in India: Pavers England received permission to invest ₹982.6 million (US$17.9 million); Brooks Brothers can invest ₹62.2 million; and Damiani can invest ₹3.5 million. The permissions were granted by the FIPB on 2 November.

The largest SBR approval to date came through on 20 November, for an investment of ₹105 billion by IKEA. IKEA could change the FDI landscape in India and could be the beginning of large-ticket investments in SBR in India.

Area of concern

As discussed in my previous column, a significant concern could be the potential misuse of the free trade agreements that India has signed with neighbouring countries such as Sri Lanka, Pakistan, Bangladesh and Nepal. International brands have the ability to mass produce cheap goods in low-cost destinations such as China, Indonesia and Vietnam. Such cheap goods could flood the Indian markets and ruin the competitiveness of Indian industries in areas where single-brand retailers sell in the Indian market. Current FDI policy and free trade norms do not provide protection in this area and a clear definition of such protection is definitely required.

The next parliament session in India commences on 22 November. Everyone expects a turbulent session where the fate of the current government could hang on how the voting for a key bill turns out. I don’t expect SBR to undergo any policy change irrespective of the political consensus and outcome on the retail FDI policies. The fate of MBR, however, will hang in balance until the current government is able to clear its MBR proposals in the parliament.

No matter what happens in the coming two months, the retail scenario in India has changed forever and we should see a new cycle of retail growth and boom in the coming decade.

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

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