Open for business

The government recent relaxed foreign investment requirements in areas such as single brand retail and contract manufacturing to outside players. Dipti Lavya Swain assesses the move

The Indian government recently announced several measures intended to revive the economy amid worries of a slowdown and very weak global markets. The measures include allowing 100% foreign direct investment (FDI) in the contract manufacturing sector, while regulations on local sourcing norms for foreign investment in single brand retail trading (SBRT), and 100% FDI under the automatic route for coal mining, have also been relaxed.

The government also imposed a 26% cap on FDI in the digital media sector, which has raised a few questions. All this information was contained in a press release, so it will be worthwhile to read the fine print on the changes, which are expected soon.

Single brand retail (SBRT)

Single brand retailers with a majority foreign shareholding were required to procure from India at least 30% of the value of their goods sold in the first five years. The government has now relaxed this requirement by counting any kind of procurement either by themselves or through their group companies from within India, even if such procurement was exclusively meant for exports, towards the local sourcing requirement. Any procurement made by third parties at the behest of SBRT companies under a contract, as well as any and all procurements (and not just year-on-year incremental increases in exports), would also count towards such local sourcing requirements.

The good news is that SBRT companies will no more be required to set up brick-and-mortar stores before starting online retailing. This allows companies to test market sentiment for their brands before making substantial capital expenditures. Most companies are apprehensive about making large investments unless they are certain, so this relaxation will provide a lot of strength in such decision-making processes for interested corporates.

The retail trading business is no longer a taboo for FDI, as the government has progressively relaxed this sector with a major boost that came in 2015, when e-commerce rules for FDI in SBRT were first relaxed. Since then, India has covered a lot of distance, as can be seen in the table.

Dipti Lavya Swain is a partner at HSA Advocates and the founder of DLS Law Offices. He was previously a general counsel at Azure Power.