The Union Government[1] issued its much awaited clarification
late last evening with regard to FDI policy in multi brand retail trading
(“MBRT”).
In September 2012, the
Government had allowed FDI in MBRT up to 51%[2], braving significant political
opposition and legal hurdles. The liberalization came with several riders,
notably the discretion vested with individual state governments to decide
whether foreign owned multi brand retail stores would be allowed or not in their
states as well as mandatory capital commitment obligations, investments in
back-end infrastructure and sourcing of products. Despite the government’s
concerted efforts to push retail reforms, no formal application has been filed
till date under this MBRT policy.
Various clarifications
had been sought by large multi brand retailers interested in investing in India
with regard to policy interpretation and implementation on key issues arising
under the current policy. The Government, while clarifying these questions, has
followed a conservative approach and reiterated strict adherence to its
September policy pronouncements.
Establishing
integrated structures
Retail players had
been toying with structures involving combination of 3 routes – owned front end
stores (in conforming states), franchisee stores (in non conforming states) and
wholesale trading (to serve both the owned and the franchise stores) - in order
to establish operations that could service the entire country.
In perhaps what is the
most vital impact of these clarifications, specific queries raised by these
players on scope of operations of the MBRT entity do not seem to have found a
positive response from the Government. The Government has unequivocally stated
that.
·
operations of the
multi brand entities must remain confined to multi-brand retail stores and it
cannot engage in any wholesale trading or B2B activities;
·
such entities cannot
engage in any form of e-commerce activity;
·
such entities can only
establish ‘company owned and company operated’ stores and the franchisee
model will not be permissible for such entities.
At the very least,
this means that companies hoping to consolidate their trading operations across
India under one legal entity will not be so permitted. Wholesale and retail
businesses would be mandatorily required to be carried out through different
entities wherein the operations of the MBRT entity would be confined to company
owned stores. The wholesale cash and carry trading entity would continue as the
main supplier for other trading operations, subject to group company threshold.
These restrictions thus potentially limit a retailer’s flexibility to structure
its franchisee arrangements, online channels, supply chain and distribution
network in a cost efficient and integrated manner.
Establishment of
pan-India presence
The Government has
continued its soft policy stance of upholding the primacy of the State
governments in the sensitive MBRT space and has stated
that:
·
individual states
shall have the ability and discretion to impose additional conditions, while
according approval for front end stores in their states;
·
in the event a foreign
investor manages to obtain State government approval from a State not presently
notified, the same would be valid and endorsed by the DIPP.
Additionally, the
policy reiterates that investment in back end infrastructure continues to be
under the 100% automatic route and will therefore not be subject to locational/
State restrictions. It would therefore seem logical to infer that goods can
also be procured from the entire country
The Union Government
has reiterated its earlier stand of saying that the MBRT policy provides an
overarching framework and individual states have the prerogative to impose
additional conditions. While individual
states could seek to maximise capital investment, infrastructure creation,
sourcing opportunities for their own state and protect local trader community,
the Central government guidelines provide that State imposed restrictions should
be in accordance with applicable State/Union Territory laws and regulations.
Effectively, a MBRT player would thus simultaneously open discussions with the
Union and relevant State governments before seeking to establish front end
stores in India.
Investment in back end
infrastructure
Foreign retailers have
been grappling with the obligation to bring in a minimum capital of USD 100
million, of which 50% had to be invested in back-end infrastructure within a
span of 3 years. The scope of eligible investment in back–end infrastructure
was also restricted, since any form of expenditure on front end retail units as
well as expenditure on land and rentals (even on back-end) was excluded. The
government appears to be still deliberating on this issue.
However, the
Government has taken an emphatic stance that the entire investment in back-end
infrastructure should be a fresh investment in greenfield assets and any
acquisition of supply chain/backend assets or stakes from an existing entity
will not be counted.
The Government has
further mandated that investment in the equity of one or multiple existing
infrastructure company(ies) will not be acknowledged towards fulfilment of the
conditionality of 50% investment in back-end infrastructure. Similarly, present
investments in logistics and distribution by companies operating under the whole
sale cash and carry trading model will also not be recognised towards investment
in back end infrastructure.
On the positive side,
the Government has clarified that the foreign investor can separate back-end
infrastructure into a 100% owned entity, subject to the same being a greenfield
investment.
With respect to back
end infrastructure, the government has continued with its minimum capital
obligations as well as imposed restrictions on the manner of recognizing
qualifying investment. Effectively, this means that only very large retailers
with the financial power and inclination to invest large sums, will be able to
partake of the Indian multi brand retail story and players’ ability to share
infrastructure (a la towers sharing by telecom operators) may be limited. These
norms also mean that inorganic activity on the multi brand retail side will be
relatively slow.
Mandatory sourcing
requirement
·
Similar to the view
taken by the Government while approving IKEA’s application for single-brand
retailing, the Government has clarified that the mandatory 30% sourcing
obligation has to be distributed by the MBRT entity through its front end retail
stores. Export of the sourced goods and/or re-sale in India through other
operations will not be reckoned as discharge of sourcing obligation.
·
The government has
further clarified that procurement of only manufactured and processed items
would be recognised towards the mandatory 30% sourcing requirement from small
enterprises. The underlying question in this regard was whether sourcing of
agricultural/ farm produce, fruits, vegetables would be considered as a part of
the 30% sourcing norm on the grounds that agricultural activities also involve a
fair level of investment in plant and machinery. However, this request has not
been acceded to.
·
The definition of
small enterprises spelt out in the policy as “an enterprise which has a total
investment in plant & machinery not exceeding US $ 1 million at the time of
installation, without providing for depreciation” has been reiterated.
Accordingly, it appears that this criteria would be applied to an individual
enterprise and shall not include its parent company, subsidiaries, affiliates
and/or franchisor.
·
The policy stipulated
that if at any point in time, this valuation is exceeded, the industry shall not
qualify as a 'small industry'. Some hope (and ambiguity) had arisen after this
year’s budget pronouncement that SMEs could retain their non-tax benefits for
another three years even if they grow in size and do not remain a SME. The
government has indicated that this point is still under discussion and will be
subsequently clarified.
·
The government has
also stated that group company sourcing restriction will be clarified in the
context of the MBRT policy. Under the current wholesale trading guidelines,
this presently carries a 25% limit.
It has not been
explicitly clarified whether the MBRT entity has to source ‘directly’ from the
small industry to the extent of 30% of its total procurement of
finished/processed/manufactured goods.
No comments:
Post a Comment