FDI in Single Brand Retail in India - an Analysis


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An In-depth analysis of the recent pronouncements on single brand retail in India.
How despite the changes, very little has changed.

Published in: Business, Economy & Finance
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FDI in Single Brand Retail in India - an Analysis

  1. 1. India Newsflash Foreign Direct Investment : Single Brand Retail BackgroundThe Department of Industrial Policy and Promotion (“DIPP”) of the Ministry of Commerce andIndustry vide Press Note No. 1 (2012 Series) dated January 10, 2012 (“PN 1”) has permitted 100% FDI insingle brand product retail trading under the Government route i.e. with the prior approval of theSecretariat for Industrial Assistance and the Foreign Investment Promotion Board. While the presentstipulations remaining untouched, the decision to increase the extant limit of 51 percent to 100 percenthas been introduced with a rider forcing brands to locally source from small and village industries,30% of the value of the products sold by them.The single brand market in India is currently valued at $7 billion and is expected to reach $25 billionover the next five years. Threshold Old : 51% New :100% Conditions•Products sold should be of “Single Brand” only.•Products should be sold under same brand internationally.•Investor should be owner of the brand.•Products should be branded during manufacturing.•Sourcing of at least 30% value from Indian SSIs•Investment only after Government approval.•Any addition in product categories to require additional approval.
  2. 2. India Newsflash Foreign Direct Investment : Single Brand Retail Small Print“Small Industries” have been defined as industries which have a total investment in plant & machinerynot exceeding US$ 1.00 million. This valuation refers to the value at the time of installation, withoutproviding for depreciation. It has been further provided that if, at any point in time, thisvaluation threshold is breached, then the industry shall cease to qualify as a small industry.“Village industry” has been assigned the same meaning as under the Khadi and Village IndustriesCommission Act, 1956, as amended from time to time.“Value of products sold” While DIPP mandates sourcing of 30% of value of products sold fromwithin India, However, it is unclear, as to whether 30% refers to the cost price or the selling price of theproducts, both having its own set of lacunas.“Owner of the Brand” It is common for companies to hold their intellectual property including brands,in separate IP holding companies or group entities for IP and/or tax purposes, The requirement for theFDI investor to own the brand diminishes the structuring flexibility otherwise available while makinginvestments.“Single Brand” It is not clear if there may be a single brand with several sub-brands under them, thisshould be clarified by the government to allow investors to comply with the policy. Policy Document http://dipp.nic.in/English/acts_rules/Press_Notes /pn1_2012.pdf
  3. 3. India Newsflash Foreign Direct Investment : Single Brand Retail OpinionThe raise in FDI cap is a welcome step for the retail industry and a much needed shot in the arm for theeconomy as whole, in times of regulatory log jam. However, the imposition of mandatory sourcingrequirements severely limits the benefits of such relaxation. The legislation in its current guise onlyfavors those retailers who have established supply chains in the country involving small scale andvillage industries as envisaged by the announcement.The government must re-visit the sourcing clauses and make the legislation more business friendly toenable greater participation in the Indian retail story.Greater light should be set by the lawmakers on the points mentioned before which could provecontentious in the future.
  4. 4. India NewsflashDISCLAIMER: This paper is a copyright of Arkay & Arkay, Chartered Accountants. Noreader should act on the basis of any statement contained herein without seekingprofessional advice. The authors and the firm expressly disclaim all and any liability to anyperson who has read this paper, or otherwise, in respect of anything, and of consequencesof anything done, or omitted to be done by any such person in reliance upon the contents ofthis paper.Suite 1101,KLJ Towers, NSP,Delhi -110034 IndiaTel : +91 9910124927Fax : +91 11 27940068Email : info@arkayandarkay.comwww.arkayandarkay.com