The document discusses India's policy journey regarding FDI in multi-brand retail. Key points include: - In 2012, the Cabinet approved 51% FDI in multi-brand retail and increased FDI in single-brand retail to 100%. - FDI in multi-brand retail is now permitted at 51% in cities with a population over 1 million, requiring $100M investment and 30% sourcing from small industries. - FDI is seen as an opportunity to improve infrastructure, supply chains and employment, but may also negatively impact small retailers. Foreign investors face challenges adapting to India's diverse market but could find success with a long term view.

1. FDI in Multi Brand Retail Trade – The Journey

2. The Story So Far….
Union Cabinet approved
 51% FDI in multi-brand retail
 Increasing the FDI limit in single
brand retail to 100%
 However the implementation was
deferred, for evolving a broader
consensus on the subject
2011
2012
2010
DIPP had put up a discussion
January
paper proposing FDI in multi-brand
retail  DIPP notified the
2006 decision to allow 100%
 FDI permitted in cash & carry, FDI in Single brand
wholesale trading comes under retail
the automatic route
 FDI in single brand retail was
September
1997 permitted to the extent of 51%  Union Cabinet approves
100% FDI being the FDI limit in Multi
permitted in cash & brand retail of 51%
carry wholesale trading
under the government
approval route
2
*DIPP: Department of Industrial Policy and Promotion

3. The Policy - Single Brand Retail Trading
EARLIER NOW
 For Single Brand Retail Trading (SBRT)  FDI in single brand retail trading is permitted
sector – only 51% FDI permitted – subject up to 100% with Government approval
to approvals and conditions such as:
 Products should be of a „Single  Products to be sold should be of a „Single
Brand‟ only Brand‟ only
 Products to be under the same brand  30% sourcing is to be done from micro and
in one or more countries if are sold small industries (investment in Plant and
outside India Machinery not exceeding US $ 1mm)
 „Single Brand‟ products should be  This condition will ensure that SME sector,
branded during manufacturing including artisans, craftsman, handicraft and
cottage industry gets the benefits of
 The foreign investor should be the liberalization
owner of the brand
3

4. The Policy - Multi Brand Retail Trading
EARLIER NOW
 FDI in Multi Brand Retail Trading was not  FDI in Multi Brand Retail Trade is permitted up
allowed to 51%, subject to following conditions:
Outlets to be set up - only in cities with a
population of more than 1m (within a 10km
range)*
Minimum investment by the foreign investor -
US $100mm and at least 30% of the
procurement of manufactured / processed
products shall be sourced from 'small
industries‟ (investment in Plant and Machinery
not exceeding US $1million)
Sourcing requirements will be checked
together for first five years – after that on a
annual basis
Retail trading by means of e-commerce – not
permissible
At least 50% of total FDI brought in shall be
* States in favor of FDI in MBRT - Andhra Pradesh, Assam, Delhi, Haryana,
J&K, Maharashtra, Manipur, Rajasthan, Uttarakhand and Daman & Diu and invested in „back-end infrastructure‟** within
Dadra Nagar Haveli
three years of the induction of FDI
** Back-end Infrastructure includes supply chain, logistics and warehousing but 4
not land and rentals

5. SWOT Analysis of FDI in Retail
S W
TRENGTHS EAKNESSES
• Retail is a $450bn Industry in • High capital investment required
India in the retail sector (real estate)
• Young and dynamic manpower • Lack of trained and educated
• Highest shop density in the world work force
• High growth rate in retail & • Higher prices as compared to
wholesale trade local shops
• Presence of big industrial houses • Will mainly cater to high-end
with deep pockets consumers placed in metros
O T
PPORTUNITIES HREATS
• High employment generation in • Effect on the small retailers - local
the future Kirana stores (mom-pop stores)
• Will enhance financial condition of • Long gestation period - Foreign
farmers Retailers will take a while to adapt
• Encourage foreign capital inflows to India and generate profits
• Result in increasing supply-chain • States not buying in so
efficiency efficiencies expected may not be
• Improve Logistics & Infrastructure achieved
5

6. Rough ride so far…..
 It is not easy to be successful in a place where culture, tradition and food habits change
every 124 miles
 Some of the largest and most prominent Indian business houses such as Reliance, Godrej,
RPG and the Future Group have all struggled in the Retail Industry in India1. These large
players have lost a significant amount of money and in fact one of the leaders in the space,
Subhiksha, which at one time had almost 1,600 outlets has shut down
 India‟s image is one of a “fickle policy maker” with regulations being frequently changed,
rolled back and even retrospectively amended have made investors speculative
 Subsequent populist decisions are feared, such
that the foreign retailers may not be able to
achieve dominant market positions or buy / rent at
the right locations
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7. Hidden Opportunity despite the rough ride
 A comparison of the Retail Industry in Emerging Markets shows that India actually has the
lowest organized retail sector amongst its peers and therefore is the biggest opportunity
 India‟s closest peer in terms of size of population, China, has an organized retail market that
is almost 3x the size of the market in India. A country like Brazil which is less than a 1/6th
of India in terms of population has a organized retail market of almost 6x of that of India
and mostly homogeneous tastes across the country making it easy to standardize offerings
 Indonesia which is the largest economy in Southeast Asia and often cited as replacing
India as the “I” in BRIC economies has displayed strong growth in 2011 and in the first half
of 2012 with significant growth in the Retail sector. It has only 1/5th of India’s population
and yet has a organized retail sector which is 5x of that of India
 There are two ways to look at the above data. One is to see that there are plenty of
emerging markets where more capital could be deployed in retail, but the other is to see
the hidden opportunity in investing in the retail sector in India (the 2nd largest country in
the world in terms of population) where there is a white canvas and wide spaces and the
story of organized retail can be painted in whichever way the potential foreign entrants desire
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8. Global Experience of FDI in Retail
Emerging Markets which allowed FDI in Retail with the share of
organized retail in the overall retail industry:
India Brazil Russia China Indonesia
• FDI allowed • FDI allowed • FDI allowed • FDI allowed • FDI allowed
51% in Multi- 100% 100% 100%, up 100% in 1998
brand & • Population • Population from 49% in • Population
100% in 205.7m 143.1m 1992 242.3m
Single Brand • Share of • Share of • Population • Share of
• Population organized organized 1,343m organized
1,210m retail 36% retail 33% • Share of retail 30%
• Share of • Top Retailer: • Top Retailer: organized • Top Retailer:
organized Pao de X5 Retail retail 20% Matahari
retail 5-6% Acucar Group • Top Retailer: Putra Prima
• Top Retailer: Bailian Group
Future Group Co Ltd
8
Source : Goldman Sachs, Technopak

9. Steps to Establish Presence in India
Find a Joint Venture Partner –
The maximum equity stake which a Foreign investor can
hold cannot be more than 51%, therefore it will have to
find an Indian partner to enter into a Joint Venture with
Look for space – It will have to look for a city with a
minimum population of 1 million as per the 2011 census.
India comprises of about 51 cities which meet the
condition. Further state government and FIPB
permissions will be required
Get it approved - All the regulatory approvals of FDI and
other applicable laws will have to be obtained, which will
be easier to do, given the presence of Indian partner
9

10. Proposed Business Model
Indian Partner Foreign Partner
- To provide 49% stake in - To provide capital of at
form of capital / least US $100mm
infrastructure or leverage
their network to establish
presence - They will bring
-They will also be able to technology, efficiency in
navigate the political and supply chain
legal hurdles as well as management and global
use their local knowledge experiences from
and brand previous ventures
Outcome:
- There is a possibility of a mutually symbiotic relationship between the
Foreign and Indian Partner to jointly harness their capabilities and
create a world-class Retailer in India, which will have the unique
advantage of a being the first mover and establishing the benchmark of
excellence for the Industry 10

11. The ride despite the speed breakers …
 There is clearly an opportunity for the Domestic Giants, Kirana Stores and the Foreign
Retailers to co-exist in India
 The Wal-Mart model, offers every-day low pricing, but are typically in far-off locations, have
a homogenous selection of products across their stores, typically need 150,000 sq feet of
space and require a car to get to. India is years away from when majority of its population
will have the ability to only shop at the Wal-Marts of the world. Competition will force the
Kirana Stores to lift their game, become more price competitive, have a better selection
of goods at lower prices and maintain proper records of customers (people will still shop
there for proximity, comfort of relationship and easy credit)
 Foreigners will bring to India their expertise and efficiency in retailing, they will invest
capital in improving logistics and infrastructure in India (for example: Cold Storage
Logistics is still almost non-existent in India) and share technology and know-how with their
local Indian Partners, but will also be able to become profitable over a period of time as their
brands and presence increase across the country
 Hopefully, the Domestic Giants will learn the best practices from their foreign counterparts
and just as in Brazil foreign retailers thrive but still a local player is the most dominant
(Pao de Acucar) India will see a much more inclusive and efficient Retail Industry
11

12. The ride despite the speed breakers …
 On the whole, if India has to grow it needs capital, training
and innovation. Yes the short-term effects of the announced
reforms will be painful, but in the long-term if they will help
make Retail a more organized industry in India, provide
better quality goods at cheaper prices at convenient
locations, improve infrastructure and the supply chain
mechanism throughout the country, provide employment
and retail sector specific training to a large population it will
be a huge boon to the nation
 Foreign Retailers who are looking to make a quick profit are better off investing elsewhere. But
those who are willing to be patient and make a more long-term bet on India, definitely have the
opportunity to “HIT THE BULLS EYE.” India is a virtually untapped and a huge growing market
in terms of the Organized Retail Industry ($450bn industry, with only 5-6% organized retail).
The foreign players who are willing to learn from their mistakes in other emerging markets and
early experiences in India, go through a careful partner selection process, understand the
political / legal / external hurdles and invest with a realistic time horizon truly have an
unique opportunity to create win-win situations for all stakeholders. Several other sectors have
seen foreign entrants with a successful and profitable model in India (Dominos, Citigroup,
Honda etc). Our view is that the FDI in Retail will unfold in a similar manner in the times to come! 12

13. Executive Summary
 For more than a year, every problem in India has been blamed on the incumbent
government by national and international lobbies and “Policy Paralysis” has been the
reason cited for every shortfall including the falling rupee, the worsening fiscal deficit, high
inflation, high interest rates and delayed capital expenditure plans
 On September 14, 2012 the government broke the shackles and came out with the much
needed and highly anticipated reforms regarding Foreign Direct Investment (FDI) in the
Multi-brand Retail Sector (MBRT) of India with a surety of no roll – back this time
 Dinodia Capital Advisors‟ view is that these reforms will create price competition and
remove the multiple layers of inefficiency between the farmers and the final retailer and
hopefully help the farmers and producers of goods realize a bigger share of the pie in
the long-run
 Given the current negative sentiment of foreign investors (post Vodafone and Draft GAAR
Guidelines) and the lack of capital inflows in India, these reforms will encourage foreign
firms to give India a serious look and encourage them to invest capital in the country
 As foreign firms who partner with local Indian firms are able to generate profits and achieve
success in India it will encourage FDI in other sectors as well and create a positive