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Jun 7, 2013

FDI Policy Clarifications on Multi-Brand Retail Trading in India

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Yesterday Department of Industrial Policy and Promotion (DIPP) had answered many queries from stakeholders and investors regarding the FDI policy of Multi-Brand Retail Trading. After the FDI in retail has got the green signal, many single brand retailers are showing interest to invest in India. But the multi-brand retail trading is still deeming as most are still unknown to the rules.

To clear the confusion DIPP answered the queries and also published a document regarding this. We’ve compiled some of the major queries and their answers here –

Issue - 30% sourcing from Small and Medium Enterprises  

Question - Can the Foreign Investor purchase the 30% of the total procurement of manufactured or processed goods by the SME but distribute them either through the retail operation and/ or cash & carry operations and/ or export for the Foreign Investor’s International retail & trading operations?

Answer - No. The 30% sourcing will be reckoned only with reference to the front end store. As such a Multi-brand retailing entity cannot engage in any other form of distribution.

Issue - 50% investment in back-end infrastructure

Question - Can the new retail entity to be set up acquire supply chain/back-end assets or stake from an existing company having such assets and will such assets /stake values be counted towards the back-end investment requirement?

Answer - No. Entire investment in back-end infrastructure has to be an additionality. The entity can invest only in greenfield assets and it will not be possible to acquire supply/chain/backend assets or stakes from an existing entity

Question - Whether investment in back-end infrastructure for instance for storage, warehouses, agricultural produce infrastructure in non-FDI approved states will be counted towards investment in back-end infrastructure.

Answer - FDI in these activities is already allowed throughout the country. As far as MBRT is concerned FDI in non-FDI approved States in back-end infrastructure will be counted provided it is additionality.

Question - Will the new retail entity include back-end facilities that have the capacity to supply its own businesses and other businesses? It should be free to supply back-end services (e.g. logistic supply, goods) to related or third party companies, including but not limited to the company’s existing wholesale entity and the retail franchisee operated by its partners.

Answer - As per the conditions for wholesale cash & carry trading, such an entity is not permitted to undertake retailing of any form. Therefore, both the businesses have to be kept separate through different entities. As regards supplies by MBRT company to franchisees run by its partners, it is clarified that the policy envisages multi-brand trading in retail. The MBRT entity is not envisaged to undertake wholesale activity i.e. B2B. The front-end stores set up by MBRT entity will have to be ‘company owned and company operated’ only.

Question - Would a company operating in wholesale trading/ cash & carry trading be considered as a company providing back-end infrastructure in efficiently distributing the goods to the small retailers and professional/ business users?

Answer - No. The wholesale trading/ cash & carry trading cannot be considered to be providing back-end infrastructure. FDI in MBRT will require fresh investment in back-end infrastructure.

Investment in Front-end / back-end infrastructure

Question - If the same foreign investor is an investor in various companies for logistics, services etc., will the back-end investment made by such investor be aggregated?

Answer - No. Investments in multiple infrastructure companies would not be counted towards fulfillment of condition of investing 50% in the back end infrastructure.

Policy on E-commerce

Question - Allowing online sales will enable the Company to better serve Indian customers through enhanced convenience and assortment as well as improve the site customer experience. This will allow the company to make significant investments in Logistics.

Answer - Multi-brand retail trading by way of e-commerce is not permitted.

Investment in greenfield or brownfield front-end entities

Question - Can the minimum investment of US$ 100 Million be used to acquire existing retail stores or setting up new retail stores or a combination of both?

Answer - 50% of the investments brought in, must be invested in back-end infrastructure, and any amount spent in acquiring front end retail stores would not be counted towards back-end infrastructure. The front-end retail stores must also be set up as additionality and not through acquisition of existing stores.

As per the reports, there are some other issues which are still under consideration by DIPP and soon will be notified to the investors or stakeholders. For more information, download the full document from DIPP site here .

Image Courtesy - TheHinduBusinessOnline.com


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