In September 2012, the Indian government permitted foreign investors to have up to a 51% stake in multi-brand retail in the country but, so far, not a single foreign investment proposal has been put forward. There are as many as 12 to 14 multi-brand players waiting for clarifications on the policy before they decide whether to roll-out their operations into the country, according to Diljeet Titus, a partner at Titus and Company, the law firm that handled single-brand retailer Ikea’s entry into India.
Clarifications are needed on whether companies will have to mandatorily source 30% of their goods from small and medium-sized enterprises and whether they have to invest 50% in back-end infrastructure. Companies are also wary of the fact that each state has the power to opt in and out of the 51% law.
CEO of UK supermarket chain Tesco, Philip Clarke, met India’s commerce minister in May 2013. All he said of that meeting was: “I think it was important that we heard from the minister about some of our small concerns. There will be important points of clarification in the months ahead.”
Tesco has a franchise agreement with a local chain that is part of the Tata Group for back-end and wholesale trade, which is likely to extend to multi-brand retail as well. Uppermost in Tesco’s mind is whether farm produce such as fruit and vegetables can be kept outside the mandatory sourcing limit. The indications are that it has been assured by the government that the limit would apply to only 15% of its products if it were to open stores in the front-end segment.
France-based Carrefour is going to review its investment plans in the country if what it calls “tough” riders are not relaxed. Carrefour runs a fully owned cash-and-carry business in India, with four wholesale outlets in New Delhi, Jaipur, Meerut and Agra. It has yet to identify an Indian partner for its retail operations, according to the country’s business newspaper, Business Standard.
As the sourcing requirements are proving a major point of contention among foreign businesses, the government has made assurances that companies can source from the entire country, including from states that choose not to allow FDI in multi-brand retail.
As for the requirement regarding back-end infrastructure, the government has clarified that this will apply to the first tranche of FDI only. The commerce minister has also stated that this requirement entails only fresh investments in back-end infrastructure and not the acquisition of existing facilities belonging to local players.
N Chandra Mohan is an economics and business commentator based in New Delhi.