For the purposes of the FDI policy, a company is
considered an Indian company if the ownership and control is with Indian residents or entities, meaning that at least more than 50% of the equity and the abil- ity to appoint the majority of directors must vest with the Indian entity. If either of these conditions is not present, the company will be considered a foreign company and all foreign investments made in the holding company will be counted for determining the sectoral holding in the downstream company. On the other hand, any foreign investment made in a so- called Indian company that is the holding company for downstream investment will not be counted as for- eign investment for such determination.
Sector analysis and recent policy changes The FDI Policy prescribes the maximum permissible limit of foreign investment that can be made in Indian entities operating in various sectors, along with the conditions of entry and manner of investment. All sectors which are not specifically prohibited under the FDI Policy, and all sectors in respect of which no max- imum limit has been prescribed in the FDI Policy, are entitled to receive FDI up to 100% of their capital under the automatic route. Foreign direct investment is prohibited in eight
areas: lottery business, including government and pri- vate lottery, online lotteries, and so on; gambling and betting, including casinos; chit funds; nidhi compa- nies; trading in transferable development rights; real estate business or construction of farm houses; manu- facturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes; and activities/sec- tors not open to private sector investment, such as atomic energy and railway transport. Foreign technology collaborations in any form
(including licensing for franchise, trademark, brand name, and management contracts) are also not per- mitted in the lottery business and gambling and bet- ting services, implying that these activities are not pro- hibited in the other sectors listed above.
Retail trading Organised retail in India is still in its nascent stage and comprises only around 4% of the total retail trade. The growth potential is, therefore, enormous with expected annual growth rates of between 15 and 20% primarily driven by demand from the upwardly mobile consumer, particularly the youth segment that have increasingly better disposable incomes and are very brand conscious. While some large UK players
such as Marks and Spencer and Debenhams have entered India through the franchise route, global retail giants including Walmart and Metro have set up cash and carry wholesale trading outlets either on their own or in collaboration with Indian groups: FDI in this sector is permitted up to 100% under the auto- matic route. Companies such as Bata, Coca-Cola and Samsung have established a presence by setting up manufacturing facilities, licensing and distribution agreements, joint ventures for each brand, franchising agreements and commission agents. While entry of foreign retailers into India was not previously prohib- ited, the choice regarding mode of entry was restricted. In 1997, FDI in cash and carry (wholesale) with
100% ownership was allowed under the govern- ment/approval route and liberalised to the automatic route in 2006. Wholesale is a business-to-business sale transaction and a wholesale dealer is not permitted to open retail shops to sell goods directly to individual consumers. In 2006, 51% FDI in single-brand retail was per-
mitted, under the government/approval route, subject to certain conditions. India is probably the only country in the world which has a brand-based FDI retail policy. Since April 2012, FDI up to 100% has been allowed in single brand retail with prior FIPB approval subject to conditions including: products to be sold should be of a single brand only and should be sold under the same brand internationally; only one non-resident entity (whether owner or otherwise) is permitted to undertake single brand product retail trading for the specific brand through a legally tenable agreement with the brand owner; single brand prod- uct-retail trading would cover only products which are branded during manufacturing; and sourcing of 30% of the value of goods purchased is to be done from India, preferably from micro, small and medium enterprises, village and cottage industries, artisans and craftsmen, in all sectors. The government has relaxed its earlier policy on
single brand retail trading that mandated sourcing of 30% from small industries/villages and cottage indus- tries, artisans and craftsmen to preference in sourcing. This ensures that the interests of local artisans and small industries are balanced with that of large global retailers intending to enter India. Previously, only the owner of the brand could be
the foreign investor. According to the government, it was necessary to make changes to the condition relat- ing to brand-ownership since globally, single brand
retailers often adopt a variety of business models. The brand-owning entity and investor entities may be kept separate, though they may have the same parent or there may be no link between the investing arm and the brand-owning arm. In such cases, the brand owner entity could issue an exclusive licence/franchise to the investor entity, to use the brand for the purpose of retail trading. One key change in the FDI Policy in the recent
past is permitting foreign investments in the multi- brand retail trading sector up to 51%, on condition that: minimum funds of $100 million are brought in as FDI; at least 50% of the total FDI brought in is invested in backend infrastructure such as packaging, storage, logistics or distribution within a period of three years of the first tranche of the FDI; at least 30% of the value of procurement of manufactured/ processed products is purchased from Indian micro, small and medium enterprises; retail sale outlets can be established only in cities with a population of more than 1 million (as per the 2011 census); and agricul- tural produce (such as fruits, vegetables, fishery, poul- try and grains) are unbranded and the government has the first right to procurement of agricultural pro- duce. The policy on multi-brand retail is only an
enabling policy and its implementation is left to the discretion of the state governments. Retail outlets can be set up only in states that have given, or will in future give, their assent to FDI in multi-brand retail trade. Thus, the final authority for granting the trade licence rests with the states under their respective Shops and Establishment Acts. It is expected that the fears of the unorganised sector that has been strongly opposing the entry of foreign investment will be put to rest. At present the states that have assented to the policy are Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand, Daman & Diu and Dadra and Nagar Haveli. These states include 19 cities (such as Delhi and Mumbai) with a population of more than one million. The main beneficiaries of this policy change are
likely to be the farmers who can realise the true value of their produce and effect reduction in wastage of agricultural produce due to creation of backend infra- structure. Generally entry of food and grocery retail- ers in new markets results in technology transfers, vast employment generation, competitively priced prod- ucts and improvements in the quality of produce. It remains to be seen whether the big global players will
About the author Sonali Kapoor is currently part of the Corporate Advisory practice at Lakshmikumaran & Sridharan. She holds a bachelor's degree in law from Faculty of Law, University of Delhi
and in Commerce from Shri Ram College of Commerce, University of Delhi. She has previously been associated with a bank at Hyderabad in the real
estate division.
5 Link Road, Jangpura Extension, New Delhi - 110 014, India T: +91 11 41299800 F: +91 11 41299899 E:
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