The much-talked about entry into single brand retail space by Swedish furniture maker IKEA, whose concerns played a major role in bringing about changes in foreign direct policy in this sector was cleared by the Foreign Investment Promotion Board (FIPB). The Swedish brand proposes to bring in Rs 10,500 crore of foreign direct investment (FDI).
The proposal will now go to the Cabinet Committee on Economic Affairs (CCEA) as all proposals over Rs 1,200 crore will have to go to the CCEA after FIPB approval. IKEA plans to set up 25 single brand retail stores in India through a 100% subsidiary of group Ingka Holding Overseas B. V.
|November 2011- Government clears 100% FDI in single brand retail, 51% in multi-brand retail|
|December 2011- Government puts on hold 51% FDI in multi-brand retail due opposition pressure|
|January 2012- Government notifies 100% FDI in single brand retail|
|June, 2012- IKEA seeks permission to open single brand stores in the country with a Rs 10,500 crore investment proposal|
|July 2012- IKEA demanded relaxation in the FDI sourcing norms|
|July 2012- FIPB rejects Zara's investment proposal to open Massimo Dutti’ format stores on grounds that an investor must own the brand it proposes to bring to India|
|September 2012- Government allows 51% FDI in multi-brand retail and eases 100% FDI single brand norms|
|October 2012- Government clears 3 single brand FDI proposals- Pavers, Brooks Brothers and Italian jewellery maker Damiani|
|November 2012- FIPB clears IKEA investment proposal; CCEA to give final clearance since investment over Rs 1200 crore|
In its last meeting in October, FIPB had cleared three single brand FDI proposals, including British footwear retailer Pavers England to open fully owned stores and investment worth Rs 98.26 crore. The others were of Brooks Brothers, a 51% joint venture of American luxury clothing retailer and Italian jewellery maker Damiani's plan to form a venture with Mehta's Pvt Ltd. In November 2011, government allowed 100% FDI in single brand retail. In June this year, IKEA had sought permission to enter the single brand space. However, the company had asked for dilution of 30% sourcing requirement from micro, small and medium scale enterprises (MSMEs). MSMEs are defined as ones whose total investment in plant and machinery does not exceed one million dollars. IKEA had raised concerns that it would be difficult to comply with this condition in case of luxury brands, which involve high technology. Moreover, since the volume and investment to the MSME increase to comply to the brand requirement the small entity will not qualify as a ‘small industry’ in years to come, IKEA had stated. Bowing to the deand, in September this year, single brand retail norms were diluted. As these stand now, the 30% sourcing from MSMEs was changed to ‘preferred’ from ‘mandatory’.
So, now companies are now free to source it from MSMEs or not, but they will have to source it from Indian companies only. Another company keen on entry into the single retail brand space--Zara of the Netherlands-- had sought approval from FIPB earlier this year, but its proposal was rejected. The grounds for turning down the company engaged in the business of luxury clothing was that applicant did not own the brand. Then, the application was made by Zara Holdings Netherlands, but the brand is owned by group company Euro 13.8-billion Spanish retail chain, Inditex. In September this year, the Cabinet relaxed this norm as well. Now, a non-resident entity, whether owner of the brand or otherwise, can undertake single brand product retail trading in the country.
In that Cabinet meeting, FDI up to 51 per cent was also allowed in the multi-brand retail, subject to approval by the state governments. This policy has created political storm among the opposition. Erstwhile ally of the UPA--Trinamool Congress-- has threatened to bring no-confidence motion in the upcoming Parliament session against the government on the issue, while other opposition parties are calling for separate motions that entail voting. The Winter session is slated to begin from Thursday.