The government late this evening notified its decision to allow 51 per cent foreign direct investment (FDI) in brick-and-mortar multi-brand retail. However, it also prohibited such investments in e-commerce in both multi-brand and single-brand sectors — a move that would hit Walmart and Amazon.
The norms for single-brand retail have been watered down further, giving foreign companies five years to comply with the rule to source 30 per cent of goods from India. The Cabinet had already said sourcing from micro, small and medium enterprises (MSMEs) should be preferred, instead of making it mandatory as had been the case earlier. Multi-brand chains will also get five years to adhere to the 30 per cent sourcing norm, but this sourcing must compulsorily be from MSMEs. The notification came on a day when most opposition parties and some ruling coalition allies had hit the streets as part of a “Bharat bandh” to protest against the move to allow FDI in multi-brand retail. The Trinamool Congress, hitherto part of the coalition, is set to withdraw support to the government tomorrow over this issue.
The notification would be a blow to e-commerce companies, as the government has prohibited any FDI in e-commerce across the entire multi-brand and single-brand universe. The foreign investment norms for e-commerce have been the same as brick-and-mortar retailers so far.
In brick-and-mortar multi-brand chains, up to 51 per cent FDI was permitted by the Cabinet last Friday, while single-brand retail FDI was hiked to 100 per cent from 51 per cent last November.
FDI in multi-brand e-commerce has been restricted to suit the government decision of letting states take a call on if foreign chains should operate there, said Mohit Bahl, Partner, Transaction Services, KPMG. As geographical boundaries cannot be set in e-commerce, the state-wise rollout of chains cannot be executed for online companies, said Bahl, explaining the rationale behind the move.
For the brick-and-mortar chains, the government has notified that 30 per cent sourcing from Indian companies, in case of single-brand retail, and from MSMEs, for multi-brand retail, will have to be over the first five years and on an annual basis thereon. “This procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the manufactured processed products purchased, beginning April 1 of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis,” the notification said.
This would meet mid-way a demand by Swedish furniture brand IKEA, which had asked for the 30 per cent sourcing requirement over a cumulative period of 10 years.
With this move, American online major Amazon’s plans to set up business in India has gone for a toss, though it entered the country through Junglee.com, a product comparison site, earlier this year. Online players such as Flipkart and Snapdeal will have to continue to make do with backend and B2B foreign investment, keeping the frontend clear of any FDI.
The world’s largest retailer, Walmart, which has been gung ho on online retail to compete with Amazon in the US market, will have to skip e-commerce in India, at least as of now. Also, many consumer goods companies like Canon and Sony have been wanting to set up online operations in India to tap the e-commerce potential—they too have to stay away from the initiative.
The notification comes six days after the Cabinet Committee on Economic Affairs (CCEA) cleared 51 per cent FDI in multi-brand retail, subject to the states approval.
Three other notifications on 49 per cent FDI for foreign airlines in aviation sector, clarity on foreign investment in power exchanges and certain sectors of the media, came simultaneously.