Tesco, Vodafone receive big-bang FDI clearances

Retail giant enters India, to invest $110 mn; Vodafone can buy 100% stake in India arm

Two days before New Year, the government on Monday approved British retail giant Tesco Plc’s plan to invest $110 million to buy 50 per cent stake in Tata Group’s Trent Hypermarket Ltd (THL). With this, Tesco will become the first foreign player to open stores here that will sell anything from fruit to furniture.

The nod given by the Foreign Investment Promotion Board (FIPB) is expected to open the doors for future investments by foreign retailers. So far the market has been dominated by domestic players such as Tata’s Trent, Future Group, Reliance Retail and Aditya Birla Retail.

While in its application the company has stated that it will invest $110 million (around Rs 680 crore), the amount “could be scaled up later depending on how operations expand in the initial three to four years”, a senior official told Business Standard.

VODAFONE’S JOURNEY

• 2007: Vodafone Plc enters India by buying 67% stake in Hutch-Essar for $11.1 billion, gets a notice on why it had not deducted tax. The company moves high court, which dismisses its plea
• 2010: Vodafone challenges order in a writ petition, which is again dismissed.
• 2011: Company raises stake in Indian entity to 74%
• 2012: Supreme Court rules in favour of Vodafone. Govt brings retrospective amendments allowing it to tax Vodafone-type deals
• 2013: Cabinet approves conciliation with Vodafone.Company seeks approval to raise stake in Indian entity to 100% and gets approval

According to the FDI policy in place, the company has to invest a minimum 50 per cent of the $110 million in creating new back-end infrastructure. Back-end infrastructure refers to packaging, logistics, storage and warehouse, among others.

The FIPB meeting, chaired by Economic Affairs Secretary Arvind Mayaram, also approved British telecom group Vodafone’s $1.6-billion investment plan to take full ownership of its India business. The proposal is yet to get Cabinet approval.

THE ROAD TO TESCO’S DEBUT

• Nov 24, 2011: CCEA allows 51% FDI in multi-brand retail but puts it on hold later due to protests from opposition parties, traders and farmers
• Sept 14, 2012: FDI with 51% cap rolled out with stiff riders
• Aug 1, 2013: Govt relaxes three contentious norms
• For the 30% mandatory local sourcing norm, definition of micro, small and medium enterprises expanded
• Govt mandates 50% investment in fresh back-end infrastructure
• Retailers allowed to open stores in all such states that agree to implement policy
• Oct 9, 2013: US retailer Walmart quits six-year partnership with Bharti Enterprises. The move seemed to have spelled doom for the country’s multi-brand retail segment
• Dec 17, 2013: Tesco applies to DIPP to invest $110 million in collaboration with Trent Hypermarket Ltd, a Tata group enterprise
• Proposal mentions that the JV would operate through a chain of stores under banners including Star Bazaar, Star Daily and Star Market, with the tagline ‘A Tata and Tesco Enterprise’
• Dec 30, 2013: Tesco’s proposal is approved

Tesco wants to initially focus on Karnataka and Maharashtra where it already has 16 stores with partner Trent Hypermarket Ltd under different banners. For back-end infrastructure also, the company might focus on these two regions. The £64.8-billion grocery and merchandise retailer has said the JV will operate in India through a chain of stores under various banners, including Star Bazaar, Star Daily, Star Market — their tag line saying ‘A Tata and Tesco Enterprise’. It has plans to open three to five stores every financial year.

According to another official, Tesco will not open any stores before the general elections, likely in May 2014.

Foreign direct investment (FDI) in multi-brand retail trading was allowed in September 2012 but with a set of conditions that global retailers were opposed to. Major foreign players such as Wal-Mart, Tesco and Carrefour were severely against some of the particular regulations related to mandatory investment in back-end infrastructure, compulsory 30 per cent local procurement norms and restrictions on cities in the FDI policy.  Under pressure, the government had to relax the policy in August. In October, the policy suffered another setback with US retail juggernaut Wal-Mart breaking of its six-year partnership with Bharti Group.

Tesco’s entry might not open the floodgates yet as foreign retailers still have difficulties with the sourcing norms and in scouting for Indian partners. “In the coming months you can see other global retailers present in India making applications. But you need a partner in India to actually go ahead and apply for approvals. Most other global retailers in India are still looking for partners. There are just a few global retail chains that can make the huge investment required,” said Arvind Singhal, chairman, Technopak India. According to Pinakiranjan Mishra, partner and national leader (retail & consumer products), EY, retailers will not play their card before the elections are over, though he added that a rollback of the policy was unlikely.

On the Vodafone decision, Mohammad Chowdhury, telecom industry leader and member of global executive team, PwC, said, “This brings more flexibility in terms of operating decisions and would pave the path for fresh investments. As the approval has come before the forthcoming auction of spectrum, it would help the company take future investment decisions better.”

A decision on the proposal of HDFC Bank to increase the foreign institutional investor holding limit was deferred.