Status quo for foreign investors in retail as suspense continues

One clarification that the government has kept for later could hold the key to foreign investors opening multi-brand retail businesses in India, said experts and sector representatives.

This is about 50 per cent of the mandatory $100-million investment on creating back-end facility.

While officials had earlier indicated this condition was meant for the first tranche of investment during the first three years of operation, the clarification issued yesterday said the matter was still under consideration.

A source, who did not want to be identified, pointed out that if it is only about 50 per cent of the first tranche or $50 million that a foreign chain has to invest in new back-end, then the condition won't be seen as a big hurdle for international chains such as Walmart, Carrefour or Tesco. On other hand, if the government wants chains to spend 50 per cent of every dollar invested in India on new back-end, it will be a serious roadblock, something that will make them review India plans, he warned. An executive at a prominent retail group told Business Standard it was status quo for the sector after the clarifications.

"Nothing will move forward now, at least till the 2014 elections," he said. The clarification that states will have the prerogative to impose additional conditions has just made things more complicated, said another retail sector representative. So far, only 11 states have allowed foreign retailers to set up shop there, while another, Karnataka, is expected to say Yes soon.

Kishore Biyani, founder and CEO of Future Group, learnt to be keen on foreign investments, said the clarifications do not help anybody. "The guidelines for foreign retailers are still not clear" Biyani said. He, however, added, "We were not expecting any foreign investment."

A senior executive from Spencer's, another chain said to be looking for foreign money, told this newspaper: "I think it is a step in the right direction. It may take time for foreign retailers to figure out all the guidelines."

Fingers are pointing towards the government's own strategy of slowing things at this point, fearing a backlash from the Opposition. "The government wants to play safe by projecting a hard line now," said another retail business representative. According to Mohit Bahl, associate director of KPMG, the government has "gone back to the spirit of the policy cleared nine months ago".

The clarifications have shown there is no question of any change in the policy that might dilute its impact.

However, the general impression now is that the clarification has sent out a wrong signal to the world. "With the new clarification, it is difficult for domestic guys to get foreign capital," said Govind Shrikhande, managing director, Shoppers Stop.

RULE BOOK

* Only company-owned and company-operated structure permitted in multi-brand retail
* Mandatory $100 million must be invested in new facility or in creating additionality, of which 50 per cent must be in back-end
* Global sourcing must be distinct from the compulsory 30 per cent buying from small and medium sector

* States will have the power to impose additional conditions
* Back-end facilities can be built anywhere in India, irrespective of which state allows FDI