IKEA on India's doorstep as govt accepts key demands

30% sourcing requirement from day one to be relaxed firm's 'small scale' definition accepted

Swedish furniture retailer IKEA might not have to wait much for its India entry. The Department of Industrial Policy & Promotion (DIPP), after a meeting with company representatives this week, moved swiftly and decided to accept some of their key demands, including relaxation of the 30 per cent mandatory sourcing requirement from day one.

The DIPP has also accepted IKEA’s definition of ‘small scale’ sector, from which it has to mandatorily source products under the rules for 100 per cent foreign direct investment in single-brand retailing. The department is also inclined to permit the ownership of the brand name to be with a company different from the one that has applied to set shop in India. That is not permitted under the current policy. It is also willing to exclude ‘taxes and duties’ while defining the value of products that it has to mandatorily source from others.

The company has told the DIPP that it understands the sourcing condition is not a day-one requirement and should be checked for a cumulative period of 10 years, since the gestation period of an IKEA store is three-five years.

WHERE THEY STAND NOW
IKEA’S DEMANDS	DIPP’S RESPONSE
30% mandatory sourcing  cannot be done from day one	Accepted; should be met over a period of time on a cumulative rather than year-to-year basis
$1-mn valuation should apply when IKEA first establishes a relationship with the small scale industry	Accepted
Allow applicant company to be separate from company owning brand	Could be considered if the two have a close relationship
In calculating purchase  value, exclude taxes and duties	Acceptable
Consider sourcing done by group companies for export under mandatory sourcing condition	Acceptable on a case-specific basis

The DIPP has agreed to this view, saying there is a practical difficulty and it may be appropriate to consider compliance over a period of time and also on a cumulative rather than a year-to-year basis. It has contended compliance has to be continuous and not initial. As such, compliance would again need to be checked over the next 10-year period.

The DIPP has also endorsed IKEA’s view that the $1-million cap for defining a small scale unit be taken as pertaining to the year in which the entity developed a relationship with it.

The current rules say “if at any point of time this valuation (total investment in plant and machinery not exceeding $1 million) is exceeded, the industry shall not qualify as a small scale one”. Under the norms, a retailer has to source 30 per cent of the products sold from the small scale sector.

The DIPP has said as the term in the guidelines says “any point of time”, the interpretation of that should be taken as pertaining to the year in which the entity developed a relationship with IKEA.

That is in line with IKEA’s application, which has stated “this valuation shall apply to the industry at the time the IKEA group first established a relationship with such industry and thereafter, such industry shall continue to qualify as small industry for this (30 per cent sourcing ) purpose”. The DIPP has, however, made it clear the small industry must individually fulfil the criterion of investment of $1 million and it cannot be considered on an aggregate basis (average of the aggregate of all suppliers) as IKEA wants.

The department has also agreed to a request by IKEA to include containers, packaging and labelling for products under sourcing from India. IKEA has requested the component of sourcing done through any of the group companies for export should be included while computing compliance with the mandatory sourcing requirement. The DIPP has said even this plea could be considered on a case-specific basis if group entities within India are closely related and linked for business purposes with the IKEA group company proposing to carry out single-brand retailing.