Joint venture fillip possible for foreign single-brand chains

Industry sources estimated that currently there could be over 60 applications at DIPP for 49% single brand retail investment

The government’s decision to allow automatic approval to single-brand retailers with up to 49 per cent foreign investment (FDI) could step up the possibility for joint ventures in the sector. For foreign brands that are already in India under the franchisee model may start exploring the option of joint ventures (JVs) under the automatic approval route, industry representatives said.

Some experts, however, dismissed the latest government move as an ‘ornamental’ tweak.

Industry sources estimated that currently, there could be over 60 applications at the Department of Industrial Policy and Promotion (DIPP) for 49 per cent single brand retail investment. Since 2006, around 65 applications have been cleared for the 49 per cent FDI model. Right now, there are more than 200 fashion and lifestyle brands operating through franchisee model, it is learnt.

"The policy change will encourage more JVs and companies would actually start investing in the market rather than most of them going through franchisee route," said Saloni Nangia, president, Technopak Advisors, a retail consultancy.

Pointing out that it would be a great opportunity for firms that are already here, she said that it sends a positive message that doing business in India is not very difficult.

According to industry experts, the existing brands operating through franchisee model could receive proposals from their Indian counterparts for buying equity in the existing business. The existing franchising giants could make a move citing this change in policy and pitch for attracting investments from parent company. "You would see that the brands which have already have had a taste of Indian market, built some confidence with their business partner and not yet prepared for 51 or 100 per cent, would opt for 49 per cent model for investing money," said Gaurav Marya, chairman, Franchise India.

However, critics argued that Foreign Investment Promotion Board’s (FIPB) approval was hardly a bottleneck. Any retailer wanting to take a step ahead in the Indian retail market would prefer 51 per cent or 100 per cent FDI, so why would they go for 49 per cent, asked Pinaki Ranjan Mishra, partner and national leader (retail), EY (formerly Ernst & Young). "This decision is more a feel good factor for the market... Don’t expect an extra flurry of players wanting to enter market," said Mishra.

According to Marya, the franchisee route is not over yet in retail. "We still suffer from international image issues and lack of clarity on policy. Many international players who are not sure about growth prospects in India would still prefer the franchisee route. It’s the existing players who could benefit from the policy," he added.

Citing the case of Marks & Spencer, which was under the finance ministry scanner for selling sub-brands, Mishra said, "The challenge for single brand retail has never been FIPB approvals. It has been about the definition of single brand."

There have been calls from inside the industry for a purposive rather than a literal interpretation of the policy. Goldie Dhama, executive director (tax and regulatory services) at PricewaterhouseCoopers (PwC), says: "As long as the products are coming from the main brand, the brand should qualify as a single brand retail, which would bring in more clarity and paving way for more investments."