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After furniture major IKEA, investment proposal of another Swedish company - retail chain Hennes & Mauritz (H&M) - has hit the roadblock of India's sourcing regulations, with the government asking the company to clarify on mandatory procurement from the country.
Five months after H&M filed its application to invest ^100 million (About Rs 700 crore) in setting up single-brand retail stores in India, the government has asked it about its commitment to comply with the mandatory 30 per cent sourcing. H&M, it's learnt, will also need to do some explaining on the licence agreement for its brand use here.
The H&M proposal to establish a 100 per cent foreign-owned subsidiary in India is the second-largest single-brand application after IKEA's ^1.5-billion proposal, which was cleared by the Cabinet earlier this year.
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In fact, H&M's investment could be much bigger than ^100 million, according to its April 18 application to FIPB. Pointing out that in many developing markets, it had invested around $300 million in five years, the firm said it saw the same potential in the Indian market.
A department of industrial policy & promotion (DIPP) official confirmed that queries related to sourcing and brand licensing had been sent to H&M's Stockholm headquarters last week. The company, which is ready to roll when its proposal is cleared by the Foreign Investment Promotion Board (FIPB), is expected to reply soon.
The company did not reply to a questionnaire sent by Business Standard on the matter.
According to single-brand FDI guidelines, in the cases where foreign investment is more than 51 per cent, sourcing of 30 per cent of the value of goods purchased must be done from India, preferably from small and medium enterprises. The products so sourced would have to be used for single-brand retailing in India. But, DIPP is seeking clarity from H&M on whether it wants to source from India for retail operation in the country or for exports to other geographies also.
In its application, the company had confirmed compliance, saying: "H&M will source from India (preferably from MSMEs) the equivalent of 30 per cent of the value of the goods (excluding taxes and duties) purchased by H&M Retail India, the proposed investee company to be incorporated in India." It had added: "The goods sourced from India for the purposes of meeting the 30 per cent sourcing requirement will be utilised for export sales, as well as for domestic sales, through retail stores in India." The latter part of the statement is understood to have raised doubts in the minds of the officials.
The FDI rules also say that only one non-resident entity, whether owner of the brand, or otherwise, shall be permitted to undertake single-brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner. H&M would have to clarify to the government on its licensing agreement, an official said without elaborating. In this case, the applicant company (H&M Hennes & Mauritz GBC AB), as well as the second minority investor entity (H&M Hennes & Mauritz International AB) are 100 per cent subsidiaries of Hennes & Mauritz AB, the brand-owning entity. Hennes & Mauritz AB, through a licence agreement on April 11, 2013, had granted to H&M Hennes & Mauritz GBC AB, the applicant company, the exclusive right to undertake single-brand product retail trading in India, according to its application.
The government scrutiny of the H&M proposal has come at a time when multi-brand foreign retail chains have not made even a single application since the sector was opened to FDI last year.
H&M, which competes with fashion brands like Spain's Zara, wants to open 50 stores in India over a period.
