The stock markets have welcomed the courage shown by the government in clearing foreign direct investments (FDI) in multi-brand retail among a host of other policy decisions. Calling their coalition partners’ bluff, the government also did not concede on rolling back the fuel price hike.
But the one event which is clearly a mood-changer as far as the FIIs are concerned is multi-brand retail FDI. The government had earlier cleared 100 per cent FDI in single brand retail, though there have been few takers for it; it has now gone ahead with 51 per cent FDI in multi-brand retail. This means that any global giant investing in the country would have to first tie up with a local partner, new or existing. Little wonder then that stocks of companies engaged in the retailing business are zooming.
It, however, might not be as simple as it seems. The devil as they say lies in the detail. We take a closer look at the notification issued by the Department of Industrial Policy & Promotion (DIPP) with regard to multi-brand retail.
The notification says that FDI will be permitted subject to certain conditions. Here are some of the main conditions cited:
• Minimum amount to be brought in as investment by the foreign investor would be $100 million. At least 50 per cent of this amount should be invested in ‘back-end’ infrastructure, which will include investments in processing, manufacturing, distribution, design improvement, warehouse, logistics, storage, etc. Investment in rentals and land cost will not be counted.
Little money will thus be available for the existing listed retailers to bring down their debts, which is a bigger worry for almost the companies. The government is sending a clear signal that the funds are to be deployed for asset creation.
• At least 30 per cent of the procurement of manufactured/processed products purchased shall be sourced from small industries with investment in plant and machinery not exceeding $1 million.
The investment limit will restrict purchases of smaller items. Electronics, garments, kitchenware, sports goods, consumer goods and most of the other items will not fall in this list. This would largely leave groceries and smaller gift items to be sourced from Indian players.
• Retail sales outlet may be set up in cities with a population greater 10 lakh as per 2011 Census.
The limit of a population of 10 lakh restricts the entry to around 37 cities in the country. But as the government has given the choice of implementing to the state government, the number falls down to around 19 cities in the country, with 10 cities being in Maharashtra alone. There will be a logistical issue for the players as they would require contiguous states in order to be operationally effective.
• The policy is an enabling policy only and state governments would be free to take their own decision. The list of states that have agreed to multi-brand FDI are Andhra Pradesh, Assam, Delhi, Haryana, Jammu and Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakand and the Union Territories of Daman & Diu and Dadra and Nagar Haveli.
Of the above list of states only five have cities which have a population of more than 10 lakh. The policy however, allows for setting up of retail shops in the largest city in case the state does not have a city with greater than 10 lakh population, purchasing power and other factors like security would weigh in the mind of investors.
Meanwhile The Economic Times has reported that BJP has said that states are not in a position to stop FDI in retail due to bilateral investment agreement with 82 countries which says that foreign investors are to be treated at par with Indian ones. They have cited a Kerala High Court judgment which had prevented the Communist government of the state from putting in restrictions for foreign chains.
• Retail trading by means of e-commerce will not be permissible for companies with FDI.
This will be a dampener to companies like Amazon, which were looking at investing in the country.
These are early days for multi-brand retail and it is unlikely that any investor would be in a hurry to declare their investment in the country till the dust settles down.
