Saturday, August 3, 2013

Approval of New FDI Norms; Impact on Multi-brand Retail

In an earlier post, we had discussed the relaxation measures approved by the Union Cabinet for increase in the foreign direct investment (FDI) in certain sectors. Now, the specific changes to the FDI Policy Circular of 2013 have issued. The changes to the FDI caps and routes are available on the website of the Press Information Bureau (PIB) (under releases issued on August 1, 2013).

Separately, the Government has also announced the liberalization of FDI in the multi-brand retail sector (also accessible through the PIB website), which is expected to remove some of the impediments that existed under the current regime. There are broadly three changes introduced in this regard:

1.         The first change relates to the amount which is to be brought in towards “back-end infrastructure”. Under the pre-existing policy, while there was a minimum capitalisation requirement of USD 100 million, the requirement for spending 50% of the FDI in back-end infrastructure was somewhat ambiguous, i.e. whether the 50% related to the total FDI or to the minimum amount of USD 100 million. It has now been clarified that the 50% requirement relates to the first minimum tranche of USD 100 million (therefore effectively amounting to USD 50 million). This would minimise the backend infrastructure obligations for the foreign investors compared to the previous position.

2.         The second change relates to domestic sourcing. Under the pre-existing policy, at least 30% of the value of domestic procurements was required to come from small-scale industries that have a total investment in plant and machinery not exceeding USD 1 million.  Furthermore, if as a result of supply to the multi-brand retail entity, the investment were to exceed the said amout, then the supplier will no longer qualify as a small-scale industry. This has been amended in at least two ways. First, the maximum limit for qualification as a small scale industry has been raised from USD 1 million to USD 2 million.  Secondly, it has been clarified that a supplier needs to be qualified as a small-scale industry only at the time of first engagement with the multi-brand retailer, and it does not matter if the industry outgrows the limit as a result of supply to the retailer. These changes increase the sourcing possibilities for multi-brand retail entities with foreign investment, which would make it more attractive to receive FDI.

3.         The final change relates to the locations in which retail sales outlets may be set up. Under the erstwhile policy, outlets were permissible only in cities with a population of more than 10 lakhs  (1 million). Under the revised policy, state governments have been conferred the discretion to extend the facility of opening retail outlets in other cities as well.

Evidently, the opening up of the multi-brand retail sector in 2012 has not resulted in a substantial inflow of foreign investment as envisaged. Part of the reason may have been the onerous nature of the conditions imposed on multi-brand retail companies. At the same time, it also seems to be the case that the policy was riddled with issues of interpretation and technicalities that needed some time to be ironed out. This speaks to the nature of policy-making. While the concerns of the government in opening the floodgates to the multi-brand’s retail sector without any checks and balances whatsoever is understandable, once the decision to liberalise the sector has been taken, it is somewhat disconcerting that hurdles have been placed due to technicalities rather than due to any broader strategic reasons. Such issues are likely to create uncertainties in the foreign investment regime, and therefore call for a more transparent and long-lasting policy-making process.

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