FDI in Single Brand Retail Trading

Introduction

Foreign Investment in the retail sector has been historically seen as a threat amongst the local retailers. It would be unfair to expect the domestic retail sector to face competition from multinational players in the retail industry. Small domestic retailers do not have the technology, expertise, manpower and most importantly funds to survive alongside these big retailers. This being the rationale behind limiting Foreign Direct Investment (FDI) upto 49% in automatic route in the retail sector for so many years till 2018. 

In 2018, the FDI Policy emphasized on the fact that Foreign Investment in Single Brand product retail trading will aid in attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. Thereafter, 100% FDI in Single Brand Retail Sector (SBRT) was allowed in automatic route in the year 2018 with a condition of local sourcing of goods upto 30%. 

There’s no clarification or guidance by the ministry or RBI as to which entities shall be considered as SBRT entities, however, going by the meaning of “single brand retail” in common parlance, it simply means selling goods of a single brand whether domestically or internationally. Few real-life examples of single brand retailers are Adidas, Oppo, Apple, Nike, Ikea, Marks & Spencer’s, etc. Also, a list of brands who have received approvals till 2016 can be viewed here.

FDI in Single Brand Retail Trading

As per the Guidelines for Single Brand Retail Trade dated July 24, 2019, FDI policy on Single Brand Retail Trade (SBRT) has been in operation since 2006. From 2006 till 29.03.2018, 112 brands have obtained approval from the Government for SBRT activities.  From April, 2006 to April, 2019, SBRT sector has received total FDI equity of USD 1,636.24 million.

 Series of amendments in FDI 

• Till the beginning of 2018, FDI policy allowed only 49% FDI in SBRT under automatic route, and beyond 49% and up to 100% FDI was compulsorily through Government approval route. 
• On January 10, 2018, the Union cabinet took the initiative to liberalize FDI norms in SBRT and allowed 100% FDI under automatic route for SBRT, by way of a Press Release. 
• Post this, DPIIT released Press Note 1 (2018 series) to amend FDI Policy, 2017 and 100 FDI under automatic route was officially notified. 
• Subsequently, to harmonize the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2017 with the FDI Policy, 2017, Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2018 were notified from March 26, 2018 to give effect to the 100% FDI rule.
• To the contrary, the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 which were issued in supersession of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017, created ambiguity by stating that only 49% FDI will be allowed under automatic route in SBRT, and beyond 49% and up to 100% it will be allowed under Government approval route. [This scenario was prior to 2018 regime]
• Later on December 5, 2019, vide Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2019, this error was rectified and finally both the FDI Policy and NDI Rules came into agreement that 100 % FDI is allowed under automatic route in SBRT. 

Single Brand

The FDI Policy has been quite clear from the beginning that the products which will be sold by way of SBRT should be of a ‘Single Brand’ only. It further elaborates that the products should be sold under the same brand internationally i.e. products shall be sold under the same brand in one or more countries other than India. However, Indian brands have been exempted from this condition. ‘Single Brand’ product-retail trading shall cover only products which are branded during manufacturing.

Sub-Brands

First there’s ambiguity as to what is considered a single brand, then with questions being raised by the Finance Ministry over Marks & Spencer, Zara and Massimo Dutti selling sub-brands in their single brand retail (SBR) stores, retailers were in a dilemma whether sub-brands will also be considered as a part of single brand. Products under sub-brands are generally sold without using the main brand name which is the reason for this ambiguity, However, these sub-brands do not have an independent existence without the main brand name and they mostly become popular because of the primary or leading brand. Without a clarification from the Ministry, sub-brands are also being treated as a part of single brand retail trading only.

Eligibility

Person resident outside India: A person resident outside India, whether owner of the brand or otherwise, has been permitted to undertake ‘single brand’ product retail trading in India for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking single brand retail trading and the brand owner. However, Indian brands have been exempted from this condition.

Person resident in India: Indian brands should be owned and controlled by resident Indian citizens and/ or companies which are owned and controlled by resident Indian citizens

Domestic sourcing of goods

FDI beyond 51%: In case of proposals in which the foreign investment exceeds 51%, sourcing 30% of the value of goods procured, shall be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors. 

Self-certification: The quantum of domestic sourcing shall be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company shall be required to maintain. 

Time-limit: The procurement requirement is to be met in the first instance as an average of five years total value of goods procured beginning 1st April of the year of the commencement of SBRT business (i.e. opening of first store or start of online retail, whichever is earlier). Thereafter, SBRT entity shall be required to meet the 30% local sourcing norms on an annual basis. 

Eligibility: For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company incorporated in India, which is the recipient of foreign investment for the purpose of carrying out single brand product retail trading. 

Set off of incremental sourcing: Single brand retail trading entities shall be permitted to set off their incremental sourcing of goods from India for global operations during initial 5 years, beginning 1st April of the year of the opening of the first store, against the mandatory sourcing requirement of 30% of purchases from India. After completion of this 5 years period, the SBRT entity shall be required to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis. [Incremental sourcing: It shall mean the increase in terms of value of such global sourcing from India for that single brand (in INR terms) in a particular financial year from India over the preceding financial year, by the non-resident entities undertaking single brand retail trading, either directly or through their group companies.] 

Calculation of local sourcing: For the purpose of meeting local sourcing requirements, all procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported. [‘sourcing of goods from India for global operations’ shall mean value of goods sourced from India for global operations for that single brand (in INR terms) in a particular financial year directly by the entity undertaking SBRT or its group companies (resident or non-resident), or indirectly by them through a third party under a legally tenable agreement.] 

Exemption from sourcing requirement: Sourcing norms shall not be applicable up to three years from commencement of the business i.e. opening of the first store or start of online retail, whichever is earlier for entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible. It is pertinent to note that NDI Rules, when first notified, did not consider online retail in commencement of business. It was on December 05, 2019 when online retail was also included vide Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2019.

‘State-of-art’ and ‘cutting-edge’ technology

A Committee under the Chairmanship of Secretary, DPIIT, with representatives from NITI Aayog, concerned Administrative Ministry and independent technical expert(s) on the subject shall examine the claim of applicants on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology where local sourcing is not possible and give recommendations for such relaxation. Exemption for entities having products in the nature of ‘state-of-art’ and ‘cutting-edge’ technology is a major and much needed relaxation. At the same time, a clarification is required for these terms. Till now, SBRT entities will have to explain how local sourcing is not possible for their products due to ‘state-of-art’ and ‘cutting-edge’ technology. 

Brick and mortar stores

A SBRT entity operating through brick and mortar stores, can also undertake retail trading through e-commerce. However, retail trading through e-commerce can also be undertaken prior to opening of brick and mortar stores, subject to the condition that the entity opens brick and mortar stores within two years from date of start of online retail. Opening up of physical stores is considered as another hurdle for multinational retailers who prefer going digital and cover a large chunk of consumers. Therefore, a carve out of commencing brick and mortar stores is limiting the FDI upto 51% or entering into franchising or distribution agreements with Indian companies.

Conclusion

Single Brand Retail Outlets often come with premium/luxury products which do not seem to be a competition for local retailers. However, to some extent these SBRT entities may affect the sales of small domestic retailers as seen in the case of Oppo Electronics (Kerala) Pvt. vs State Of Kerala dated 3 October, 2017 wherein the grievance of mobile phone retailers was only that opening up of such outlets will adversely affect their sales, especially since they had been promoting the petitioner’s model in competition with other mobile brands. 

For the multinational brands also, sourcing norms, opening up of brick and mortar stores and ambiguity of sub-brands concept serves as a reason to stick to franchise or distribution model and not exceed FDI beyond 51%.