Legal Challenges in Retail Sector: Foreign Direct Investment

The recent amendments made by Government of India according to which about from 51% foreign direct investments (FDI) in single brand retail changed to 100% FDI in single brand retail trading through automatic route.

So the question arises exactly what is this change and how does it affect the retail sector?

Before this amendment was made the foreign companies could own up to 49% in a single branded retail chain but had to intimate and take permission from the Department of Industrial Policy and Promotion (DIPP) for the approval to acquire the rest of 51%, but this new policy change has given these companies to fully own their Indian operations without asking DIPP.

Earlier, foreign players could about 49 per cent in a local single-brand retail chain but had to take approval from the government body DIPP for a go-ahead to acquire the remaining 51 per cent. Now they can fully own their Indian operations without applying for DIPP approval.

But these new concessions are limited to single branded retail chains as of now. FDI in the multi branded segment trading in India is still capped up to 51%.

To clarify on the single branded retail chain it can sell and operate all its products under only one brand label across all its retail outlets like Levi’s, Starbucks or IKEA for instance. A perfect example to explain the concept of multi branded retail store is Big Bazar, D-Mart or Metro who sweep multi brands under one retail store roof.

There are still a few complications and strings attached though to clarify and differentiate between these two like if an MNC operates a single branded retail chain the product must be sold under the same brand name globally as well. In addition the MNC must also source about 30% of its purchases like raw materials or stock for the business from India itself. However this particular part of the rule has also undergone some changes allowing the MNC to set off any local sourcing for its global business against the stipulated quota of 30%.

The question of why this rule change was amended can be because of the sole reason that while the foreign investors may look of this a vital opportunity to capture the thought of selling to a population close to 1.3 billion, the traditional retail industry in India is still dominated by the mom and pop outlets as terminology referred by market analysts. Those who opposed to FDI worry that opening the door to the giant gorillas will drive away the consumers from these medium and small scale retail outlets to the giant departmental stores and it doesn’t stop at that they can lure away their suppliers too like what Amazon did to Toys ‘R’ US or what currently Walmart is doing to local retailers in Indian Market.

This new proposal acts as a compromise temporary solution which tries to protect such outlets while acting as leverage for government to test the water as to how much the presence of the MNC outlets affect the Indian Retailer. Granted that many of the global single brand retailers focus on only premium or luxury goods it’s still a hope that it won’t be a major impact on traditional home retail market.

But there is still a bit of confusion for one, any MNC can sell both premium as well as mass market products under single brand stores. Two all the retailers in the market are essentially looking to compete for a share in the same consumer’s wallet the spending on the premium products can come at a cost to the consumer for instance one simple trip to Starbucks equals nearly a monthly bill of your refreshments at your local road side tea/coffee stalls.

The newer entrants into Indian Market like Tesco, Wal-Mart and Metro in the organized retail sector in India indirectly in the initial days though franchisee agreements with cash and carry whole sale trading is a concern for local retail players. Many Indian companies such as Reliance Industries, Pantaloons and Bharti telecom are facing a stiff competition from these global giants. This domination paved way for the discounting practice which is bringing down the profit margin of the Indian retailers.