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

In an earlier
, 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
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

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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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