[Dhanush Dinesh is a III Year, B.A. LL.B (Hons.) student at the National Law School of India University, Bangalore]
Introduction
Press Note 1 of 2018, amending the 2018 Indian FDI Policy, has been the cause for much celebration amongst foreign-owned entities engaging in single-brand retail trading (“SBRT”). With this press note, the entry route for foreign investment in SBRT has been simplified, allowing up to 100% foreign direct investment (“FDI”) through the automatic route, removing the need for government approval. Despite these steps towards liberalisation, however, the FDI Policy remains silent on the very definition of a “single brand”, with no official clarification issued either by the Government or the Reserve Bank of India (“RBI”) that administers the policy, and that too since its introduction into the FDI Policy since 2006. This post shall thus examine the status quo with respect to the definition of a “single brand” under the Policy, outline the consequences of such ambiguity, and finally arrive at possible solutions to remedy the situation.
Overview
The current Indian FDI Policy, as amended by Press Note 1 of 2018, provides for certain conditions that must be complied with by entities having foreign investment that seek to engage in SBRT in India. These conditions, among others, stipulate that the products must be sold under a ‘single brand’, with such brand being the same as is sold internationally, and that only those products that are branded at the time of manufacturing shall be covered. This is the extent of the Policy’s conditions on the ‘single brand’ under which products are sold in SBRT. Neither the definitions section within the Policy, nor the Foreign Exchange Management Act, 1999, under which the FDI Policy is notified, define the term ‘single brand’, or even ‘brand’.
Sub-Brand or Multiple Brands?
The ambiguity surrounding the term “single brand”, particularly whether sub-brands constitute a single brand, has been an issue for multiple foreign retailers. In 2013, British retailer Marks & Spencer ran into regulatory issues with the Department of Economic Affairs (“DEA”) over its sale of “sub-brands”, such as M&S Woman, Autograph, etc. under the M&S parent brand. In that case, while the DEA had sent a reference to the Department of Industrial Policy and Promotion (“DIPP”) for issuing a clarification, no action was taken, and M&S was implicitly allowed to continue retailing their sub-brands under the broad M&S brand. Various other retailers have since been following the same path, with brands like Decathlon trading in multiple sub-brands, such as Quechua, Kalenji, Domyos, etc.
Upon a perusal of the list of SBRT proposals that were approved by the DIPP till 2016, it is seen that foreign investors have only submitted the names of the parent brand to the Government (such as Decathlon, Nokia, Zara, etc.). The names of the sub-brands do not find mention within this list, indicating that the investor-entities do not consider these brands to be distinct. This has been the case even where sub-brands may often be retailing entirely distinct products. This is possibly due to the sub-brands not having a distinct presence in the market outside of their association with the parent brand. Decathlon’s multiple sub-brands are a prime example of this. Its Kalenji sub-brand is marketed separately and independently of other sub-brands, and is targeted at Decathlon customers interested in swimming gear. On the other hand, the Quechua sub-brand focuses on hiking and mountaineering gear, while Domyos is targeted at general fitness and gym enthusiasts.
The thread that binds these sub-brands together is the parent brand which is marketed to the customer and is associated with each of the sub-brands. Thus, while a company like Decathlon could potentially open separate individual outlets for each of its sub-brands’ products, I submit that it must still be construed as indulging in single brand retail trading. The reason for this is that none of the sub-brands enjoy a distinct identity outside of the parent brand, with all revenue flow ultimately accruing to the parent brand company.
Complications may arise when a single parent company owns and operates multiple subsidiaries. This was the case with Inditex, an Italian holding company that owns both Zara as well as Massimo Dutti – two competing brands in the fashion retail sector. Inditex’s attempts to retail the latter in 2013 after having obtained FDI approval for the Zara brand was not permitted by the DIPP as it was deemed to be a separate brand. As a result, Inditex had to submit a fresh proposal for undertaking retailing of the Massimo Dutti brand, despite common ownership of the brands and similarity of the products that were being retailed. Thus, common ownership of the brands in terms of intellectual property rights or revenue channels does not appear to be the sole determinant in deciding whether brands are sub-brands or distinct.
Keeping the cases of Decathlon and Inditex in mind, it is submitted that the unstated factor in determining whether an entity is retailing two separate brands or two sub-brands under a parent brand is the level of day-to-day control that the parent brand exerts over the functioning of the (sub)-brands. In the case of Decathlon, the parent company Oxylane controls the manufacturing, branding, and other marketing of all the sub-brands, from Kalenji to Domyos. Inditex, however, despite being the common owner of Zara and Massimo Dutti, does not appear to exert such a level of control, with each subsidiary company responsible for its own marketing and branding.
This test of “control” may further be determined through an examination of whether the sub-brands indicate the name of the parent brand on the packaging. Zara and Massimo Dutti individually operate multiple sub-brands, each having a clear indication of the parent brand. This is indicated by Zara in the case of Zara Women, Zara Home, etc. and Massimo Dutti in the case of its fragrances, accessories, and men’s and women’s wear sub-brands. On each of Decathlon’s sub-brands’ products as well, the Decathlon parent brand finds a mention, making it clear to the end-customer that they are purchasing a Decathlon product. Thus, I submit that an examination of the parent brand’s presence in the marketing and advertising of an individual sub-brand can provide a way to distinguish between sister brands that are owned by a common entity (and thus, multiple brands), and sub-brands that are marketed under a single brand (thus, forming a single brand).
Consequences of Ambiguity
Given the above complexities that may arise in the classification of brands and sub-brands, the prevailing ambiguity over whether or not these sub-brands form a “single brand” is a cause for concern. This is particularly so in light of the vast differences that exist in the conditions imposed on SBRT and multi-brand retain trading (“MBRT”). While SBRT’s treatment is relatively liberal, those engaging in MBRT are far more strictly regulated, due to the perceived negative effects that traders such as Walmart or Tesco may have on small-scale grocery stores. A legal vacuum with respect to the interpretation of the term “single-brand” allows the Government to arbitrarily initiate action against and bar foreign retailers whom they deem to be trading in multiple brands, when in fact, they may merely be engaged in retailing of sub-brands. This scope for arbitrariness creates an unpredictable business environment for foreign investors, which frustrates the ease of doing business in India. Further, given the fact that the FDI Policy is often a key election issue for parties seeking to secure trader and retailer associations’ votes, the legal regime for foreign investment in the country can also potentially be held hostage to political considerations.
The submitted solution to filling this regulatory gap is the issuance of a notification by the DIPP or other relevant authority, stating that an entity may market sub-brands under the SBRT category. A formal notification, which may incorporate the aforementioned test of control and parent brand presence, allows the DIPP to set the regulatory landscape and the conditions under which retailers may market as sub-brands within the SBRT model. This provides some much-needed clarity to foreign retailers and enhances the ease of doing business in India.
Conclusion
While the liberalisation of the SBRT sector in the FDI Policy is commendable, this may not have the desired effect of stimulating growth and foreign investment in such sector if basic definitions continue to remain ambiguous and subject to change. The Government must thus clear the air about what constitutes a single brand in order to give full effect to the provisions of the FDI Policy.
– Dhanush Dinesh