The government of India has revised its policy regarding foreign direct investment (“FDI”) in Indian companies engaged in retail trade. Effective as of January 10, 2012, foreign investors will now be permitted, subject to certain conditions, to own up to 100 percent of single-brand retail trading companies in India.
Prior to 2006, the government of India prohibited FDI in both single-brand and multi-brand retail trading.
In February 2006, the Indian government decided to open up India’s retail sector to FDI and, subject to certain conditions, permitted FDI up to 51 percent in single-brand retail trading companies. This policy was made effective by a press note dated February 10, 2006, issued by the Department of Industrial Policy and Promotion (“DIPP”) of the government of India.
Over the years, there have been recommendations to further liberalize the Indian government’s policy regarding FDI in retail trading, including to increase the permissible level of FDI in single-brand retail operations and to open up the multi-brand retail sector to FDI. These moves were heralded by several multi-brand retailers (such as Walmart) because the liberalization would present multi-brand retailers with a prime opportunity to enter India’s approximately US$450 billion retail sector. Such moves were, however, resisted by various stakeholders and political parties in India.
In November 2011, the Cabinet of India, the decision-making body of the Indian government, decided to permit up to 100 percent FDI in single-brand retail trading and up to 51 percent FDI in multi-brand retail trading. Unfortunately for foreign retailers, the Cabinet’s November 2011 decision produced a considerable political backlash in India. Consequently, the Indian government reversed course and indefinitely suspended plans to reform the retail sector.
Recognizing that the political backlash was focused on the multi-brand aspect of the proposed retail-sector reform, by a press note dated January 10, 2012, the DIPP notified the Cabinet’s decision to permit FDI up to 100 percent in the single-brand retail sector, subject to the prior approval of the Foreign Investment Promotion Board (“FIPB”) of the Indian government and certain other conditions. FDI in multi-brand retail trading continues to be prohibited.
According to the DIPP, the rationale for permitting FDI in single-brand retail trading was “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.” Underlying this stated rationale is the fact that, globally, single-brand retail follows a 100 percent-ownership business model, and major global retailers have been reluctant to establish their presence in India because of the restrictive policy environment. This is evidenced by the fact that in the last five years, FDI of only US$44.45 million (constituting approximately 0.03 percent of the total FDI inflows) was received in the single-brand retail trading sector in India. Further, while a 51-percent-ownership cap enables a foreign investor to pass “ordinary resolutions” (i.e., matters that are required to be approved by shareholders representing more than 50 percent of the share capital of a company) but not “special resolutions” that require at least a 75 percent majority, enhancing the cap to 100 percent provides the foreign investor the ability to have full ownership and control of a company.
Effective as of January 10, 2012, up to 100 percent FDI in single-brand retail trading companies is permitted subject to the following conditions:
1. Products to be sold must be of a “single-brand” only.
2. Products must be sold under the same brand internationally (i.e., products should be sold under the same brand in one or more countries other than India).
3. Single-brand retail trading would cover only products that are branded during the manufacturing process.
4. The foreign investor must be the owner of the brand.
5. In respect of proposals involving FDI beyond 51 percent, it is mandatory for at least 30 percent of the value of products sold to have been sourced from (a) Indian small industries, (b) Indian village and cottage industries, and/or (c) Indian artisans and craftsmen.
We expect that the issues identified above will be resolved over a period of time through policy clarifications or clarifications provided by the Indian government in the context of specific factual situations.
A foreign investor must apply to the Secretariat for Industrial Assistance of the DIPP in order to seek the approval of the Indian government. The application must specifically identify the product or product categories that are proposed to be sold under a single brand, and any addition to the product or product categories to be sold under the single brand would require a fresh approval of the Indian government. Applications will be processed by the DIPP, which will determine whether the products proposed to be sold satisfy the aforementioned conditions. Thereafter, the application will be considered by the FIPB for final government approval.
The liberalization of FDI in India’s single-brand retail sector should benefit foreign retailers as well as Indian consumers. The conditions imposed by the Indian government on such FDI should also provide a stimulus to small industry in India. According to the U.S.-India Business Council (“USIBC”), India’s single-brand retail market is valued at approximately US$7 billion and is expected to reach a value of US$20-25 billion over the next five years. Furthermore, there are approximately 300 million “middle-class” individuals with a purchasing power parity of US$30,000 per year according to the USIBC’s data. This otherwise attractive market should now be significantly more attractive for foreign single-brand retailers, as they will no longer be forced to share profits and control with India-based companies as a condition to enter the market.
Although the Indian government has not expressly defined the term “single brand,” it can be inferred from the DIPP’s press note and the government’s enforcement history that foreign companies are permitted, through their ownership in Indian companies, to sell goods in India that are sold internationally under one brand name (e.g., Reebok, Nike and Adidas). The marketing of different products under a single “brand” is also permitted. For example, Apple would be permitted to own an Indian company that would market iPads, iPods, and iMacs under the “Apple” brand. However, a company that has multiple product lines that it markets under distinct brands (e.g., a company that has a different brand for marketing each of fashion goods, wines and spirits, and jewelry) would require separate approvals from the FIPB in respect of the goods to be sold in India under each brand.
While certain conditions under the liberalized policy may be onerous (e.g., sourcing of at least 30 percent of the value of the products sold from small industries), foreign retailers interested in entering India’s growing single-brand retail market should begin evaluating their investment strategies.
Rahul Patel is a Partner in King & Spalding’s Corporate Practice Group. He is also a member of the firm’s Hiring Committee. Mr. Patel’s practice focuses on mergers and acquisitions, strategic corporate transactions, and general corporate work. Mr. Patel regularly represents leading companies (including General Electric Company, Mahindra & Mahindra, Avantha Group, The Home Depot, Inc., Roper Industries, Inc., LexisNexis, Cooper Industries, Inc., SunTrust Banks, Inc. and Oxford Industries, Inc.) in a broad variety of mergers and acquisitions, joint venture and other control and non-control transactions. A significant portion of Mr. Patel’s practice focuses on cross-border transactions, particularly transactions involving Indian companies. In addition, Mr. Patel has represented both underwriters and issuers in corporate finance transactions and general corporate and securities matters.
Rajat Sethi is a Partner at the New Delhi offices of S&R Associates, an Indian law firm. Mr. Sethi’s practice covers mergers and acquisitions, foreign investment, joint ventures, private equity, venture capital, corporate governance, regulation and distressed assets matters. Rajat has advised Fortune 500 corporations, Indian companies and private equity firms on acquisitions and sales, significant minority investments and exits, joint ventures, restructurings and shareholder disputes. He has been recognized as a leading individual by Chambers Asia: Asia’s Leading Lawyers for Business in 2010 and IFLR1000: The Guide to the World’s Leading Financial Law Firms.
Steven E. Bartz is an Associate in King & Spalding’s Atlanta office and a member of the Corporate Practice Group. Mr. Bartz’s practice focuses on mergers and acquisitions, strategic corporate transactions, including joint venture and other control and non-control transactions, corporate governance matters, and general corporate work. A significant portion of Mr. Bartz’s practice focuses on cross-border transactions, the preponderance of which involve Indian companies.
Rachael Israel is an Associate at the New Delhi offices of S&R Associates. Her practice covers mergers and acquisitions, joint ventures, commercial contracts, capital markets and general corporate matters.