Continuing a trend of liberalizing foreign direct investment (“FDI”) in its retail sector, the Indian government announced in September further changes to its policies designed to permit FDI in multi-brand retail trading of up to 51 percent, subject to certain significant conditions, as well as further relaxation of its policies on FDI in single-brand retail trading. While these amendments were met with mixed reactions from commentators and business leaders both within India and globally, it appears that major retail institutions, such as Walmart, will move quickly to take advantage of the new policy permitting foreign investment in multi-brand retail trading.
We expect U.S. retailers to closely examine the relaxed FDI policy and to utilize this regulatory shift as an opportunity to enter the vast Indian retail marketplace. Considering even a limited sample of recent Indian demographic and market statistics, it is not difficult to see the potential opportunities available to U.S. retailers that are able to successfully navigate India’s FDI policies.
However, in taking advantage of the new policy governing FDI in the Indian retail sector, U.S. companies must carefully balance the structural and other conditions placed on their FDI by the new policy while not losing sight of key U.S. regulatory considerations which continue to be of paramount importance in overseas joint venture transactions, such as compliance with the Foreign Corrupt Practices Act (“FCPA”).
On September 14, 2012, the Government of India announced its revised policy on FDI in the Indian retail sector. Following this announcement, on September 20, 2012, India’s Department of Industrial Policy & Promotion (the “DIPP”), of the Ministry of Commerce & Industry, issued (i) Press Note No. 4 of 2012 relating to FDI in single-brand retail trading and (ii) Press Note No. 5 of 2012 relating to multi-brand retail trading (together, the “Press Notes”). The Press Notes set out the amendments to India’s Consolidated FDI Policy dated April 10, 2012 (the “FDI Amendments”).
Previously, India prohibited FDI in multi-brand retail trading at any ownership level and FDI was only permitted up to 51 percent in single-brand retail trading, despite earlier attempts at liberalization. In November 2011, the Cabinet of India, the decision-making body of the Indian government, proposed an increase in the FDI limit for single-brand retail trading to 100 percent and allowing 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 Press Note No. 1 dated January 10, 2012, the DIPP notified the Cabinet’s decision to permit FDI up to 100 percent in single-brand retail trading, subject to the prior approval of the Foreign Investment Promotion Board (“FIPB”) of the Indian government and certain other conditions. However, following the January 2012 changes, FDI in multi-brand retail trading continued to be prohibited.
As a result of the FDI Amendments, effective September 20, 2012, FDI up to 51 percent is permitted in multi-brand retail trading, with the prior approval of the FIPB and subject to the following conditions:
Applications for FDI in multi-brand retail trading will be processed by the DIPP, which must determine whether the proposed investment satisfies these guidelines, before being considered by the FIPB for final approval.
The FDI policy on multi-brand retail trading creates an enabling framework, and the decision to implement the policy is left to individual state governments/union territories. The policy had been agreed to by several states/union territories, including, Delhi, Maharashtra, Andhra Pradesh, Haryana, Rajasthan, Uttarakhand, Assam, Manipur, Daman & Diu and Dadra and Nagar Haveli. Certain other states, such as Kerala and West Bengal, have expressed reservations regarding the opening up of the Indian multi-brand retail market to foreign investment, and at this time it is uncertain whether such states will implement the policy.
The January 2012 policy changes permitted up to 100 percent FDI in single-brand retail trading companies, subject to the following conditions:
Reservations had been expressed with respect to certain of these conditions, including with respect to brand ownership and the 30 percent sourcing requirement, since it was unclear how strictly the Indian government would interpret such conditions. Through the FDI Amendments, the Indian government made important changes to the January 2012 policy in relation to FDI in single-brand retail trading.
While the FDI Amendments present new and exciting opportunities for U.S. companies to enter the Indian retail marketplace, they should cause companies to carefully consider their FCPA risk profile and compliance structure prior to taking action. U.S. companies experienced with overseas transactions are not strangers to the FCPA, which has come to be known generally as the U.S. anti-bribery law that prohibits payments to foreign government officials to gain business or an improper advantage. However, some of the basic provisions of the FDI Amendments, such as the foreign/domestic joint venture structure mandated for multi-brand retail and the back-end infrastructure investment and small industry procurement conditions, present areas for heightened FCPA compliance risk.
U.S. companies should consider basic precautions to mitigate their FCPA compliance risks associated with proposed Indian retail investments following the FDI Amendments, including:
As evidenced by the FDI Amendments, it is clear that the Indian government intends to balance access to India’s vast retail marketplace with promoting local industries and creating infrastructure within the country. As a result, the FDI Amendments present several areas that will require careful examination by U.S. companies seeking to take advantage of the Indian marketplace, including potential FCPA compliance risks. Notwithstanding these challenges, and the conditions under the FDI policy (compliance with certain of which could be onerous), it is expected that U.S. retailers will seek to establish a presence in India.
Walmart’s September 14, 2012 statement:
On September 14, 2012, Walmart issued the following reaction to India’s FDI announcement: “We believe that allowing 51 percent foreign direct investment in multi-brand retail is an important first step for the Government of India to further open this sector. We are grateful that the Government has realized and appreciated the value that we will bring to strengthen the Indian economy. This policy change will allow us to connect directly with the consumer and save them money. By being “stores of the community,” we will also help them live better. We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation. Through these, and several other initiatives, we hope to make a positive impact on the lives of the people of India.” http://news.walmart.com/news-archive/2012/09/14/walmart-statement-regarding-india-foreign-direct-investment
Although the Indian government has not expressly deﬁned the term “single brand,” it can be inferred from the press note and government 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 iPhones under the “Apple” brand. However if, following the receipt of an approval from the Indian government, any additional products or product categories are proposed to be sold under the same brand, a fresh approval from the Indian government will be required. 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 Indian government in respect of the goods to be sold under each brand.
 Government of India, Ministry of Home Affairs Office of the Registrar General & Census Commissioner, India, http://www.censusindia.gov.in/2011-prov-results/indiaatglance.html.
 Press Release, India’s Single-Brand Liberalization will Promote Investment, Create Jobs, U.S.-India Business Council, January 11, 2012.
 The Indian Kaleidoscope, Emerging Trends in Retail, Federation of Indian Chambers of Commerce and Industry and PricewaterhouseCoopers, September 2012.
 CRISIL Opinion, Indian retail: Short-term blips but long term prospects bright, CRISIL Research, a division of CRISIL Limited, May 2012.
 Media Note, Foreign Direct Investment in Retail to give a boost to Job creation. Has the potential to turn retail sector into largest job creator by 2020, Indian Staffing Federation, September 18, 2012.
Rahul Patel is a Partner in King & Spalding's Corporate Group. Mr. Patel's practice focuses on mergers and acquisitions, joint ventures, strategic corporate transactions, and general corporate work. A significant portion of Mr. Patel's practice focuses on cross-border transactions, particularly transactions involving Indian companies. Matthew Bozzelli is a counsel in King & Spalding's Corporate Group. Mr. Bozzelli advises public company clients on a variety of SEC reporting, corporate governance and disclosure matters and he is a counselor to public company boards. Mr. Bozzelli represents issuers and underwriters in a range of corporate finance transactions and securities matters including public and private securities offerings and also represents parties in both public and private mergers and acquisitions. Rajat Sethi is a Partner and Rachael Israel is an Associate in the New Delhi office of S&R Associates. Mr. Sethi’s practice covers mergers and acquisitions, foreign investment, joint ventures, private equity, venture capital, corporate governance, regulation and distressed assets matters. Ms. Israel’s practice covers mergers and acquisitions, joint ventures, commercial contracts and general corporate matters.