Govt gets ball rolling on FDI in retail

The Union government has initiated a move to open the country's multi-brand retail segment to foreign investment, without revealing its mind on details such as how much investment will be permitted.

In a 21-page discussion paper, it has sought comments from stakeholders on a dozen issues, ranging from allowing retail chains with foreign capital to open stores in select cities to government approval for opening each store, mandatory hiring of rural population and sourcing from small and medium enterprises.

Part of the calibrated opening-up plan touched upon by the paper, released by the Department of Industrial Policy and Promotion on its website, is the option of initially allowing foreign investment in cities with a population of at least one million.

Feedback has been sought on steps such as a special legal and regulatory framework for protecting the interests of small retailers.

This, the discussion paper suggested, can be left to the discretion of states, too.

In addition, it has touched upon the issue of how to protect the public distribution system after the entry of large foreign players in the multi-brand retail arena.

One option is to retain the right of first procurement for a part of the season or put a system of levy from private trades in case buffer stocks fell below a certain level.

"We have tried to analyse the impact of organised retail and unorganised retail so that the government can take a view on the foreign direct investment aspect in the sector. Our view is that, if at all foreign direct investment comes, it must fill the gaps that exist in the system in terms of our weak back-end infrastructure.

"We should leverage our FDI policy in retail to create our back-end infrastructure, which is missing in the country at present. This will not only lead to decrease in the wastage of fruits and vegetables; this will also uplift the position of SMEs (small and medium enterprises) in the value chain," DIPP secretary R P Singh told Business Standard.

"In this discussion paper, we have categorically not suggested any FDI ceiling or cap for the sector. This call can be taken later on by the government," Singh added.

"If the policy process is strategically done, it can create a synergic relationship between the small retailer and the larger retail chains.

India can develop its own model, based on its own realities towards modernisation of this sector in a calibrated manner," said Rajan Bharti Mittal, president of the Federation of Indian Chambers of Commerce and Industry, who is also vice-chairman and managing director of Bharti Enterprises.

Bharti and Walmart are partners in a wholesale cash-and-carry venture.

The discussion paper has cited the oft-repeated concerns over the entry of foreign capital into the multi-brand retail format, including the impact on jobs (the sector is the second largest employment-generator), displacement of unorganised retailers and the impact on nascent domestic retail chains.

It has also talked about the limitations of the present set up, such as the lack of investment in logistics resulting in large-scale loss of fruits and vegetables.

The debate over the adverse impact of the entry of foreign retailers has stopped the government for several years from opening the sector.

Foreign companies are allowed to hold up to 51 per cent stake in retail chains selling just one brand, referred to as single-brand retailing.

In the case of the wholesale cash-and-carry segment, foreign investors are allowed to set up wholly-owned ventures. Global players such as Walmart and Metro have entered the Indian market through this avenue, while a host of companies such as Marks & Spencer and Hamleys have used the single-brand retail format.

There is another set of players, including the likes of Beverly Hills Polo Club and Ladybird, that have franchise arrangements with Indian companies which sell their ware.

"It will not be unconditional opening… The proposed conditions will help soften opposition to opening up," said Prashant Khatore, Partner at Ernst & Young.

The move to allow foreign players in the multi-brand retail format is also going to help Indian companies such as the Kishore Biyani-promoted Future Group to bring in a foreign partner.

Biyani was in talks to sell stake to private equity investors for funding Future's expansion.

Similarly, TPG is in talks with Vishal Retail to acquire stake in a wholesale venture as part of the latter's debt recast package.

Related concerns

The discussion paper floated today has also touched upon the issue of avoiding a situation where financial investors run the Indian entities.

"Since retailing requires long-term capital and returns are difficult to come by, capping FDI is not correct.

Retailing should be opened up without any cap… It is necessary to encourage genuine players in the sector. You cannot allow punters who will invest today and sell out tomorrow," said B S Nagesh, vice chairman of Shoppers Stop and Hypercity.

"Another important thing which the government should address clearly is how much investment foreign institutional investors can make in multi-brand retailing," added Aditya Birla Retail's CEO, Thomas Varghese.

The underlying tone of the discussion paper is to allow FDI in a way that the back-end chain and logistics are strengthened. It has suggested the norms be such that it mandates, say, 50 per cent investment going towards the creation of infrastructure, logistics and agro-processing facilities.

Similarly, it has suggested the rules could mandate that at least half the jobs be reserved for the rural youth.

"This is a positive move but jobs should be specifically kept for the low-income group, instead of reserving it for rural youth as they can be utilised at the farming end," said Saloni Nangia, vice-president at Technopak.