Previously, for investment in Single Brand Retail, foreign investment was allowed up to 49% through the automatic route and up to 100% through the Government approval route along with heavy restrictions.
The change in law removing the limit for Foreign Direct Investment (FDI) in this sector is estimated to ease the process for foreign brands to enter India due to the removal of the requirement of federal approvals. Along with the requirement for federal approvals, there was also a requirement of mandatory sourcing of 30% of the value of goods purchased to be from India.
The proposed change to the FDI policy would allow foreign entities / brands to set off the mandatory sourcing requirement against its incremental sourcing of goods from India for “global operations”. This will be applicable for the initial 5 years (starting April 1 of every year) of opening the first store in India preferably from Micro, Small and Medium Enterprises (MSMEs), village and cottage industries, artisans and craftsmen, in all sectors. The incremental sourcing for the purpose of set-off shall be equal to the annual increase in the value of goods sourced from India for global operations (in INR terms), either directly or through their group companies.
If the value of incremental souring is equivalent to the value of mandatory sourcing, then effectively, there would be zero local sourcing requirements for the foreign investor’s Indian entity during the first 5 years. However, after completion of the 5 year period, the single brand retail entity would be required to meet the mandatory 30% local sourcing norms directly towards its India operations on an annual basis.
Relaxing of the FDI norms is expected to bring in a welcome inflow of foreign capital and also provide impetus for the growth of the retail industry. The ease of process without any federal approvals and regulatory scrutiny should allow foreign companies easier entry into the Indian market. They would also have the option to set-off against incremental sourcing. The Indian Government hopes to attract large retail groups to the Indian market.
Big retail companies such as Tesla, Uniqlo, Ikea and Apple had already displayed interest in entering the Indian market. The change in law should now allow these companies to enter India in an efficient and transparent manner.
Srijoy Das, IDI agency & distribution country expert for India
