Pursuant to Press Note 1 of 2012, the Department of Industrial Policy and Promotion has liberalised the FDI policy on single brand retail trading, effective from 10 January 2012.
The earlier FDI policy on single brand retail trading permitted FDI up to 51% through the government approval route, which has now been changed to permit 100% FDI, once again under the government approval route.
The amended policy now also stipulates that for proposals involving FDI beyond 51%, the investee company will now be obligated to source at least 30% of the value of products sold, from Indian “small industries/village and cottage industries, artisans and craftsmen”. For this purpose, “small industries” has been defined as industries which have a total investment in plant and machinery not exceeding US$ 1 million. This valuation refers to the value at the time of installation of the plant and machinery, without reckoning subsequent depreciation. If at any time, this valuation of investment in plant and machinery exceeds the limit of US$ 1 million, the industry will not qualify as a “small industry” for this purpose.
The investee company must self-certify compliance with the additional condition which must be subsequently checked by statutory auditors, from the duly certified accounts, which the company will be required to maintain.
This latest policy change in single brand retail trading may have little impact on retailers such as foreign luxury brands to either enter the Indian market or enhance their equity stake in existing Indian operations beyond 51% since the requirement to source at least 30% of the value of products from Indian small industries or cottage industries will not be aligned with their mode of operations or product positioning. However, retailers without such considerations who have so far been reluctant to partner with Indian joint venture partners (such as, reportedly, Starbucks and Ikea), are likely to find the amended policy attractive.