Foreign retailers gain limited access to Indian markets – the fine print

The Indian Government has recently liberalized the conditions relating to FDI into the MBR sector in India. Accordingly, FDI of up to 51% in the MBR segment with the prior permission of the Foreign Investment Promotion Board (FIPB) now stands approved. While the Cabinet had earlier taken up and approved this proposal in November 2011, its implementation was kept in abeyance until a broader consensus on the subject could be evolved.

Pursuant to the MBR Policy, FDI in the MBR sector is now permitted up to the specified limits and subject to the following conditions:

1, MBR outlets to be set up only in those states which have agreed (or may agree in future) to implement the MBR Policy. Such outlets shall be established in compliance with the applicable state laws, including the Shops and Establishments Act, zoning regulations, etc.

2, Thus far, the states of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana, Manipur and Jammu and Kashmir and the Union Territory of Daman & Diu and Dadra and Nagar Haveli have expressed support for the MBR policy. At the same time, Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have expressed reservations against such a move.

3, MBR outlets shall be set up only in cities (i) with a population of more than one million as per the recently concluded 2011 Census; and (ii) within an area of 10 kms around the municipal/urban agglomeration limits of such cities. According to the 201 Census there are 51 cities with a population of more than one million inhabitants.

4, Additionally, locations for MBR outlets will be restricted to conforming areas as per the master/zonal plans of the concerned cities and provision for requisite facilities such as transport connectivity and parking shall be made.

5, States which do not have cities that conform to the minimum population requirement may, however, permit MBR outlets to be set up in any city covering an area of 10 kms around its municipal/urban agglomeration limits.

6, There shall be a minimum investment requirement of USD 100 million of which at least 50% shall be invested in ‘back-end infrastructure’ for purposes like facilitating manufacturing, packaging, distribution, creating storage and warehousing facilities, design improvement, quality control, logistics, agriculture market produce infrastructure, etc.

7, Investments for the development of back-end infrastructure is required to be completed within three years of the foreign capital infusion and expenditure on land cost and rentals, if any, shall not be counted for the purposes of backend infrastructure.

8, A minimum of 30% of the products to be retailed in the MBR outlets should be sourced from Indian micro and small businesses having a capital investment of not more than USD 1 million. This
investment refers to the value at the time of installation, without providing for depreciation.

9, Fresh agricultural produce including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products may be unbranded.

It is expected that the requirement to invest at least 50% of the total quantum of foreign investment into back-end infrastructure would provide a much needed boost to the existing infrastructure facilities in the country and improve the supply chain efficiencies in the agricultural sector as well.

The Indian Government also seeks to integrate the smaller manufacturers with MBR outlets through the requirement to source at least 30% of the retailed products from smaller industries. The above conditions/safeguards have been brought in by the Government pursuant to the discussions with the various stakeholders and to evolve much needed consensus on the matter. To date, MBR outlets have only been permitted in larger Indian cities in order to protect the smaller retail trading model prevalent in other areas.

Foreign retailers need to be careful about the fine print and adhere to it in letter and spirit. It is not uncommon for foreign investors to seek clarifications from the FIPB where serious doubts about policy implementation emerge. The MBR sector continues to be politically sensitive with several leading political parties staunchly opposed to it. Accordingly, it is important more than ever to examine the regulations in minute detail to prevent a recurrence of the current regulatory investigation into Walmart’s operations, which perhaps could have been avoided by having more transparency into the operations.