FDI IN RETAIL LEGAL ASPECTS

By UMANG AGARWAL (12PGP111) APURVA BAJAJ (12PGP010) NIKESH KUMAR AGARWAL (12PGP030) VIKASH KUMAR PANDEY (12PGP051) KOMAL BILLU KUJUR (12PGP021)

Under the guidance of

Prof. Rashmi Aggarwal

Indian Institute Of Management Raipur

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ACKNOWLEDGEMENT
This report was the result of the thought process combined with hard work of not just us, but a group of other people. This thesis would be incomplete without expressing my heartfelt gratitude to them. We profoundly express our thanks to Prof. Rashmi Aggarwal for giving an opportunity to work on this paper. We would also like to express our sincere thanks to all our faculty members and non-teaching staff members of our department and our friends for their invaluable and their kind help throughout this work. Finally, we would like thank all those who were generous with us in providing time for our survey and giving their valuable inputs. We are very grateful to our colleagues in IIM Raipur who helped us during the process of formation of this report

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ABSTRACT
Researches indicate that Indias retail sector is worth US$ 428 billion and has a low organised retail penetration (ORP) of5 to 8%. Modern trade emerged during the 90s, primarily in the food and grocery sector, and is growing at a CAGR of 15to 20%.In this context, the present paper attempts to analyse the new policy announced by GOI on FDI in multi retail and single brand on 24th September 2012. The latest move of the Indian Governments policy decision to allow Foreign Direct Investment (FDI) of up to 51% in multi brand retail and upto100% in single brand retail. The paper analyses the legal aspects of the policies in implementation. It lists out the steps involved for an investor to invest in the retail sector. It also describes the policies of government in detail. Steps involved in investment in this sector have been described by taking an example of IKEA, a giant furniture company. The findings of the study point out that FDI in retail would undoubtedly enable India Inc. to integrate its economy with that of the global economy. Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but should be significantly encouraged.

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TABLE OF CONTENT
PURPOSE........................................................................................................................................1

INTRODUCTION..................................................................................................................2 RESEARCH METHODOLOGY................................................................................................3 FDI IN MULTI BRAND PRODUCT RETAIL TRADING..............................................................4 FDI IN SINGLE BRAND PRODUCT RETAIL TRADING.............................................................6 IKEA IN INDIA......................................................................................................................8 DISCUSSION................................................................................................................. LIMITATIONS OF THE STUDY............................................................................................... CRITICAL ANALYSIS............................................................................................... CONCLUSION............................................................................................................. REFERENCES..........................................................................................................

PURPOSE
FDI has been a very contentious issue. Recently when government of India approved 51% FDI in multi retail brand a lot of uproar happened, even on-going parliament sessions are facing its heat. If we see the dictionary of economics it says that FDI is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. With regard to FDI in multi brand retailing in India, prior to 21st September 2012 Government of India had not even defined the term Multi Brand, on September 21 government of India issued a notification through which it allowed 51% investment in multi retail brand. Our purpose of study here would to develop a clear understanding regarding Multi Retail branding what all is cover under Multi Retail Brand. What does the term FDI signifies? What is the legal aspect of FDI in multi retail Brand. When and how a company can invest and when will it be classified as FDI. What all policy initiatives has been taken in past. To understand all these aspect we will be referring to the notifications issued by Indian Government in this regard and major studies done and committee findings in this field.

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INTRODUCTION
Indian retail market one of the top five market in the world is estimated to be approx. US $ 450 billion market. Retail segment contributes approx. 15 % to GDP of the country. Indian retail which mainly constitutes of small kirana shops serves 1.2 billion people. In 2010, in urban cities larger format of the convenience stores started showing their presence which is hardly 4% of the total market. Employment in retail segment including logistics is hardly 3.3% of total population. Till 2011 FDI in single brand retail was 51% and no entry was allowed for FDI in multi brand. For the first time Indian government announced reforms in retail sector, both in single brand and multi brand in November 2011.There was a huge outcry both in favour and against the reforms. These reforms brought innovations in retail segment in both types and paved the way for world giants like Walmart, Tesco and others in multi brand and IKEA, NIKE and many others in Single brand in India. The Government of India on 24 November 2011 had considered liberalization of Foreign Direct Investment in Multi Brand Product Retail Trading (MBPRT) and Single Brand Product Retail Trading (SBPRT). However, the Government of India has on 14 September 2012 finally approved the keenly awaited policy measures of permitting Foreign Direct Investment in Multi Brand Product Retail Trading up to 51% and further simplified FDI in Single Brand Product Retail Trading where FDI is allowed up to 100%. The major rationale for relaxing FDI in SBPRT and allowing FDI in MBPRT is leveraging foreign investment in supply chain infrastructure, increase in supply chain efficiencies, Securing remunerative prices for farmers, reduction in impact on food inflation and creation of employment opportunities. This is, inter alia, aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. As per the new policy announcement of GOI on 14th September 2012, the suspension of GOI decision taken on 24th November 2011 permitting FDI in Multi Brand Product Retail Trading stands removed, however the conditions approved by the GOI in the press release dated 24th November 2011 is unchanged.

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RESEARCH METHODOLOGY

Qualitative research methodology has been adopted for the project as the focus is based on the effects and after effects of FDI. The quantitative analysis holds less importance with respect to the legal procedures and hence more focus has been laid on the analysis of the concept. Special attention has been give to the descriptive and comparative aspect of the research. Various books, journals, newspapers and magazines were referred to collate the data. As the scenario is very dynamic in nature with respect to FDI, recent findings through newspapers played a major role in giving the final verdict. A large part of information was extracted from the online available government pages. Once the evidence was collected, a thorough screening was done so as to find any loop holes in the system. If any were found, a deeper study was done to find out the solution and hence come out with a clear report.

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FDI IN MULTI BRAND PRODUCT RETAIL TRADING

The existing FDI Policy relating to Retail Trade for MBPRT prohibited FDI in MBPRT. However as per the 14th September 2012 announcement, FDI is permitted up to 51%, with Government Approval Route and subject to conditions. The existing FDI Policy relating to Retail Trade for SBPRT prior to September, 2012 permitted FDI up to 100%, with Government Approval and subject to conditions and additional conditions were specified for FDI in excess of 51%. However as per the 14th September 2012 announcement conditions were relaxed for all FDI in SBPRT and all FDI in SBPRT exceeding 51%. So if a company wants to build its roots in India via the MBPRT route, the following salient features of FDI in MBPRT must be kept in mind and comply with the following: 1. Minimum Investment: Minimum amount to be brought in by a Foreign Investor would be USD 100 million. 2. No FDI in MBPRT in NO GO States: Retail sales outlets may be set up only in those States which have agreed or agree in future to allow FDI in MBPRT under the FDI policy. Subject to FDI policy and location requirements, the respective State government to decide where a multi-brand retailer, with FDI, is permitted to establish its sales outlets within the State. 3. The establishment of retail sales outlets will be in compliance of applicable State laws, regulations such as the Shops and Establishments Act etc. 4. Location for retail Sales: Retail sales locations may be set up only in cities with a population of more than 1 million as per 2011 Census and may also cover an area of 10 km around the municipal or urban agglomeration limits of such cities. Accordingly, 53 Indian cities qualify for MBPRT with FDI. Retail sales locations may be set up in States and Union territories not having cities with population of more than 1 million as per 2011 Census in the cities of the choice of such State / Union territory preferably the largest city and may also cover an area of 10 km around the municipal or urban agglomeration limits of such cities.

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Retail locations will be restricted to conforming areas as per the Master / Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking. For the rest of India, current FDI policy regime will continue. As per the current FDI regime, 100% FDI is allowed up to wholesale cash and carry point from which franchise / small retailers are able to source products for sale to the public at large. 5. Mandatory Procurement: At least 30% of the procurement of manufactured / processed products shall be sourced from 'small industries' which have a total investment in plant & capital machinery not exceeding US $ 1 million. This can be done anywhere in the world and is not India specific. This valuation of USD 1 million refers to the value at the time of installation, without providing for depreciation. If at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. 6. Unbranded Products: Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded. 7. Agricultural Products: First right to procure agricultural products will lie with the Government. 8. Backend Infrastructure: At least 50% of total FDI brought in shall be invested in 'backend infrastructure' within 3 years of the induction of FDI. Back-End Infrastructure will include capital expenditure on all activities, excluding that on front-end units. For instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure. The foreign investor would be accountable for proper implementation of the condition. 9. Self-Certification by Companies: Companies to self-certify and ensure compliance of the stipulated conditions which could be cross checked as and when required. Foreign Investors may also be required to maintain accounts, duly certified by statutory auditors.

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10. Internal Trade Reforms: A high level group may be constituted by GOI to examine various issues concerning internal trade and make recommendations for internal trade reforms as Trade and Commerce within the State is the prerogative of the states under the Constitution of India. Now, if a foreign company wants to set up its shop in India via the SBPRT it has to remember the following existing and the modified conditions for SBPRT.

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FDI IN SINGLE BRAND PRODUCT RETAIL TRADING

As per existing conditions for SBPRT with any level of FDI, prior to September, 2012, FDI is SBPRT is permitted up to 100% on Government approval route which will require amongst others, compliance with the following: 1. Products to be sold in India should be: a. of a 'Single Brand' only b. sold under the same brand in one or more countries other than India c. branded during manufacturing process. 2. Foreign investor should be the owner of the brand. However after the policy changes made on September, 2012 the following changes and relaxations were made: A foreign investor no longer has to be the owner of the brand. Only 1 non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake SBPRT in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking SBPRT in respect of the specific brand for which approval is being sought. The onus for ensuring compliance with this condition shall rest with the Indian entity carrying out SBPRT in India. The investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing / franchise / sub-license agreement, specifically indicating compliance with the above condition. As per existing conditions, prior to September, 2012, for SBPRT with FDI exceeding 51% sourcing of at least 30% of the value of products sold had to be mandatorily done from Indian 'Small Industries/ Village and Cottage Industries, Artisans and Craftsmen'. These sources are those which have a total investment in plant & capital machinery not exceeding US $ 1 million. This can be done anywhere in the world and is not India specific. This valuation of USD 1 million refers to the value at the time of installation, without providing for depreciation. If at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. As per the policy changes of September, 2012 at least sourcing of 30%, of the value of goods purchased, will be done from India, preferably, from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where it is feasible. The quantum of domestic sourcing
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will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out SBPRT. FDI would be allowed only with prior approval of the Government. Application seeking permission of the Government for FDI in retail trade of Single Brand products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The application would specifically indicate the product/ product categories which are proposed to be sold under a Single Brand. Any addition to the product/ product categories to be sold under Single Brand would require a fresh approval of the Government. Applications would be processed in the Department of Industrial Policy & Promotion, to determine whether the products proposed to be sold satisfy the notified guidelines, before being considered by the FIPB for Government approval. Application for NRI investment, EOU and for FDI in retail trading (single branded product) cases should be submitted to SIA in DIPP There are three main approvals that are required in FDI Retail: 1. This is one of the primary steps where the company needs to get the approval of the Department of Industrial Policy and Promotion (DIPP) 2. The company then goes to the Foreign Investment Promotion Board (FIPB) 3. After this the Union cabinet would take up the matter if the investment quantum is over Rs. 10,000 crores.

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IKEA IN INDIA
The first step that IKEA took before entering into negotiating with the Indian government for FDI was that it appointed an European, Juvencio Maeztu, as the country manager. IKEA Retail India plans to invest 1.5 billion euro (Rs 10,500 crores) in India to set up 25 stores. The condition on mandatory 30% sourcing from small sector industries was seen as a hurdle by many foreign investors including IKEA. Recently, the government tweaked that condition, saying 30 percent must be sourced from India and preferably from small and medium sector units. The Foreign Investment Promotion Board (FIPB), which clears foreign investment proposals in the country, approved on IKEA's 1.5 billion Euros investment plan on conditions that the retailer would operate only in its core business. IKEA earlier had plans to serve food and drinks at its outlets but this has been forbidden. The also includes textile products and office supplies. The foreign investment promotion board FIDB disallowed it from selling food in its planned stores and offering financing to suppliers and customers. FIPB has ruled that the firm will not be able to able to open its famed cafes and food markets, famous for selling products such as meatballs and Lingonberry jams, in its stores because that will violate the FDI policy on food retailing. Besides not being able to sell food, the company will not be allowed to mail newsletters to customers and also will be prohibited from selling old furniture. Among the lines IKEA has been told by the Foreign Investment Promotion Board that it cannot sell are gift items, fabrics, books, toys, consumer electronics, and food, the newspaper reported. This has made the company to revise its plans as a large part of the income of the company was planned to come through these sources. If the board does not allow any kind of secondary business then IKEA the profits will be cut down drastically and the company may not be interested to invest in India.

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DISCUSSION
The government has opened up the retail sector to global investors through FDI in multi-brand retail with a ceiling of 51%, and 100% FDI in single-brand retail. It means that global retailers can set up mega deep-discount stores in the country through joint ventures with Indian firms, where the foreign partner can hold up 51% equity. The policy of single-brand retail is adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods in India. The policy of allowing 100% FDI in single brand retail is beneficial for both the foreign retailer and the Indian partner foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow. By partially opening this sector, the government is able to reduce the pressure from its trading partners in bilateral/ multilateral negotiations and can demonstrate Indias intentions in liberalising this sector in a phased manner. Permitting foreign investment in food-based retailing is ensuring adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. It also helps bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices inflation. Apart from this, by allowing FDI in retail trade, India is likely to significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should also encourage FDI in retail trade. Lastly, it is to be noted that the Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, which is appointed to look into the impact of BIG capital in the retail sector, has also come to conclusion that investment of big money (large corporate and FDI) in the retail sector will in the long run not harm interests of small, traditional, retailers. In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector is not only leading to a substantial surge in th e countrys GDP and overall economic development,
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but also helping in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them. Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the American Chamber of Commerce in India, The Retail Association of India (RAI) and Shopping Centres Association of India (a 44 member association of Indian multi-brand retailers and shopping malls) have favoured a phased approach toward liberalising FDI in multi-brand retailing, and most of them agreed with considering a cap of 49-51 per cent to start with. The international retail players such as Wal-Mart, Carrefour, Metro, IKEA, and TESCO shared the same view and insisted on a clear path towards 100 per cent opening up. Thus, as a matter of fact FDI in the buzzing Indian retail sector should be significantly encouraged. FDI in multi brand retail is bringing about Supply Chain Improvement, Investment in Technology, Manpower and Skill Development, Tourism Development, Greater Sourcing From India, Up gradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market size and Benefits to government through greater GDP, tax income and employment generation.

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LIMITATIONS OF THE STUDY

FDI policy reforms announced by the government are very recent (2 months) therefore the report has limitations of live examples Therefore the report has example of only Single Brand (IKEA). The report has also limitations in the legal aspects, it doesnt say anything about the various sections of Indian Penal Code involved in this policy nor does it mention the various forms the investor has to fill and get approval. All the policy and factual statements made in this report are subjected to the announcement of the policy by the GOI on 24th September 2012. Indias retail fundamentals Market Size CAGR Unorganised Retail Organised Retail Penetration Retail Density Contribution to GDP US $350 billion 15-20% 12 million mom and pop stores 5-8% 6% 14%

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CRITICAL ANALYSIS
After going through all the finding, if we put FDI in multi brand under a critical scanner we adjudge the following: Localization GOI has created a legal system under which the products of local market can be marketed in this big retail stores by making it mandatory for the retailers to procure 30% from MSME however there is a big question about how much of these products will be procured from local market and how much it will help the local farmers. Generating Skilled Jobs As it has been made mandatory for the companies to invest their 50% of investment in backend infrastructure, there will be job creation by these companies. Impetus for the growth of MSME As GOI of India has made it mandatory for 30% procurement from MSME, there would be enough opportunity for MSME growth. State Government Prerogative AS GOI has given final say to state government whether to allow FDI or not, it may demotivate few companies from investing. Greater shelf life for farm products As GOI has made it mandatory for companies to invest 50% of their investment in backend infrastructure It would reduce wastage and allow greater shelf life to farm products. This will also minimize the layers of intermediaries between the farmers and Retailers. Self-certification by Companies As GOI has asked companies to self-certify, there would always a chance of providing wrong certificates which if found will lead to legal battles. But it will have a negative impact as it will signal that India is not good for FDI.

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Internal Trade Reforms GOI may do internal trade reforms in future if committees constituted by it recommends the same but how much will it be accepted by recipient parties will always be a question mark as investment in this sector has always been very debatable so it will be accepted amicably by every party is doubtful and some party make take government to court of law.

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CONCLUSION
The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure are allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing. It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China; where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their countrys GDP. It is also pertinent to note here that it can be safely contended that with the advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector cannot be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience.

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REFERENCES

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