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The gov­ern­ment’s new FDI pol­icy cre­ated a po­lit­i­cal tur­moil and set de­bates rag­ing across the coun­try. For the re­tail sec­tor, the new pol­icy means many things. Knight Frank has re­leased its Econ­omy and Realty @ Glance re­port for the month of Septem­ber 2012 which looks into the im­pact of the gov­ern­ment’s new FDI Pol­icy on the Re­tail and the Real Es­tate Sec­tors, along with the per­for­mance of top 5 Re­tail play­ers. It clears many doubts as it lists down some im­por­tant con­di­tions laid down in the pol­icy and lists down what it en­tails for the in­dus­try. Here is an ex­tract from the re­port per­tain­ing to the re­tail sec­tor. Read on. While the sen­ti­ment boost by the re­cent mea­sures will im­pact over­all real es­tate sec­tor, the re­lax­ation in FDI lim­its in the re­tail sec­tor would have di­rect im­pact on the com­mer­cial real es­tate mar­ket. The en­try of for­eign re­tail­ers would not just ad­dress the high va­cancy in re­tail real es­tate but also help in the growth of such developments in fu­ture. In In­dia, for the pur­pose of for­eign in­vest­ment norms, re­tail in­dus­try is clas­si­fied in to three cat­e­gories viz, cash & carry whole­sale trad­ing, singe brand re­tail and multi brand re­tail. FDI in whole­sale trade was opened up for more than a decade and grad­u­ally over this pe­riod the in­vest­ment limit has been in­creased to 100%. As per the FDI norms for this cat­e­gory sale to re­tail­ers, in­dus­trial, com­mer­cial, in­sti­tu­tional or other pro­fes­sional busi­ness users shall be al­lowed. Re­stric­tion on sale to con­sumers makes it a Busi­ness to Busi­ness (B2B) model. Large multi­na­tion­als like Metro and Wal­mart are al­ready present in the coun­try through their cash and carry stores. The front end sales i.e. sale to con­sumers is clas­si­fied un­der sin­gle brand re­tail and multi brand re­tail wherein both of these have a dif­fer­ent set of reg­u­la­tions with re­spect to for­eign in­vest­ments. Sin­gle brand re­tail was opened to for­eign in­vest­ment in 2006 with a cap of 51%. This cap con­strained for­eign re­tail­ers de­sirous of en­ter­ing In­dia al­beit with a full con­trol. The limit, sub­ject to ful­fil­ment of cer­tain con­di­tions, was hiked to 100% in Jan­uary this year. Not­with­stand­ing the 100% FDI per­mis­sion in Jan­uary 2012, the FDI in­flow in the sin­gle brand re­tail cat­e­gory has not picked up. The pri­mary rea­son that put down the in­ter­est of for­eign play­ers was con­di­tions on sourc­ing from small scale in­dus­try. The fol­low­ing are the ma­jor observations for FDI in sin­gle brand re­tail:

Prod­ucts to be sold in the ven­ture should be of a sin­gle brand only.

The Prod­uct un­der con­sid­er­a­tion should be sold un­der the same brand in­ter­na­tion­ally.

The per­mis­sion would cover only prod­ucts which are branded dur­ing man­u­fac­tur­ing.

As per the ear­lier rule, For­eign in­vestor should be the owner of the brand. How­ever, this con­di­tion was a hur­dle and hence is waived now in Press note 4 of 2012 re­leased on 20th Sep 2012. As per this re­vi­sion, only one for­eign en­tity, whether owner of the brand or oth­er­wise, shall be per­mit­ted to un­der­take re­tail trad­ing in the coun­try, for the spe­cific brand. Hence, a ma­jor is­sue has been ad­dressed.

As per the ear­lier rule, in case of pro­pos­als in­volv­ing FDI more than 51% manda­tory sourc­ing of min­i­mum of 30% of value of prod­ucts sold had to be done from In­dian small in­dus­tries. This con­di­tion was a hur­dle and hence is waived now. Ac­cord­ing to the Press note 4 of 2012 re­leased on 20th Septem­ber 2012, sourc­ing of min­i­mum of 30% of value of goods pur­chased would have to be done from In­dia, prefer­ably from small in­dus­tries. This pro­cure­ment re­quire­ment would have to be met, in the first in­stance, as an av­er­age of five years’ to­tal value of the goods pur­chased, be­gin­ning 1st April of the year dur­ing which the first tranche of FDI is re­ceived. There­after, it would have to be met on an an­nual ba­sis. The third cat­e­gory of re­tail in­dus­try from the FDI norms per­spec­tive is the multi brand re­tail. The is­sue of for­eign in­vest­ment in multi brand re­tail has re­mained the big­gest pol­icy con­tention in the last few years and cre­ated a lot of po­lit­i­cal up­heaval in the coun­try. Lot of con­cern has been raised by stake­hold­ers with re­spect to its im­pact on the lo­cal in­dus­try. Amidst this con­cern and po­lit­i­cal up­heaval, the gov­ern­ment al­lowed FDI in the cat­e­gory by is­su­ing Press note 5 of 2012 on 20th Septem­ber 2012. The fol­low­ing observations on multi brand cap­ture the essence of the new norms:

Min­i­mum FDI in­vest­ment of USD 100 mil­lion for a multi brand re­tail ven­ture is re­quired

Min­i­mum 50% of FDI should be in cap­i­tal ex­pen­di­ture on back­end in­fra­struc­ture within 3 years of the first tranche of FDI. Back end in­fra will in­clude all the fol­low­ing ac­tiv­i­ties ex­cept ex­pen­di­ture on land cost and rentals.




De­sign im­prove­ment

Qual­ity con­trol




Agri­cul­ture mar­ket pro­duce in­fra­struc­ture

At least 30% of the value of pro­cure­ment of man­u­fac­tured/ pro­cessed prod­ucts pur­chased shall be sourced from In­dian small in­dus­tries. This pro­cure­ment re­quire­ment would have to be met, in the first in­stance, as an av­er­age of five years’ to­tal value of the man­u­fac­tured/pro­cessed prod­ucts pur­chased, be­gin­ning 1st April of the year dur­ing which the first tranche of FDI is re­ceived. There­after, it would have to be met on an an­nual ba­sis. Al­though this con­di­tion on sourc­ing pre­vails for multi brand re­tail, the elon­gated time­line for such com­pli­ance would be a re­lief for a re­tailer.

There are con­di­tions for set­ting up re­tail out­lets. In states/union ter­ri­to­ries

it has to be in cities with more than 1 mn. Pop­u­la­tion or 10 km. around such city lim­its. In states/ union ter­ri­to­ries not hav­ing cities with a pop­u­la­tion of more than 1 mil­lion it can be set up in any city, prefer­ably the largest city or 10 km. around such city lim­its.

E-com­merce is cat­e­gor­i­cally dis­al­lowed in multi brand re­tail in line with norms in sin­gle brand re­tail where it is not al­lowed. But the big­gest point is that the pol­icy on multi brand re­tail is only an en­abling pol­icy and the State Gov­ern­ments/Union Ter­ri­to­ries would be free to take their own de­ci­sions in re­gard to im­ple­men­ta­tion of the pol­icy. This choice in the hands of state would re­strict the ben­e­fits from for­eign in­vest­ment from per­co­lat­ing to the de­sired level. With the gov­ern­ment al­low­ing for­eign di­rect in­vest­ment in multi-brand re­tail stores, it is im­per­a­tive to ex­am­ine how the lo­cal re­tail com­pa­nies have been far­ing. Hence, we stud­ied the fi­nan­cial in­di­ca­tors of the top-six most re­ferred re­tail com­pa­nies of In­dia. This set of six com­pa­nies has been used as a rep­re­sen­ta­tive of the In­dian retailing in­dus­try. In­crease in mid­dle-class pop­u­la­tion and high dis­pos­able in­come led to height­ened de­mand for the branded prod­ucts in In­dia. Tak­ing cog­nizance of this, re­tail­ers ex­panded their busi­ness across the length and breadth of the coun­try. This ex­pan­sion fu­elled the rev­enue growth of the re­tail com­pa­nies, which wit­nessed an an­nual growth of 30% dur­ing 2007-12.

As per the FDI pol­icy “It is the in­tent and ob­jec­tive of the Gov­ern­ment of In­dia to at­tract and pro­mote for­eign di­rect in­vest­ment in or­der to sup­ple­ment do­mes­tic cap­i­tal, tech­nol­ogy and skills, for ac­cel­er­ated eco­nomic growth.” The anal­y­sis in­di­cates that the re­tail in­dus­try has tremen­dous po­ten­tial for growth and its op­er­a­tions re­main healthy even dur­ing this slump. How­ever, prof­itabil­ity has se­verely crip­pled on ac­count of in­ci­den­tal costs. Par­tic­i­pa­tion of for­eign play­ers can ad­dress this la­cuna not just by bring­ing in in­vest­ments, but also ex­per­tise and scale of op­er­a­tions that equip them to con­tain sev­eral cost com­po­nents in­clud­ing real es­tate. Fresh in­vest­ment in the sec­tor would ease the cap­i­tal con­straints faced by most of the do­mes­tic play­ers and there is a pos­si­bil­ity of re­duc­tion in over­all cost of cap­i­tal. While the growth of in­dus­try will lead to fur­ther em­ploy­ment gen­er­a­tion in front and back end sec­tors of the trade, com­pe­ti­tion amongst a large num­ber of play­ers will en­sure bet­ter cus­tomer ser­vice and qual­ity of prod­ucts in ad­di­tion to lower prices. Re­tail in­dus­try in In­dia, like in any other mar­ket, needs strong back end sup­port from ef­fi­cient busi­ness part­ners such as third-party lo­gis­tics, dis­tri­bu­tion, whole­sale ser­vices and sup­ply chain man­age­ment so­lu­tions. Some of these ser­vice sec­tors are just be­gin­ning to de­velop in In­dia. The per­mis­sion for for­eign in­vest­ment in a phased man­ner will help in ad­dress­ing the tech­nol­ogy and ex­pe­ri­ence gap that the in­dus­try is fac­ing cur­rently. The im­pact of big for­eign re­tail play­ers on the do­mes­tic un­or­ga­nized play­ers would be pos­i­tive. In fact, it is likely that these un­or­ga­nized play­ers would move to a higher equi­lib­rium level of ef­fi­ciency in a medium to long term hori­zon. Since we ex­pect ro­bust GDP growth as pro­jected in the 12th five year plan, the in­ef­fi­cient un­or­ga­nized play­ers are likely to be pushed out of re­tail mar­ket and get ab­sorbed in other eco­nomic sec­tors. There will be teething prob­lems ini­tially, but in the mid to long term hori­zon for­eign par­tic­i­pa­tion will reap ben­e­fits for the In­dian re­tail sec­tor

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