The relaxation of FDI norms in single-brand retailing in India will benefit companies that source goods from the country for their global operations.
Companies that use ‘cutting-edge’ or ‘state-of-the-art’ technology to make their products but do not source goods for their global business said the sourcing norms, which have also been relaxed, could still be a hurdle. Fashion and lifestyle brands that purchase some of their requirements from India for their global operations are relieved.
The government has allowed automatic approval for 100% foreign direct investment in single-brand retailing. The move will save companies from submitting voluminous levels of paperwork and clarifications to the Department of Industrial Policy and Promotion, the nodal agency for trade and commerce policies, which can take several months to approve a proposal, companies and consultants said.
Uniqlo, the Japanese clothing and accessory retailer that had applied for a singlebrand retail venture in India, may now get approval under the automatic route.
The liberalised regime gives companies five years before the 30% domestic sourcing requirement kicks in for their India operations. They will be allowed to set off purchases of goods from the country for their global business against this requirement for the first five years.
The offset amount will be equal to the annual increase in the value of goods purchased from India for global operations in rupee terms, either directly or through their group companies. Single brand retailers such as Hennes & Mauritz (H&M) and Ikea have been asking for easing this condition, which hindered their ability to bring in a larger international assortment to their Indian stores.
“We are happy to hear about the India sourcing requirement being offset towards H&M’s global sourcing from India. While it is in the right direction, we look forward to the same relaxation for the period beyond the initial five years as well, which works towards ease of doing business in India,” said Janne Einola, country manager for H&M India.
“In addition to boosting the retail business, we also believe it will bring in more investments into the country. However, we await more details on this before we can comment further,” said Manu Jain, vice president of Xiaomi.
After five years, the single-brand entity will be required to meet the 30% sourcing norm directly towards its India operation on an annual basis. This means the same entity will be involved in both the retail and sourcing businesses, which is a deviation from how most international brands operate, experts said.
Reacting to government’s decision on FDI, All India Congress Committee chief spokesperson Randeep Surjewala recalled BJP’s earlier stand on the issue and said, “Deception, dishonesty and dodginess of BJP leadership unmasked on FDI in retail. Dupe, lie and vilify when out of power. Do the opposite on gaining power.”
Surjewala then quoted what senior BJP leaders had said in the party’s booklet which was brought out to oppose UPA regime’s policy push on FDI. “BJP’s ‘Booklet on FDI: Govt of Foreigners-Narendra Modi. End Consumer Interests-Arun Jaitley. Betrayal-Sushma Swaraj,” Surjewala quoted.
Foreign brand retailers that do not source goods from India for their global operations are seeking a relaxation in this norm on the grounds of making ‘state-of-the-art’ or ‘cutting edge’ products. Such companies will still have to get approval from the government for their investments, experts said.
“Sourcing norms remain. So any company which does not source from India for global operations and is seeking exemption on the basis of making ‘cuttingedge’ products will have to take approval from the government,” said Pinakiranjan Mishra, partner, Consumer Products and Retail, EY.
A top official of a premium foreign consumer brand that recently got its licence to operate in India said the approval came almost a year after filing its application.
“We had asked for a waiver but the government was adamant that we source from India. The clarifications it sought went back and forth several times. Government should realise that foreign companies will source from India only if they find it competitive to do so,” he said, asking not to be identified.
Apparel companies are sourcing from India because it is viable for them, the official said. “It doesn’t make business sense for us but we still have to do it. As a result, we are less aggressive on our plans… Headquarters is apprehensive about the quality of products we will source from India,” he said.
Experts said clarity is needed on the reference to the initial five-year period for setting off domestic sourcing for global operations “beginning 1st April of the year of the opening of first store.”
“One view could be that for companies having less than 100% foreign investment, the reference to April 1st would be the year in which they increase their investment to 100%. Further, for companies having foreign investment of 100%, the present year would be the relevant year. The press note in this regard would hopefully provide clarity,” said Vineet Aneja, a partner at Clasis Law.
Until now, 100% FDI was permitted in single-brand retailing, with government permission needed if the level exceeded 49%. Single-brand retailers are allowed to take the ecommerce route. The 30% sourcing requirement could be relaxed in case of companies with ‘state-of-the-art’ or ‘cutting edge’ products, for which local sourcing was not possible.
However, the absence of a definition for ‘state-of-the-art’ or ‘cutting edge’ technology has stalled the applications of global companies including Apple and Xiaomi.
Source: Economic Times