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India fortifies the ban of FDI in retail
M. A. Winter
Date of posting: 20-04-10
      Once in a while, the Government of India issues a document which combines all earlier regulations about FDI (foreign direct investment) in various sectors. So the new doc from this April clarifies again that FDI is most welcome in areas like floriculture, horticulture and food processing, for example, where the so called automatic route applies, and where permits for the foreign investment have not to be applied for.

      This time, a small chapter on wholesale clarifies what is a wholesale business and define its conditions. But there is one point comes as a surprise, as it contains a new regulation. It says that “ such wholesale trade to group companies taken together should not exceed 25% of the total turnover of the wholesale venture and the wholesale made to the group companies should be for their internal use only”. As such, the regulation tries to cap the turnover of wholesale companies to related ones.

      In order to understand what this is all about one has to see the actual situation in the wholesale / retail trade sector. Several foreign companies have entered India and have set up a wholesale business. From all them, Wal-Mart and Tesco are the ones which are retailers elsewhere but have set up wholesale business in India in cooperation with Indian retailers which act as partners or franchisees. When Wal-Mart has set up its activities in 2007 together with Bharti, it has announced that the chain of stores in India that would be set up by Bharti would be also 100% owned and operated by Bharti, but the wholesale venture is owned by both at 50%. So the new 25%-rule seems to affect Wal-Mart’s expansion plans.

      It has to be mentioned that in the same chapter on wholesale, the government has ordered that the wholesale companies have to provide “full records indicating all the details of such sales like name of entity, kind of entity, registration/license/permit etc. number, amount of sale” of the buyer which should not be a consumer, as this would be a retail business, but a retailer or re-seller which has to be proofed. And all that would have to be made on a “day to day basis”, which means extra bureaucratic efforts, a sort of a new job creation scheme for accountants and programmers as a side effect.

      In the meantime, the government is said to have launched discussions between ministries about opening multi-brand retail to FDI, as newspapers reported. The department of industrial policy and promotion (DIPP), the government body responsible for foreign investment policy, is said to have written to the finance ministry on the issue and is also in talks with the agriculture ministry about the pros and cons of the move, a top DIPP official was quoted.

      Anand Sharma, Union Commerce Minister, asked in an interview about the background for the new regulation, defends the move. He sees the social function of the retail jobs where there are millions of small shops in the country. “The retail sector is a big social security net for the country”, he said. He wants first to further consolidate the backend - from farm to cash and carry, where more investments have to come and farmers would benefit.

      India has opened almost all sectors in the past few years to foreign investment. In retail, the story is different. Whereas up to 51% foreign investment is allowed in single-brand retail, it is still forbidden in multi-brand retail. The new regulation creates a clear barrier between wholesale trade and retail trade for the companies involved. It can be read as a fortification of the ban of FDI in retail.

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