FDI in Multi Brand Retail

- By X-Biz Team Divanshu Dubey Dhiraj Ramakrishnan Neekunj Mehta Ravi Kalle Yogesh Kohli On 14th of September 2012 government announced its decisions to allow 51 % FDI in multi brand retail. This was supposed to be implemented in 2011 however the government had to postpone the decision due to massive opposition. This policy allows transnational retailer (TNR) like Carrefour, Tesco, Walmart, etc, to start multi brand retail operations in India. There are certain conditions attached to it. Some of the important ones are described below. TNRs will have to take approval from Foreign Investment Promotion Board (FIPB) before investing. They will also have to make a minimum investment of $100 million of which 50% will have to be invested in back-end infrastructure. The backend investments have to be done within three years of induction. The policy also states that the TNRs will have to procure at least 30% of the products from small scale industries. The small scale industries are defined as ones in which the total investment on plant and machinery doesnt exceed $250,000. The backend infrastructure includes processing, manufacturing, distribution, design improvement, quality control, warehouses, cold chain and packaging. Expenditure on land cost and rental if any will not be counted as part of back end investments. Another condition for TNRs is that they cannot open the stores in any city that has a population of less than 10 lakhs as per 2011 consensus. There are 51 cities that qualify this condition. The policy gives the right to the state governments to decide on the entry of foreign players in multi brand retails in their respective states. The TNRs opting to open the stores in the states will have to comply with applicable state laws such as Agricultural Produce marketing Committee (APMC) Act, Shops and Establishments Act etc. Until this announcement FDI was permitted in single brand retail and cash & carry format. Presently the Indian market is highly fragmented and is heavily dominated by traditional

retail formats. The penetration of modern organized retail is low and is limited to tier 1 and tier 2 cities. The following chart shows the relative penetration of organized retail in India vis-a-vis other emerging markets.

Source: Mckinsey quarterly October 2012 The war game on FDI in multi brand retail will be conducted in three parts as per the following table. Each team will be assigned a role of one of the players. The brief for each role will be provided separately. Team A/C/E Transnational Retailers Policy makers Farmers Team B/D/F Indian Organized Retailers Mom and Pop Stores Traders (Intermediaries)

The likely outcome of this war game will give us some concrete ideas to address some of the following issues. 1) 2) 3) 4) 5) The extent to which FDI in multi brand retail will happen. The manner and scope of FDI The benefits to various stakeholders The effectiveness of the rules stated in the policy The impact of FDI on infrastructure development