The year 1991 was an evolution in the Indian Economy, when our former Prime Manister Mr. Manmohan Singh had liberalize the economy and open free trade in the market and allow the FDIs to come and invest in India. Since then there is no looking back and Indian economy flurished, with grouth in the economy there are continus evolution in the laws and rules dealing with Foreign Direct Investment in India..
One of the key area where Foreign Direct Investment had played a majour role is in retail sector. Indian retail sector accounts for about 10% of its GDP and India is one of the top five retail markets in the world and has been termed as fastest growing economy. All the top brands wants to have their foot prints in the Indian markets they are of the opion that Indian is Potential market. Almost all the famous brands of the world have their presence in the Indian Market.
Availability of numerous choices in terms of brands, discount offers, reduced delivery time, personalization, cash on delivery, digital payment and easy returns have been major factors for development of online retail sector.
With Digital India focus, the government has also supported this by introducing various reforms and initiatives, which include allowing FDI up to 100% in certain sectors, increasing sectoral cap, permitting FDI under automatic route, and removing certain sector specific restrictions.
This document is an attempt to unravel the current FDI regulations in Retail and Ecommerce segment and possible doubts that the retailers and e-commerce companies may have who invested or keen to invest in this segment.
A. FDI Policy and related Regulations – Retail & E commerce
Foreign investment in India is principally governed by the Foreign Exchange Management Act 1999 (FEMA) and the regulations framed thereunder, which consolidate the law relating to foreign exchange in India. In 2010, the Department for Promotion of Industry and Internal Trade (DPIIT) had put in place a policy framework that consolidated the sectoral requirements and other conditions that must be complied with by foreign investors investing in Indian entities (FDI Policy). The FDI Policy is updated from time to time and the latest amendment was made in October, 2020
India has consistently liberalised and eased the norms for foreign investments in India. In the Retail and Ecommerce sector, FDI upto 100% is allowed either under the automatic route or under the approval route to incentivise investors. Further opportunities like relaxation in 30% sourcing requirement, allowing ecommerce to Single brand retail trading, Tax benefit schemes, allowance of same entity to do both retail and wholesale operations has further added to Investors’ confidence. As per the current policy, following table gives a summary of models and related sectoral caps:
Models
Cash & Carry- Wholesale
Single Brand Retail Trade (SBRT)
Ecommerce
Multi Brand Retail Trade (MBRT)
Duty Free Shops
Sectoral Cap
100%
(Ecommerce allowed)
100%
(Ecommerce allowed)
(Beyond 51%, 30% Sourcing Condition)
100%(B2B & B2C-Market place model)
No FDI -B2C & Inventory Base model
51%
(Ecommerce not allowed)
100%
Entry Route
Automatic
Automatic
Automatic
Approval
Automatic
For Foreign Direct Investment in automatic entry route, there is no need for prior approval from DPIIT or RBI.
In approval entry route, foreign investments are only permitted with the prior approval. Investors have to take prior approval of the sector-specific competent authority and has to take other licences to trade in Indian Makret.
FDI can invest in Indian retail sector with following models:
- Type of business models- There are various models for investors to operate in the retail sector in India. The business models can be in the form of Licensee/Distribution, Master Franchisee, JV, Wholly owned subsidiary or LLP. Each model has its advantages and disadvantages and prospective entrants need to make the choice suited to their business strategy.
- Funding – may be in the form of either of Equity, Compulsorily Convertible Preference Shares , Compulsorily Convertible Debentures
- FDI linked performance conditions provided in respect of each activity
- Valuations/Pricing Guidelines for the purpose of investment
- Post investment filings
- Competition law-approval for certain forms of acquisitions, mergers or amalgamations that exceed the jurisdictional thresholds
Conclusion
The government is taking a step by step approach to open up retail sector with the aim to provide level playing field for all the stakeholders. Some of the recent changes in FDI in retail, e-commerce, and contract manufacturing led to the increase in foreign investments and tapping modern modes of retailing thus benefitting consumers and the industry alike.
It is essential for any investor to understand the regulations and seek expert guidance, besides forming a strategy to invest in the retail market in India.