FDI in retail: Walmart, Tesco will not be able to acquire existing retailers

NEW DELHI: Multi-brand retailers such as Walmart and Tesco will not be able to acquire an existing retailer to make an easy entry into the Indian market, the government clarified on Thursday through a tighter set of norms that seeks to ensure they build chains right from scratch.

The rules are a big setback for Indian retail groups such as Bharti Retail, Future Retail and Spencer's that were hoping to cash out by selling at least part of the stake in front-end retail stores to foreign companies. "What to do? This is India," the shocked CEO of an Indian retail group said, asking not to be named.

"It's advantage Reliance," a former senior Reliance executive said. The slow start for foreign retailers will mean lesser competition for Reliance Retail, which unlike other cash-strapped Indian retailers has funds to expand quickly.

The intent of the clarifications is to ensure genuine sourcing of goods from small industry and to direct all investments towards creation of fresh capacity. The policy requires the foreign investor to bring in at least $100 million of investment, split equally between the front and back end. The implication of the policy is that this amount has to be new investment. In other words, a foreign multi-brand retailer will have to spend $50 million in setting up new stores to meet the front-end requirement.

There is no bar on acquisition, but any money spent for that purpose has to be over and above this $50 million.
For the back end, existing investments will not count. Thus, Walmart's cash-and-carry operations will not count as back-end investment if it decides to set up retail operations here.

"These are clarifications and they have to be given within the framework of the policy. The idea was not to appease foreign retailers, but to clarify on the queries raised by the foreign retail chains within the policy framework," an official of the department of industrial policy and promotion (DIPP) told ET.

"We are studying the government's clarification on FDI policy for multi-brand retail trading issued on Thursday," the Bharti Walmart spokesperson said.

The government had allowed 51% FDI in multi-brand retail in September last year, but Walmart, Tesco and Auchan had sought clarification on various clauses of the policy that imposes a mandatory 30% sourcing from small industry and at least 50% investment in back-end infrastructure.

Only manufactured or processed goods that are to be sold through front-end stores in India will be counted towards the mandatory sourcing requirement, DIPP said through a clarification to the policy. The government has also disregarded the retailers' suggestion that purchase of fresh produce from farmers or goods sourced for global operations be counted towards this requirement.

The 50% mandatory investment in back-end infrastructure has to be in fresh capacity, though it could be spread across states that have not allowed multi-brand retail. "The entity can invest only in greenfield assets and it will not be possible to acquire supply/chain/back-end assets or stakes from an existing entity," the government said, even ruling out stake acquisition in infrastructure companies.

Further, the front-end stores have to be also company owned and company operated, which rules out a franchisee arrangement.

"The government is slow in clarifying on the policy, which is not going to help foreign investment. The government needs to be proactive in making such announcements. The clarifications on states and investment are not conducive for foreign chains to go ahead and invest in the country. Also, the clarification on the entities to not just own but also operate will not support a franchise model," said Anil Talreja, partner, Deloitte.

The clarifications are silent on the risk of state governments reversing their stand if a political party that opposed multi-brand retail came to power in the 11 states that have agreed to allow multi-brand retail. "Any amendment in the policy falls under the domain of the central government. However, state laws/regulations will apply," DIPP said.

"If a state does not want FDI, they can deny the multiple permissions that a state has to give. It should not affect the existing investment," the DIPP official quoted earlier said.

Multi-brand retail trading by way of e-commerce is not permitted, the government reiterated.

DIPP said it is still examining sourcing restrictions imposed on group companies and the rule that 50% investment in back-end infrastructure has to be in the first three years. It has also not made up its mind on the status of small industrial units that outgrow this status in the course of supplying to a retailer.