DIPP to rework the current rules on brand ownership for retail FDI

NEW DELHI: Taken aback by the decision of the foreign investment promotion board to reject a proposal by Zara Holding, a Netherlands-based company, to retail the luxury brand Massimo Dutti, the Department of Industrial Policy and Promotion (DIPP) has decided to rework the current rules that stipulate that the investor should also own the brand.

In its June 29 meeting, FIPB, the body that clears foreign investment proposals, rejected a proposal by Zara Holding BV to set up a 51% joint venture for single-brand retail trading.

The FIPB did not give any reasons for rejecting the proposal, but sources told ET that the investor did own the brand.

The joint venture proposed to retail Massimo Dutti, an apparel brand owned by Spanish company Inditex, the world's largest clothing retailer, but the investment in India is being made by its subsidiary Zara BV.

The FIPB seems to have adopted a strict interpretation of the single-brand retail policy, catching the DIPP unawares.

In an interview to ET on July 18, commerce and industry minister Anand Sharma had said that the proposal had been deferred and not rejected.

The ministry now says that the rules need to be updated to accommodate investments in cases where the brand is owned by the subsidiary.

"We are looking into it seriously. It is crucial for the policy to specify the relationship between ownership and brand," a senior official of the ministry said.




"A policy should be such that it fits 90% of the cases and exceptions need to be made for just a few. If you see, lately most of the cases have had a similar business format. There is an urgent need to tweak the existing policy to bring in conformity with business practices," the official said. The changes will have to be sent to the cabinet for its approval.

Inditex had clarified to FIPB that Zara is a wholly-owned subsidiary and both of them own the Massimo Dutti brand but evidently this was not enough.

The ministry is worried that if the rules are not changed then more proposals could be rejected.

"This clarity is lacking and will end up being the reason for rejection for many eager foreign investors," he added.

The government had relaxed the foreign direct investment rules last year to allow 100% FDI in single-brand retail, compared with 51% earlier, but had imposed strict conditions including mandatory local sourcing.

Contrary to expectations, very few investors have come forward deterred by the stringent norms.

Skechers, Pavers England, Promod and Tommy Hilfiger have expressed their willingness to invest but have complained of norms that lack clarity.

Last month, IKEA, the Swedish home-ware firm, had promised to invest Rs 10,500 crore over the next five years but demanded relaxations of a provision that stipulates that 30% of the value of products sold should be sourced from domestic small and medium industries.