FIPB clears IKEA's proposal to invest in single-brand retail

NEW DELHI: IKEA, the world's largest furniture retailer, is poised to become the first major foreign company to open wholly owned stores in India after it received a crucial government clearance to invest Rs 10,500 crore ($1.9 billion).


The Swedish company's investment proposal, the biggest so far by a foreign retailer, was cleared by the Foreign Investment Promotion Board on Tuesday and will now have to be approved by the Cabinet Committee for Economic Affairs.

All foreign investment proposals over Rs 1,200 crore have to be approved by the Cabinet panel, but this clearance is expected to be a formality since the government is keen to project a foreign investment-friendly image.

IKEA, which operates 336 stores in 44 countries, plans to invest $778 million to set up 10 furnishing and homeware stores as well as allied infrastructure over 10 years. It subsequently plans to invest $1.7 billion to open 15 more stores. The company has said it will take three years to build a supply chain to roll out its first outlet in the country.

It becomes the third foreign company after apparel maker Brooks Brothers and Pavers England, the UK-based shoemaker, to obtain FIPB approval under the foreign investment policy for single-brand retail.

Key Cabinet ministers have touted IKEA's proposal as evidence that foreign investors are still bullish on India, and the government diluted some contentious provisions of its single-brand retail policy.




FDI HAS DIPPED 60% IN APR-AUG 15

The government diluted some contentious provisions to accommodate the demands of the Swedish company. These included doing away with the condition that the foreign company opening retail stores in India must own the brand being sold in these stores. The government also watered down the clause that made it mandatory for foreign retailers to source 30% of the products they sell in India from small-scale units.

Foreign direct investment into India has dropped 60% in April-August from a year ago amidst a general deterioration in the investment climate and experts hope the green signal to IKEA would spur foreign fund flows. "This is a step in the right direction. It will give out positive signals to global investors. FDI is very critical even for macroeconomic stability. The pressures on the current account deficit can be eased through this route and it is very welcome," said Sunil Sinha, senior economist, CRISIL.

IKEA's proposal has been cleared by the FIPB under the single-brand retail policy. The government also allowed foreign multi-brand retail companies to set up supermarkets a few months ago. But opposition parties are vigorously opposing the entry of Walmart and others, and the BJP-led National Democratic Alliance plans to embarrass the government by demanding that a resolution disallowing foreign investment in this sector be put to vote in Parliament.

In January this year, the government increased the FDI limit in single-brand retail to 100% from 51% but imposed riders on retailers setting up ventures with over 51% foreign capital.