Investor Issues
FDI in retail business: The key issues of the new policy

What are the salient features of the new FDI policy for retail? Here are all the key questions and answers 

After substantial amount of politicking, the government recently notified the opening up of FDI (foreign direct investment) in multi-brand retailing in India. In 1991, when the liberalisation process first started, there were substantial doubts as to what it would do to the country. It may be arguable whether the process has paid rich dividends to the masses that make India, but there is little doubt that today, the country looks at the world with far greater power and confidence than it did in the 1990s. The consequences of the opening of FDI in multi-brand retail may be a matter of political debate, but it seems clear that the retail scenario may be due for a facelift soon. 
This article provides a nuts-and-bolts approach to the implementation of multi-brand retail FDI. The article has been presented in form of questions and answers.
1. What is the change in the regulations?
Foreign Direct Investment in retail trading, except single-brand retailing, was prohibited in India. In the retail sector, FDI under the cash and carry trading (wholesale trading) was allowed upto 100% under the automatic route and single-brand retailing was allowed upto 51% with Department of Industrial Policy and Promotion (DIPP) and Foreign Investment Promotion Board (FIPB) approval. 
FDI norms were recently liberalised in single-brand and multi-brand retailing by DIPP on 20 September 2012 allowing FDI in multi-brand retail trade up to 51%, with government approval. The change in the regulations is as tabulated below:
2. What is retailing?
Retail trading or retailing has not been defined under the FDI policy. In layman terms retail trading means selling goods to the general public. So, from the local kirana stores to mall-based shopping formats, all would fall under the category of retail trading. The Delhi High Court is case of Association of Traders of Maharashtra Vs Union of India3  defined retail as sale of final consumption or sale to ultimate consumer. A manufacturer selling his own brand is not retailing. Retailing is the bridge between the manufacturer and the final consumer and falls last in the distribution chain having interface with the end customer.
3. What is the difference between single-brand retailing and multi-brand retailing?
The FDI policy does not define single-brand retailing and multi-brand retailing. However, the two may be construed to mean:
Single-brand retailing—sale of products of single brands to retail customers for personal consumption. E.g Zara, Mark & Spencer, Espirit, Nokia, etc.
Multi-brand retailing—sale of products of multiple brands to retail customers for personal consumption. E.g. Walmart, IKKEA, Carrefour, etc.
4. What are the pre-conditions for multi-brand retailing?
Multi-brand retailing is permitted subject to the certain conditions, some of which are stated below:
i. Minimum investment by the foreign investor by way of FDI would be $100 million.
ii. At least 50% of the total FDI must be invested in back-end infrastructure within three years of the first tranche of FDI. Back-end infrastructure includes processing, manufacturing, distribution, etc. but does not include land cost and rentals.
iii. Atleast 30% of the value of procurement of manufactured/processed products shall be sourced from small industries/village and cottage industries, artisans and craftsmen4 . This procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the manufactured processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis. 
iv. The company needs to self-certify on the compliance for (i) to (iii) above.
v. Retail outlets in states which have agreed or will agree to allow FDI in multi-brand retail subject to applicable local state laws;
vi. Retail outlets only in cities with a population of more than 10 lakh people as per the 2011 census. In states and Union Territories not meeting the population threshold as above, they may set up retail outlets in cities of their choice (preferably the largest city). In either case, retails outlets can also be set up to cover an area of 10km around the municipal / urban agglomeration limits of such cities.
vii. Prior approval of DIPP and FIPB will be required to determine whether the proposed investment satisfy the guidelines.
5. Can I set my shops all over the country?
The DIPP notification permits multi-brand retailing as an enabling policy, states and Union Territories are free to use discretion on the implementation of the policy. Hence, stores/shops can be set up in only cities of such states which allow for multi-brand retailing. Currently the following states/ Union Territories have permitted multi-brand retailing:
i. Andhra Pradesh
ii. Assam
iii. Delhi
iv. Haryana
v. Jammu & Kashmir
vi. Maharashtra
vii. Manipur
viii. Rajasthan
ix. Uttarakhand
x. Daman & Diu
xi. Dadra & Nagar Havelli
Establishment of multi-brand retail outlets will be in compliance with state applicable laws such as Shops and Establishments Act.
Further, population thresholds have been put as a condition for doing multi-brand retail trading. These have been enumerated in Q4 above.
6. Do I have to set up a company in India or can I just start business in the name of a foreign company?
With regard to single-brand retailing, the recent press note amends para to state one of the pre-conditions pertinent to address the issue is reproduced as below – 
“Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake (emphasis ours) single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking single brand product retail trading in respect of the specific brand for which approval is being sought. The onus for ensuring compliance with this condition shall rest with the Indian entity carrying out single-brand product retail trading in India. The investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing franchise/sub-licence agreement, specifically indicating compliance with the above condition.”
The reading of the above text indicates that the foreign operating company has several options of creating a presence in India by providing licenses, sub-licence, joint ventures , royalty model or may set up an Indian venture for the norms to be applicable.
In case of multi-brand retailing, the notification lays down the pre-conditions for undertaking multi brand retailing which do not include requirement of a foreign company to set up entity. Hence there is flexibility in this regard. 
7. What is the procedure for getting into multi-brand retailing?
In both single-brand and multi-brand retailing, the investing company needs to make an application to DIPP to verify whether the proposed investment satisfies the conditions stated in the guidelines. Once DIPP is satisfied application needs to be made to FIPB for final approval.
8. What is the extent to which FDI can be held in multi-brand retailing?
Currently FDI upto 51% is permitted in multi-brand retailing.
9. What is the form (shares, debentures, etc) in which FDI may come?
The extant FDI policy provides for types of instruments through which the investor can make FDI and the same instruments shall be applicable in case of multi-brand retailing as well. The instruments include:
i. Equity
ii. Compulsorily convertible preference shares
iii. Compulsorily convertible debentures
10. Can an FDI investor have buy-back agreements with Indian shareholders?
Here again, we need to look at the extant FDI policy to determine whether FDI investors can have a buy back agreement with Indian shareholders.
General permission has been granted to non-residents/NRIs subject to the sectoral caps, applicable laws and other conditionalities including security conditions to have buy-back agreements with Indian shareholders. Also, if the buy-back is provided at pre-fixed rate of return, then the same would tantamount to External Commercial Borrowing.
11. Are typical Shareholders’ Agreements (SHA) clauses enforceable in India?
Where the SHA forms a part of the Articles of the Company, they become binding on the members of the Company, however the enforceability of the shareholder’s agreement, outside the Articles is a grey area .
References may be drawn to Apex Court rulings such as V.B. Rangaraj v. V.B. Gopalakrishnan7  on the enforceability of shareholders agreement. 
12. Can payment be made for use of trade name/brand name?
Yes, brand licensing, sub-licensing, royalty models are possible.
13. Is e-commerce retailing permissible?
The Press Note 5 provides that retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading. 
This would mean firms that only list brands on the website can continue functioning and are not impacted by the notification. This would mean the web platforms carrying out enabling function shall not be impacted but foreign firms that buy or sell any goods or services on online portals are prohibited under the FDI policy.
Between the debate of “anti-people policy” and rosy pictures of “welcome change”, the status remains that India opens doors to multi-brand retailing. Would this ‘liberalisation’ act be a bane or a boom is for times to testify.

You may see our other relevant articles on the topic, on our website:


1.      Our notes, articles, views and analysis on FDI, ECB, FEMA related issues at

2.      See our analytical review of Legality of a Shareholder’s agreement – Can shareholders agree outside the Articles? By Nidhi Ladha at



3.  2005 (79) DRJ 426
4. The procurement needs to be sourced from ‘small industries having total investment in plant & machinery not exceeding USD 1 million. If the valuation of the industry exceed USD 1 million, it shall not qualify as small industry for procurement purposes.
5. See Retail Sector in India, August, 2012 Report to know more on joint ventures with multi brand retailing companies in India




5 years ago

The content of this article is quite informative. Thanx.

Uptrend on Sensex, Nifty wavering: Wednesday Closing Report

If the Nifty closes below 5,630, the index may go sideways

The range-bound market closed marginally in the negative a day ahead of the F&O derivative expiry in the absence of any triggers and fresh concerns from Europe. After making a lower high and a lower low the Nifty ended marginally lower today. If the benchmark closes below 5,630 we may see sideways movement setting in. The National Stock Exchange (NSE) saw a volume of 93.68 crore shares and an advance-decline ratio of 865:896. 
The market opened in the red on unsupportive global cues and cautiousness ahead of the F&O expiry on Thursday. On the global front, the US benchmarks were down nearly 1% overnight on corporate concerns while the Asian markets were trading lower in morning trade today on reports of protests in Spain over the government’s austerity measures.
The Nifty opened 21 points down at 5653 and the Sensex started the day at 18,645, a cut of 49 points from its close on Tuesday. Selling pressure in power, capital goods, metal, banking and auto sectors pushed the benchmarks lower in early trade. 
Bargain hunting soon provided support, which pushed the indices higher in subsequent trade, albeit still in the negative. The market was range-bound in the negative till noon trade in the absence of any triggers.
Another round of selling—this time of metal, capital goods and banking stocks—pushed the market lower. The benchmarks fell to their lows around 1.30pm with the Nifty at 5,639 and the Sensex at 18,573. 
While the Nifty hit its intraday high in mid-morning trade at 5,673, the Sensex went up to 18,670 in the last hour of trade.
The rang-bound market closed marginally lower. The Nifty lost 10 points to 5,663 and the Sensex fell 62 points to finish at 18,632. 
The broader markets outperformed the Sensex today. The BSE Mid-cap index gained 0.27% and the BSE Small-cap index climbed 0.65%.
The main sectoral gainers were BSE Fast Moving Consumer Goods (up 0.65%); BSE Healthcare (up 0.57%); BSE Realty (up 0.29%); BSE Oil & Gas (up 0.14%) and BSE Consumer Durables (up 0.06%). The major losers were BSE Metal (down 1.17%); BSE TECk (down 0.68%); BSE PSU (down 0.57%); BSE Capital Goods (down 0.51%) and BSE Power (down 0.40%).
Eleven of the 30 stocks on the Sensex closed in the positive. The key gainers were Cipla (up 2.66%); Hero MotoCorp (up 1.59%); State Bank of India (up 1.41%); ITC (up 1.04%) and Wipro (up 0.70%). The top losers were Bharti Airtel (down 3.93%); Coal India (down 2.81%); Hindalco Industries (down 2.22%); Tata Motors (down 2.14%) and Dr Reddy’s Laboratories (down 1.57%).
The top two A Group gainers on the BSE were—Voltas (up 5.98%) and IPCA Laboratories (up 5.21%).
The top two A Group losers on the BSE were—IFCI (down 5.76%) and Power Finance Corporation (down 4.43%).
The top two B Group gainers on the BSE were—Binani Industries (up 20%) and Mukta Arts (up 20%).
The top two B Group losers on the BSE were—Warren Tea (down 20%) and Cranex (down 13.56%).
Out of the 50 stocks listed on the Nifty, 17 stocks settled in the positive. The top gainers were ACC (up 3.8%); Ambuja Cement (up 3.87%); Cipla (up 2.62%); Axis Bank (up 2.16%) and SBI (up 1.37%). Bharti Airtel (down 3.83%); IDFC (down 3.31%); Coal India (down 3.15%); Hindalco Ind (down 2.63%) and Tata Motors (down 2.26%) were the top losers on the index.
Markets across closed, with the exception of the KLSE Composite, closed with deep cuts on fresh concerns from Europe. Spain and Greece witnessed violent protests against the governments’ austerity measures. Fears of the continuing slowdown saw the Chinese benchmark Shanghai Composite falling to its lowest level since February 2009.
The Shanghai Composite tanked 1.24%; the Hang Seng declined 0.83%; the Jakarta Composite dropped 1.11%; the Nikkei 225 tumbled 2.03%; the Straits Times fell 0.67%; the Seoul Composite slipped 0.55% and the Taiwan Weighted settled 0.83% down. Bucking the trend, the KLSE Composite added 0.04%.
At the time of writing, the key European indices were reeling with losses of 1% to 2% and the US stock futures were trading lower.
Back home, foreign institutional investors were net buyers of shares totalling Rs5845.58 crore on Tuesday while domestic institutional investors were net sellers of stocks amounting to Rs1,374.11 crore.
Siemens, a leading technology enabled solutions provider, has signed a Rs146.86 crore contract with Power Grid Corporation of India (PGCIL) to build a 765kV test laboratory, at Bina, Madhya Pradesh for National High Power Test Laboratory (NHPTL). Thee company has bagged this order on a turnkey basis and will be executing the project as an end-to-end solution provider, the company said in a press statement. The stock rose 0.31% to settle at Rs701.45 on the NSE.
Tulip Telecom, provider of enterprise data services, today said it has bagged a deal worth over Rs74 crore from the Tamil Nadu government for providing end-to-end connectivity to 2,000 offices in the state. Through this e-Governance initiative awarded by from Electronics Corporation of Tamil Nadu (ELCOT), Tulip will provide network infrastructure to connect 2,000 government offices in Tamil Nadu over a period of two years, the company said in a statement. The stock tumbled 4.99% to close at Rs45.70 on the NSE.


Mutual Funds Seminar: How will SEBI's new rules affect your investment?

At a Moneylife Foundation seminar on SEBI’s new mutual fund regulations, participants were taken through the import aspects of the new rules and how the increase in expenses would impact their mutual fund investments

From 1st October 2012, the expense ratio of mutual funds may increase by as much as 45 basis points (bps). The new regulations will penalise existing investors. Many investors are unaware what impact an increase in 0.45% in the expense ratio would have on their mutual fund portfolio in the long run. Therefore Moneylife Foundation held and exclusive seminar on ‘How will SEBI’s new rules will affect your investment?’ conducted by Debashis Basu, Editor and Publisher of Moneylife magazine, who has also served as a member of the Mutual Fund Advisory Committee of the Securities and Exchange Board of India (SEBI) in the past. The response was overwhelming. 
Mr Basu demonstrated that the new regulations are geared to enrich asset management companies by allowing a higher expense ratio of up to an additional 45 bps. Mr Basu took the participants through the recent history of the fund industry and the reasons why SEBI took these drastic steps to “re-energise mutual fund industry.”
Mr Basu explained that following SEBI’s moves, long-term investors would be penalised and fund companies would be the only ones benefiting. AMCs would have to ensure the new inflows from beyond top 15 cities are at least 30% of gross new inflows in the scheme or 15% of the average assets under management (year-to-date) of the scheme, whichever is higher. Mr Basu highlighted the fact that even if AMCs bring in a lower percentage of inflows from beyond the top 15 cities they would be able to charge an additional TER depending on the new inflows from beyond top 15 cities. However, if the new investments from these cities are redeemed before one year the additional TER will be clawed back. But who would keep a track of the latter as SEBI has not demanded any disclosure of the same? In effect, fund companies have a got a licence to charge you more with low accountability, Mr Basu pointed out.
The new circular also allows AMCs to charge service tax on investment and advisory fees to the scheme, in addition to the maximum limit of TER. This would take the total additional TER up to 45 bps. 
The redeeming feature of the new rules is that from 1 January 2013, fund houses would have to provide a separate plan for direct investments, “such separate plan shall have a lower expense ratio excluding distribution expenses, commission, etc, and no commission shall be paid from such plans. The plan shall also have a separate NAV.” Investors of these plans can expect a lower expense ratio of up to 1% which is the sub-limit for marketing and selling expenses including agents” commission and statutory advertisement. 
The topic sparked a lively discussion among the participants about the merits and demerits of the new plan. Investors who opt for the direct plan would see substantial benefits in the long run but they would have to put in that extra effort to earn that extra return. Mr Basu explained that the disadvantages of the direct plan is that investors get no advice, so they must have the ability to research and evaluate if a scheme is good deal or not. And buying direct is not as quick and simple as making a phone call to your agent. You have to get equipped with the process and this is usually not static and would change over time, therefore, you would have to keep yourself updated as well, he added. Many aspects of the mutual fund industry and equity investment were also discussed during the course of the discussion.




5 years ago

There are several issues that need to be addressed by SEBI.

1. Will the existing direct investors be moved to the direct plan? If not then this can act as a double whammy. Either the investors will have to pay the TER for the time they stay with the fund. Or else, if they plan to move to the direct plan, they will have to worry about exit loads (esp in case of SIPs) and short term capital gain if any.

2. Will the TER be applicable to direct plan? A reader had also shared concern on how the advertising expenses.

3. The timing of launch of direct plan is bit inconvenient - at least to me. My SIPs run from Jan to Dec every year. Not sure if other investors are also in the same category. The problem here is that if I have to renew my SIPs then I have to do them in November or December (2 month window). At this time the direct plan might not be available. Either I can wait till Jan and start my SIPS by Feb or March. However I doubt if AMC's will be able to dispatch the necessary documents to their branches in time or not. Or else I can continue with the normal plan. In this case I will have to pay the extra expense ratio. I can then later transfer my units back to the direct plan. But then again I have to worry about exit load and short term capital gains.

I have lodged a grievance at SEBI's SCORES. Lets see what they do about this.

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