FDI in Retail- Legal Changes and Challenges

1. FDI in Retail- Legal Changes and Challenges PXV Law Partners

2. INTRODUCTION • Indian retail structure accounts for 22% (twenty two percent) of the country’s GDP and contributes to 8% of the total employment • Sector has shown a 6.4% growth since 1998 • Only a small percentage of the market is organized retail- high growth potential • Retail market is expected to grow rapidly • India is the world’s fourth most attractive destination for retail investment • Government expects significant capital inflow, improvement in productivity and supply chain and greater utilization of Indian goods in imports

3. Gradual liberalization of the retail sector

4. INDIA’s FDI REGIME FDI Automatic Route Approval Route RBI Foreign Investment Promotion Board (FIPB) • Governing Legislation- Foreign Exchange Management Act, 1999 (FEMA) • Foreign Exchange Management (Transfer or Issue of Securities to Persons Resident Outside India), Regulations 2000 • Notifications of the Department of Industrial Policy and Promotion (DIPP) • Notifications of the Reserve Bank of India (RBI) • Consolidated FDI Policy (published once a year) • Investment can be in equity shares or compulsorily convertible preference shares or debentures • Subject to minimum valuation (DCF) • Investment permitted in private companies, partnerships, LLPs, Project offices and liaison offices

5. WHOLE SALE CASH AND CARRY • FDI permitted under the automatic route • Whether a transaction is a wholesale trade or not would depend on the type of customers to whom the sale is made and not the size and volume of the sale • Sale of goods to retailers, industrial, commercial and other users and not for personal consumption • List of valid buyers include holders of sales tax/ VAT licenses; holders of trade licenses indicating that the person is engaged in commercial activities; holders of permits/ licenses for undertaking retail trade etc. • Record of transactions to be maintained on a daily basis • Whole sale sales to group companies to not exceed 25% of the total turnover

6. SINGLE BRAND RETAIL • Press Note 4 of 2012 • FDI upto 100% permitted with FIPB approval • Products should be sold under single brand name only and under the same brand internationally, i.e. in one or more countries other than India. Any additional brand would require separate FIPB approval. • Derivative brands/sub-brands may be considered under a single application. • Covers only products which are branded during manufacturing • Only one non-resident entity is permitted to undertake single brand retail trading- the entity must demonstrate that it is either the owner of the brand or has a legally binding agreement with the owner of the brand

7. SINGLE BRAND RETAIL • In case the foreign participation exceeds 30%, the company must ensure that 30% of the value of the manufactured/ processed products purchased shall be sourced from India, preferably, MSMES, village and cottage industries, artisans and craftsmen (“local procurement requirement”) • The local procurement requirement must be met as an average of 5 years’ total value of goods produced, beginning April 1 of the year during which the first tranche of FDI is produced- thereafter required to be complied on an annual basis • Onus of compliance is with the entity carrying out retail trading- self certification • Changes brought about in 2012 regulations

8. Multi Brand Retail- PN 5 of 2012 • 51% FDI permitted subject to FIPB approval • Enabling policy- Retail only in States which permit multi-brand retail- states may impose additional conditions- so far no additional conditions have been notified • Minimum FDI amount US$ 100 million • Only in cities with population of more than 1 million, or the largest city of the state/union territory • At least 50% FDI to be invested in “back-end” infrastructure, i.e. processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-housing, agricultural market produce infrastructure etc. Land costs and rentals are not included in back-end infrastructure • Local procurement requirement- 30%, to be met over 5 years • Government will have first right of refusal over agricultural products • Self certification and compliance • Retail trading in e-commerce not permitted

9. The Competition Act – IMPACT • The Competition Act was legislated in 2002- purpose of preventing anti competitive practices • Merger control provisions notified in 2011 • Competition Commission of India ("CCI”) - responsible for the enforcement of the Competition Act in India. • Combinations (acquisitions, mergers and amalgamations, transfer of assets) above certain turnover and asset based thresholds require pre-merger filings • “Trigger event”- 30 days of either execution of the agreement or approval of the acquisition by the board of directors • 210 day wait period

10. The Competition Act Thresholds

11. Challenges to FDI in Retail • Political opposition and possible local issues • FIPB approval process- time consuming • State specific policies, compliance nightmare • Requirement to deal with several regulatory authorities • Multi-fold indirect tax implications • Threshold of US $ 100 million in multi-brand retail, will discourage all but the largest players- will also discourage private equity • Infrastructure gaps • Uneven economic development- requirement to pick and choose sites for new projects • Funding the Indian joint venture partner

12. THANK YOU!!