India Relaxes its E-Commerce Restrictions for Single Brand Retailers
On 24 November 2015, the Indian Ministry of Commerce and Industry issued Press Note No 12 (2015) in relation to its foreign direct investment (FDI) policy, announcing that a single brand retail trading entity operating through brick and mortar stores, would now be permitted to undertake retail trading through e-commerce. Further, the Government clarified that a wholesale Cash & Carry trader may now also undertake single brand retail trading provided (a) it maintains separate books of accounts for the two arms of the business and has them audited by statutory auditors and (b) each arm of the business complies with the conditions attached to the FDI policy relating to wholesale Cash & Carry businesses and for retail businesses.
Many foreign brands entering India have invested directly by holding shares in an Indian company either in the form of a wholly owned subsidiary or through a joint venture with an Indian company in order to retail products under a single brand. Foreign brands have frequently complained that they were not permitted to sell their goods on-line and were therefore unable to offer a multi-channel experience as they do in other countries. Previously, foreign brand owners had to enter into agreements with Indian e-commerce platforms or companies to sell their goods on-line. There still seems to be a condition attached that the foreign brands that are permitted to sell on-line need to have invested in brick and mortar stores in India.
What is the single brand retail trading policy in India?
The retail sector has been one of the most restrictive and politically sensitive sectors in relation to foreign investment as it affects many local vested interests. In the past the Indian Government divided the retail sector into two categories: multi-brand, mainly relating to large supermarkets and department stores; and single brand, relating to well-known or luxury brands which were permitted to sell their own products. The threat to local interests comes predominantly from the multi-brand sector and therefore restrictions on this sector remain high. In contrast, however, single brand retailing has been progressively encouraged and liberalised within India.
Under the single brand trading policy, a foreign company may hold 100% of the shares in an Indian company/subsidiary although for any shareholding above 49% the company requires consent from the Indian Government. If the foreign company enters into a joint venture with an Indian company and holds 49% or less of the issues shares, then no prior consent is required. There are certain conditions imposed on the foreign company or brand owner, which include:
- Products must be single brand only.
- Products sold under a particular brand must be sold under the same brand internationally.
- Products must be branded during manufacture.
- Either the brand owner or a license (such as a licensee or franchisee) can be involved in the single brand product retail trade.
- Where the foreign investment exceeds 51% of the issued shareholding then at least 30% of the value of the products must be purchased from India, preferably from MSMEs, village and cottage industries or artisans and craftsmen. The procurement requirement must be met annually from commencement of business (i.e. opening of the first store). Previously, this requirement ran from the date on which the investment was made. Retailers who are retailing products using 'state of the art' and 'cutting-edge' technology where local sourcing is not possible, may apply to the Indian Government to relax or waive the sourcing norms.
- Now, since Press Note 12 (2015 Series) was issued on 24 November 2015, a single brand retailer operating through brick and mortar stores can use the e-commerce channel.
Previously, it was also not clear whether a foreign company involved in wholesale Cash & Carry business (i.e. B2B) could also operate a parallel single brand retailing business. Sale of goods to the public or directly to consumers through retail outlets or through e-commerce was prohibited. Wholesale trading can be carried out in relation to products of different brands. A foreign investor can own up to 100% of the shares in an Indian company involved in wholesale Cash & Carry business without seeking prior consent from the Indian Government. The policy liberalisation permits a foreign company which is involved in wholesale operations in India, to have a separate business in relation to its own single brand, where it can open stores to sell to the public.
The progressive liberalisation by the current Indian Government in relation to retail is in line with its policy to attract foreign investment and ease doing business in India. The Indian Government has a difficult task of balancing the interest of local businesses in India and pleasing foreign investors, and as a result one small step at a time is being taken, in this case the single brand and wholesale trading which are relatively benign. The most controversial sector, in relation to multi-brand retail trading has yet to be liberalised as the Indian Government has made promises to local business to protect their interest during its election manifesto.