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Conditions attached to India's single brand retail policy not fully clarified by updated Consolidated FDI Policy of 10th April 2012
On 10th April 2012, the Department of Industrial Policy and Promotion ("DIPP"), in India's Ministry of Commerce and Industry released its Circular with the updated Consolidated Foreign Direct Investment ("FDI") Policy. It was anticipated that the Circular would clarify many of the queries on how the conditions to the single brand retail policy would apply in practice, especially since the Ministry had, on 25th January 2012, formally invited interested parties to provide the Ministry policy makers with their comments and concerns, as indeed we at Fieldfisher have done.
Instead, the contents of the last Press Note 1 issued on 10th January 2012 on the 100% single brand policy was simply replicated in the new Consolidated FDI policy (see our Franflash: 100% Foreign Direct Investment in single brand retail allowed in India with conditions)
In practice however, things have changed. The officials at the Secretariat of Industrial Assistance inside the DIPP, where applications have to be submitted by foreign retailers for consent to own shares in an Indian single brand retail company have been making major concessions and waiving conditions. However, each application is being dealt with on a case by case basis which does not help at all in terms of providing certainty for a foreign retailer considering the position, which had been hoped would be the outcome of the updating and review exercise.
The policy in relation to single brand retail therefore remains as follows:
- products sold should be under a single brand only
- the products should be sold under the same brand internationally
- "single-brand" product retailing would cover only products which are branded during manufacturing
- the foreign investor should be the owner of the brand and not just a licensee
- in situations where the foreign interest will be in excess of 51%, at least 30% by value of the products sold must be sourced from Indian small industries, village and cottage industries, artisans and craftsmen. "Small industries" are defined as industries which have a total investment in plant & machinery not exceeding US $1 million.
There has been some softening in practice in relation to the condition that the applicant has to be the owner of the brand. Concessions are now being made if it can be shown that the applicant company, even if a licensee and not itself the brand owner, is part of the same group, or has some other strong connection with the owner of the brand.
The requirement of 30% sourcing from small industries, artisans and craftsmen in India has proved to be a major issue as there are legitimate and serious concerns about quality control, finding suitable suppliers, protection of intellectual property rights, compensation etc. The Government is now waiving this condition if the applicant can make a very strong case establishing both technical and practical impossibility of sourcing in whole or in part supplies from small suppliers in India. For instance, premium foreign brands or those requiring specialised technology for the manufacture of their products can explain that to the Government and seek a more tailored approval.
The Government is apparently still undecided about whether to have set guidelines about how the conditions apply, or to continue to deal with each application on a case by case basis. So the recommended approach remains for foreign retailers to continue to do their homework on what current practice is, file their applications, and then make their case before the officials on an ad hoc basis.
If you would like any more information about this issue or for more information on franchising, please contact Chris Wormald.