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India continues to be divided over foreign direct investment in multi brand retail

11/12/2012

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United Kingdom

The Indian Government had its new investment policy affirmed by Parliament on Friday 7th December 2012. 

In September of this year, the current Government of India was very bold, in the face of intense opposition, to announce that it would allow foreign direct investment ("FDI") in the multi-brand retail sector. It was stated that foreign retailers would be allowed to hold 51% shares in an Indian company involved in multi-brand retail subject to satisfying a number of conditions to ensure that foreign parties invest significant amounts especially in developing back-end infrastructure.

Opposition to the multi-brand policy resurfaced during the winter session of the Parliament with a number of political parties including a member of the present coalition demanding a vote on this issue. The reason why the multi-brand retail policy has come under attack, is because the policy was made by way of executive order and not as a result of a parliamentary bill. The executive order allows each State Government to decide whether to implement the policy.

Opposition to FDI in the multi-brand retail sector is based on a perceived threat to small family businesses and self-employed middlemen.

The debate went on in the lower house of Parliament for two full days after which there was voting. The debate then continued in the upper house of Parliament. Today the present Government has had its policy affirmed by a slim majority vote. It received 253 votes as against 218 votes of the opposition in the lower house; and received 123 votes in the upper house as against 109 of the opposition. Two political parties walked out without voting in both houses. The results of the voting means that the new foreign investment policy in respect of multi-brand retail will remain. 

Despite the new policy, it is unlikely to be easy for any large foreign chain to operate in India, unless they restrict themselves to the States which have provided support to the policy from the start, such as Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand, Daman & Diu and Nagar Haveli.  

Because these new FDI regulations on multi-brand retail were made by way of "government policy" and not by passing a new law, it may be risky for investors to rely on these regulations. If the government changes the regulations could change again.

If you would like any more information about this issue or for more information on franchising, please contact Mark Abell, Babette Märzheuser Wood or Chris Wormald.