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Insight

Indian Retail Sector Update - policy clarification but still some grey areas

David Bond
15/07/2015
Foreign investment into the Indian retail sector has always been politically sensitive as it affects local vested interests and consequently such investment has historically been very restrictive. The Foreign investment into the Indian retail sector has always been politically sensitive as it affects local vested interests and consequently such investment has historically been very restrictive. The multi-brand sector, such as major supermarket chains, is the most restrictive and onerous conditions are in place. In contrast, there are fewer restrictions imposed on the "single brand" retail sector, such as retailers of premium goods or fashion items sold internationally under a well-known brand name where the goods are usually branded during manufacture. When entering the Indian market international retail brands have a choice of either using a franchise model or making a direct investment into an Indian company.

Under current regulations, a non-resident entity can hold up to 100% shares in an Indian company which is engaged in single brand retailing within India. No formal consent is required for the acquisition of up to 49% shareholding in such company although Government approval is required for any greater shareholding. It is possible for the non-resident entity to do business independently or with an Indian joint venture partner. It is worth noting, however, that if the Indian joint venture partner also holds a foreign shareholding, then such foreign shareholding is counted towards the percentage of non-resident shareholding even though it is indirect.

This month the Department of Industrial Policy & Promotion, Ministry of Commerce issued clarification that it is possible for a non-resident entity operating "single brand" product retail in India, to do business through more than one company, in terms of wholly owned subsidiaries or joint ventures. What is still unclear is whether "single brand" retail and franchising in relation to the same brand can be carried on simultaneously by the non-resident entity. For instance, can a non-resident entity which has a wholly owned Indian subsidiary also grant retail sector franchises for certain territories within India?

This question becomes relevant when considering the restrictions imposed on non-resident entities. For example, if a non-resident entity owns more than 51% of the shares in an Indian retail sector company then it must comply with certain conditions, including a requirement that at least 30% of the value of goods purchased for the single brand retail must be sourced from within India. The logistics would be easier and it would obviously be more profitable for the non-resident entity to be able to supply the locally sourced products not only to the corporate stores but also for franchisees in India.

If you require further clarification, please contact Lisa Sen.

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