India relaxes multi brand retail sector rules
The Indian Cabinet has carried out a comprehensive review on its Foreign Direct Investment (FDI) rules and has made a number of changes which should make it easier for companies such as Wal-Mart to establish themselves in the country.
Although large supermarket chains such as Wal-Mart would still need to invest 50% of their first tranche investment in back-end infrastructure this will not now be applicable for further investments.
Wal-Mart had been struggling with its procurement policy for India due to the rules defining small businesses. That too has been changed as have the rules on the size of a city in which multi-brands can be established; that is now being left to the discretion of the individual state governments.
The two press releases on the new FDI rules as published on the Press Information Bureau website are as follows:
“Review of the policy on Foreign Direct Investment (FDI) in Multi-Branded Retail Trading
The Union Cabinet today approved the proposal for amendment in the existing FDI policy in Multi-Brand Retail Trading (MBRT) in para 188.8.131.52(1) (iii), (iv) and (vi) of ‘Circular 1 of 2013 – Consolidated FDI Policy.
a) Amendment in para 184.108.40.206(1) (iii) of ‘Circular 1 of 2013- Consolidated FDI Policy’ to read as follows:
“At least 50% of total FDI brought in the first tranche of US$ 100 million, shall be invested in ‘backend infrastructure’ within three years, where ‘back-end infrastructure’ will include capital expenditure on all activities, excluding that on front-end units. For instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure. Subsequent investment in the back-end infrastructure would be made by the MBRT retailer as needed, depending upon his business requirements”.
b) Amendment in para 220.127.116.11(1)(iv)of ‘Circular 1 of 2013 – Consolidated FDI Policy’ to read as follows:
“At least 30% of the value of procurement of manufactured/ processed products purchased shall be sourced from Indian micro, small and medium industries which have a total investment in plant & machinery not exceeding US $ 2.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. The ‘small industry’ status would be reckoned only at the time of first engagement with the retailer and such industry shall continue to qualify as a ‘small industry’ for this purpose even if it outgrows the said investment of US$ 2.00 million, during the course of its relationship with the said retailer. Sourcing from agricultural co-operatives and farmers co-operatives would also be considered in this category. The procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the manufactured/ processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis”.
c) Amendment in para 18.104.22.168(1)(vi) of ‘Circular 1 of 2013 – Consolidated FDI Policy’ to read as follows:
“Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per the 2011 Census or any other cities as per the decision of the respective State Governments, and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking”.
The amendment in the extant FDI policy relating to Multi-Brand Retail Trading in respect of ‘small industry’ will bring in a balance between the business exigencies of the MBRT entity and intent of the policy which is to extend the benefits of the FDI policy in multi-brand retail trading to a larger constituency of small industries. The amendment in the provision regarding ‘back-end infrastructure’ will give more clarity to the policy. The amendment to the provision regarding location of retail outlets will bring in parity in the policy as it is proposed to extend such dispensation to all States.”
“Review of the policy on foreign direct investment-definition of the term “control”, for calculation of total foreign investment i.e. direct and indirect foreign investment in Indian companies
The Cabinet Committee on Economic Affairs has approved the proposal of the Department of Industrial Policy & Promotion for amendment to the existing definition of “control” under the FDI policy. The revised definition will be as follows:
Until now, the definition of “control”, in the extant FDI policy is as under: “A company is considered as “controlled” by resident Indian citizens if the resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors in that company”.
The CCEA has now approved to define “control” as below:
” ‘Control’ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.”
The revised definition of ‘control’ will expand the definition of ‘control’ to cover ‘control’ exercisable inter-alia through management and policy decisions, shareholding, management rights, shareholder agreements and ensure alignment with the definition as per the Substantial Acquisition of Shares and Takeovers (SAST) Regulations, 2011 and the definition proposed in the Companies Bill, 2012.”