FDI in retail sector in India Apoorv Verma(HRM 2012-14,XLRI) Ritika Singh(HRM 2012-14, XLRI) Introduction-Meaning of Foreign Direct Investment Foreign direct investment as defined by Organization of Economic Cooperation and Development (OECD) is a category of cross-border investment made with a strategic long-term intent. The OECD defines a transfer of 10% or more of the voting power (shares in company) as the definition of foreign direct investment. There is a significant degree of influence by the direct investor in the management of the direct investment enterprise. The objectives of direct investment are different from those of portfolio investment whereby investors do not generally expect to influence the management of the enterprise. This is why investment made by Foreign Institutional Investors (FIIs) is called Hot Money.
Defining the Retail Sector
In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale).i.e. sale to the ultimate consumer. Now let us have a glimpse of the Indian retail sector. Indian retail sector is approximately $ 450 billion in size with 96% in the unorganized sector and 4% in organized sector. The organized sector is under two formats namely Single brand retail i.e. The Adidas, Reebok, Pantaloons store we visit and Multi brand retail which houses many brands under the same roof like for example the Big Bazaar, The Shoppers Stop or the next door kirana store. Then other than the retail there is a Wholesale segment which does not directly sell to ordinary customers like me and you. An example of this type of store is the Bharti Wall Mart which acts as retailer to other stores and not directly to retail consumers
Evolution of foreign investment in the Retail Sector of India India is a signatory to World Trade Organization‘s General Agreement on Trade in Services. This agreement also includes wholesale and retailing services. So Despite the initial reservations and apprehensions the government in a series of moves opened up the retail sector slowly to Foreign Direct Investment. In 1997, FDI in cash and carry (wholesale) with 100% ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51% investment in a single brand retail outlet was also permitted in 2006. The government further extended the limit in single brand retail to 100% through the government approval route on 10th Jan, 2012. And now the latest decision on 14th Sept, 2012 of allowing 51% FDI in multi brand retail under government approval route after backtracking on a similar decision taken nearly an year ago.
The Attached Conditions with the present decision
Single Brand Retail
For proposals involving FDI beyond 51 percent, previously mandated requirement of sourcing 30 percent value of goods purchased from Indian small and medium enterprises, to be preferred and only to be done if it’s feasible. Only one-resident entity, whether owner of brand or otherwise, shall be permitted to invest in India. Single Brand retail to be allowed for specific brand, through a legally tenable agreement with the brand owner The investment can be made only through the government approved route not through automatic route.
Multi-Brand Retail The FDI will not be allowed in the E-Commerce sector i.e. The B2C (Business-to-Consumer) sector on internet would be unaffected with the FDI. But the foreign investment will be allowed in various non-store format activities such as mail order and e-commerce as long as it is B2B (Business-to-Business). The State Governments and UTs would be free to take their own decisions regarding FDI in Multi brand retail and hence the applicant will need to produce permissions from specific states, while applying to the Foreign Investment Promotion Board. Minimum investment of USD 100 million to be infused by the foreign investor. Also, 50 percent...
Please join StudyMode to read the full document