Jan. 11 – The Indian government on Tuesday agreed to allow 100 percent foreign ownership in single brand retail stores, paving the way for international businesses such as Starbucks, Ikea and Adidas to operate independently in the country without having to involve local partners. Foreign single brand retailers were previously limited to 51 percent ownership.

Besides the entrance of new companies into the Indian market, the decision is also likely to result in several existing foreign players operating under tie-ups with Indian companies to convert their existing ventures into wholly-owned subsidiaries.

The Indian government has stated that the Foreign Investment Promotion Board (FIPB) has cleared French retailer Christian Louboutin’s proposal to set up retail chains in the country while several global brands such as Mothercare and Marks & Spencer are already in India through the joint venture route.

The announcement comes six weeks after the Union Cabinet approved the proposal and almost four weeks after the government was forced to put its plans to open up the market to global multi-brand retail chains such as Wal-mart and Carrefour on hold in the wake of opposition from allies as well as Congress leaders.

Overseas retailers that want to invest beyond 51 percent will need to source 30 percent of their goods from “Indian” small, village and cottage industries and artisans. Small industries have been defined as those where investment in plant and machinery is up to US$1 million (around Rs. 5 crore).

The fulfillment of this situation will be ensured through self-certification by the company, to be subsequently checked by statutory auditors from the duly certified accounts which the company will be required to maintain, the Department of Industrial Policy and promotion said in a two-page note. The rules also stipulate that these investments would need to be approved by the FIPB. The government is also trying to develop an agreement on 100 percent multi-brand retail. A call on going ahead with the Cabinet decision is expected to be taken after the assembly elections.

Therefore, the revised conditions of this sector are that up to 100 percent ownership would be permitted in single brand product retail trading under the government approval route, subject to the following conditions:

• Products to be sold should be of a single brand only.
• Products should be sold under the same brand internationally (i.e. products should be sold under the same brand in one or more countries other than India).
• Single brand product-retail trading would cover only products which are branded during manufacturing.
• The foreign investor should be the owner of the brand.
• In respect of proposals involving FDI beyond 51 percent, mandatory sourcing of at least 30 percent of the value of products sold would have to be done from Indian “small industries/village and cottage industries, artisans and craftsmen.”
• Application is submitted seeking permission from the government for FDI in retail trade of single brand products to the Secretariat for Industrial Assistance in the Department of Industrial Policy and Promotion. The application will specifically indicate the product/product categories which are proposed to be sold under a single brand. Any addition to the product/product categories to be sold under single brand would require fresh approval from the government.
• Applications would be processed in the Department of Industrial Policy and Promotion to determine whether the products proposed to be sold satisfy the notified guidelines, before being considered by the FIPB for government approval.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in India. For more information, please contact india@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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