India Relaxes FDI Rules for Multi-Brand Retail

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Aug. 2 – The Indian government recently approved additional policies to further relax restrictions on foreign direct investment (FDI) into multi-brand retail trading (MBRT) in a move to boost foreign investment into the country’s staggering economy and to make up for last year’s failed policy.

Last year, India made the initial decision to open the MBRT sector up to further boost FDI, but the proposal ended up failing to lure major international retailers such as Wal-Mart, Tesco and Carrefour into the country due to uncertainties and ambiguities in the original policy.

This may change this year, however, as a Tesco India spokesperson confirmed that:”Tesco welcomes the proposed changes in the [MBRT] policy.”

Specifically, the amendments make the following key changes to the original MBRT policy:

A) Amendment III:

  • For investments worth US$100 million or more, at least 50 percent of total FDI brought in through the first tranche must now be invested in “backend infrastructure” within three years (excluding front-end units).
  • The definition of “backend infrastructure” is now expanded to include investments made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure, etc.
  • Expenditures on land cost and rentals are now not counted as “back-end infrastructure.”
  • Further investments in “backend infrastructure” may now be made as deemed necessary (depending on business requirements).

B) Amendment IV:

  • At least 30 percent of manufactured/processed products must now be purchased and sourced from Indian micro, small and medium-sized enterprises (MSMEs) with a total investment value in plant and machinery of US$2 million or less (the original policy listed this amount as US$1 million or less).
  • Companies that end up going over the US$2 million investment amount after their initial engagement will now still be considered MSMEs if such engagement continues.
  • During the first tranche of the total FDI amount, the procurement requirements to be met must now equal the average value of five years’ worth of purchased manufactured/processed products. It will be met on an annual basis afterwards.

C) Amendment VI:

  • Retail sales outlets may only be set up in cities with a population of more than 1 million people (using the 2011 Indian Census as a guide).
  • Retail outlets to be set up in any other city must obtain the relevant State Government’s permission.
  • Retail locations are restricted to specific areas as noted in each city’s respective Master/Zonal Plans. Furthermore, the requisite facilities (such as transport connectivity and parking) must also be included in the retail location’s development plans.

Indian Commerce Minister Anand Sharma noted that the Indian Government believed that “further review [of the FDI policy] was necessary for modifications,” which lead to these beneficial changes.

“More clarity was required [for the benefit of retailers],” he added.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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