Govt tightened At a time when global multi-brand retail chains were looking for easing of hurdles, the Government on Thursday tightened the screws on them by clarifying that if they want to set up such kind of a store in the country then that will have be directly owned and operated by the entity and not by any franchisee - a move which may directly impact joint ventures like the one between Bharti Enterprises and Walmart Stores Inc.
In a much awaited clarification, the Department of Industrial policy & promotion (DIPP) said that if any global retail entity wants to set up a multi-brand retail store then it will have to be 'company owned and company operated' and not operated by any franchisee. When contacted for its comments on the clarification by The Pioneer, a Bharti-Walmart spokesperson said that they were “studying” it.
In a clarification issued on queries from global retailers, including Walmart, Tesco and Carrefour, on FDI policy for multi-brand retail trading (MBRT), the DIPP said the “front end stores set up by MBRT entity will have to be company-owned and company operated only”.
The Department of Industrial Policy and Promotion also said the mandatory 30 per cent sourcing from small industries will be counted only for sales through the front-end stores.
On the contentious issue of investment in the back-end, the DIPP said investments in multiple infrastructure companies would not be counted towards fulfilment of condition of mandatorily investing 50 per cent in the back-end infrastructure.
“50 per cent of the investments brought in, must be invested in back-end infrastructure, and any amount spent in acquiring front end retail stores would not be counted towards back-end infrastructure,” DIPP added. The front-end retail stores must also be set up as an additionality and not through acquisition of existing stores, it added.
“Investment in the equity of the existing infrastructure company will not be treated towards the fulfillment of the conditionality of 50 per cent investment in back-end infrastructure,” DIPP said.
Also, investment towards back-end infrastructure can be made across all states irrespective of whether FDI in MBRT is allowed in that state or not.
Giving clarity on the sourcing part, it said: “The sourcing condition pertains only to manufactured and processed products. Procurement of fresh produce is not covered by this condition.”
last month, Tesco CEO Philip Clarke had met Commerce and Industry Minister Anand Sharma seeking clarity on whether buying of produce directly from farmers would be counted in meeting the sourcing norms requirement.
DIPP further said it is still considering some issues, including requirement of 50 per cent of investment in 'backend infrastructure' within three years of the first tranche of FDI, sourcing restriction amongst 'group companies' and whether 30 per cent sourcing from small industry can be allowed “if it outgrows and if so, till what periodIJ”
As per the present FDI policy, a global MBRT chain will have to mandatorily source 30 per cent of products from small industries, which has been defined as a unit with maximum investment in plant and machinery at $1 million
The Department of Industrial Policy and Promotion also said the 30 per cent sourcing rider will be considered fulfilled only if it is implemented for front end stores.
It said that multi-brand retailing entity cannot engage in any other form of distribution and the entire investment in back-end infrastructure has to be an additionality .
The mere acquisition of supply chain or back end asset from an existing company would not be counted towards the mandatory back end investment requirement.
“The entity can invest only in greenfield (new) assets and it will not be possible to acquire supply/chain/back end assets,” it said.
It also clarified that the multi brand retail trading (MBRT) entity is not envisaged to undertake wholesale activity i.E. B2B.
“The front-end stores set up by Multi-brand retail trading (MBRT) entity will have to be 'company owned and company operated' only,” it said adding the wholesale/ cash & carry trading cannot be considered as having provided back-end infrastructure. “FDI in MBRT will require fresh investment in back-end infrastructure”.
The investment towards back-end infrastructure can be made across all states irrespective of whether FDI in MBRT is allowed in that state or not.
Further, it said investments in multiple infrastructure companies would not be counted towards fulfilment of condition of mandatorily investing 50 per cent in the back end infrastructure.
On the issue of allowing online sales to enable the company to better serve Indian customers, the DIPP clearly said that “multi-brand retail trading by way of e-commerce is not permitted”.
A query was also raised on whether the minimum investment of USD 100 million can be used to acquire existing retail stores or setting up new retail stores or a combination of both.
The DIPP said that 50 per cent of the investments brought in, “must be” invested in back-end infrastructure and any amount spent in acquiring front end retail stores would not be counted towards the mandatory back-end infrastructure funding.
“The front-end retail stores must also be set up as an additionality and not through acquisition of existing stores,” it added. Several global retailers including Tesco and Walmart had sought these clarifications.