With the government keen to encourage foreign retailers to set up shop in India,multi-brand retailers are likely to be asked to invest 50% of only the first tranche of investments in back-end infrastructure,a senior official of the department of industrial policy and promotion (DIPP) said.
The DIPP,however,is likely to declare the 51% foreign direct investment limit a composite one,including FDI and foreign institutional investment,at a meeting on Tuesday. Moreover,the nodal department for FDI,which will take a call on whether a retailer can create back-end infrastructure in states that are not on board for FDI in multi-brand retail,is likely to allow it.
A senior DIPP official said Tuesdays meeting would decide whether the mandatory 50% investment in back-end infrastructure,to be made by foreign retailers,needs to be a share of just the initial tranche or the entire investment. In September 2012,the government opened up multi-brand retailing to foreign players allowing them a stake of 51%. However,no global retailer has yet approached it with a proposal to set up shop here. Several firms,including Frances Carrefour and the UKs Tesco,have been interacting with government officials,looking for clarifications on a host of issues.
According to the policy on FDI in multi-brand retail announced in September,foreign investors would need to invest at least 50% of the total FDI within three years of the first tranche in back-end infrastructure. However,retailers have raised doubts about whether the 50% will be treated as a share of the total investment or merely the first tranche.
It is certainly a major issue of doubt which we will try to resolve at Tuesdays meeting, a senior DIPP official told FE. The official explained that the doubts persisted on whether a retailer needed to invest $50 million of the minimum required investment of $100 million or an investment of,say,$1 billion over the long term,in which case the spend on back-end infrastructure would be $500 million.
Back-end infrastructure has been defined as investments made for processing,manufacturing,distribution,design improvement,quality control,packaging,logistics,storage,warehouse,agricultural market produce infrastructure and other such processes.
Expenditure on land cost and rentals has been keep out of the ambit of being part of back-end infrastructure.
The DIPP will also decide whether the 51% limit will be a composite limit including both FDI and FII. The rule needs to be in place,the official pointed out,since local retailer Kishore Biyanis Future Retail may want to sell a stake to a foreign partner. Currently,FII investment in Future Retail stands at 25.88%.
Tuesdays meeting will also deliberate on whether the back-end infrastructure can be created in states that are not agreeable to foreign multi-brand retailers doing business. As of now 11 states,including Himachal Pradesh,which announced its decision on Monday,have agreed to allow global retailers to set up shop.
“A hub and spoke model can work well for retailers, the DIPP official explained. For example if a store is in Mayur Vihar (Delhi),there is nothing that stops the retailer to source products from small and medium enterprises in Uttar Pradesh,a state which so far has not agreed to the FDI in multi-brand retail policy. Therefore,having warehouses in such states can form a good hub and spoke model.
The official also added that foreign retailers are seeking clarity on each and every minute details of the FDI policy in multi-brand retail.
“Walmart has sent us a long list of queries. Now bread manufacturing is restricted to SMEs,which companies like Britannia source. Walmart has asked us whether stocking Britannia branded bread will allow them to meet the 30% sourcing from SME norms, the official said. Similarly,Amarchand Mangaldas has asked whether the back-end infrastructure will have to come up in the same state where the front-end retail store is present.
“We intend to clarify these doubts very soon as it is worrying for us that nine months after the sector was opened up,there has been no firm proposal, the official added.