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SINGLE BRAND RETAIL TRADING IN INDIA

Meaning:-Selling of goods under a single brand name domestically as well as internationally is known as ‘Single Brand Retail’. However, Indian FDI regulations do not provide any guidance on the meaning of ‘Single Brand’. Single-brand retail trading refers to a business/franchisee/entity that sells goods to individual customers and not to other businesses and all such goods are sold under the same brand. Adidas, for example, sets up stores in India in which the foreign parent company of Adidas (Adidas Group.) invests. Such stores can only sell Adidas products under the 'single brand' route.
 

Retail Industry in India

India’s retail sector has shown tremendous evolution from traditional village fairs and street hawkers to splendid malls and organized outlets.The Indian retail industry has emerged over a period years as one of the most dynamic, robust and fast-paced industries due to the entry of several new retail brands. It is one of the pillars of the Indian economy and the largest among all industries accounting for 10% of India’s GDP and employs around 8% of India’s workforce. India is the world’s fifth-largest global destination in the retail space.

India’s retail market is expected to increase by 60% to reach US$ 1.1 trillion by 2020, with retail development taking place not just in major metropolitan cities, but also in tier-II and tier-III cities of India. Indian Retail Industry has grown based on factors such as steady economic growth, changing demographic profile, increasing incomes of citizens, rapid urbanization, changing consumer tastes and preferences, advent of online retailbusiness, lifestyle changes by middle class section of the societies and increased digital connectivity. Indian retail market is expected to grow at 12% per annum.

Indian retail sector is divided into “organized retail sector” which refers to trading enterprises, selling of goods or merchandises undertaken by licensed retailers, i.e., those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets, supermarkets, departmental stores, convenience stores, retail chains, privately owned large retail businesses as well as internet or e-retailing, which is the process of buying and selling products and servicesthrough the internet and “unorganized retail sector”on the other hand, refers to the traditional/old formats of low-cost retailing, for example, the local kirana stores for every day products, ‘mom and pop’general stores,small scale convenience stores, cart and pavement vendors, etc., this sector is highly decentralized and constitutes 91%of the total retail trade in India.

Online retail is expected to be at par with the physical stores in the upcoming few years and has grown at 23% to US $17.8 billion in the year 2017. Indian Retail Industry has massive potential as India has the second largest population with an affluent middle class, rapid urbanization, varied preferences of customers for brands and the access to digital technology.
 

FDI in the Retail Sector in India

Recently, the government disbanded the Foreign Investment Promotion Board (‘FIPB’).Now, applications seeking approval for FDI in retail trading sectors are directly reviewed and approved by the Department of Industrial Policy and Promotion (‘DIPP’), the regulator for retail trading in India.

FDI regulations have segregated the retail sector into five broad categories, each with different levels of restrictions:-

  • Wholesale trading (entities that sell goods to other retailers, industrial, commercial or business users, but not to end consumers);
  • Single brand retail trading (entities that sell goods of only one brand) (‘SBRT’);
  • Multi brand retail trading (entities that sell goods of various brands) (‘MBRT’);
  • E-commerce retail (entities that act as a marketplace for other retailers to sell products to end consumers); and
  • Food retail (entities that sell food products that are produced in India).

 

FDI in Single Brand Retail Trading in India

Foreign investment in single brand retail trading is aimed at attracting investments in production and marketing of global brand in India,improving the availability of exquisite foreign goods in India& thus creating a link that connects the Indian individual consumers withmanufacturing and distribution chains of international brands, encouragingincreased sourcing of goods from India and enhancing competitiveness ofIndian enterprises through access to global designs, technologies and managementpractices.

Up until now, foreign direct investment of up to 49% was permitted under the automatic route, beyond that, government approval was required. Ahead of the Union Budget 2017-18, the Union Cabinet under the chairmanship of Prime Minister Mr. NarendraModi has approved amendments in FDI Policy. The Cabinet has approved 100% FDI through the automatic routein the entities operating in the Single Brand Retail Trading (‘SBRT’) sector, subject to the following conditions:

  • Products to be sold should be of a single brand only (i.e., retail of goods/products of a multi-brand even if produced by the same manufacturer would not be allowed);
  • 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 would only cover products which are branded during manufacturing;
  • Any addition to product categories to be sold under a “single-brand” would require fresh approval from the Department of Industrial Policy and Promotion (“DIPP”) (i.e. for example if a single brand wants to market its sub-brands in their Indian stores,it would require approval from DIPP as the Indian FDI regulations do not provide any clarity on the meaning or scope of a 'single brand');
  • A non-resident entity or entities, whether owner of the brand or otherwise, shall be permitted to undertake 'Single Brand' product retail trading in the country for the specific brand, directly or through a legally enforceable agreement with the brand owner for undertaking single brand product retail trading;
  • In respect of proposals by companies/entities involving FDI beyond 51% in the “SBRT” sector, are required to source at least 30% of the value of goods purchased by them from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors;
  • Single brand retail trading entity operating through brick and mortar stores, is permitted toundertake retail trading through e-commerce; and
  • Single brand retail trading entity would be permitted to set off its incremental sourcing of goods from India for global operations during initial 5 years, beginning 1st April of the year of the opening of first store, against the mandatory sourcing requirement of 30% of purchases from India.
     

Key changes in the 2017 FDI Policy for Single Brand Retail Trading Sector in India

  1. Committee for examining applications for exemption from 30% local sourcing norms:-As per the 2017 FDI Policy regulations, relaxation from the 30% sourcing norms and 3 years exemption limit from commencement of business is provided to entities for SBRT of merchandise with ‘state-of-the-art’ and‘cutting edge technology’ where the such local sourcing is not possible. Under the new policy, a Committee comprising of the Secretory of DIPP, with representatives of NITIAayog, concerned administrative ministry and a body of independent technical experts has been formed to examine the claim of applicants on the issue of the products being in the nature of the ‘state-of-the-art’ and ‘cutting edge technology’ and give recommendations for relaxation of the local sourcing norms. This is a prudent move as it will ensure that such applications are evaluated by trained and adequate personnel.
  1. Relaxation for Indian manufacturers from the 70-30 rule:-One of the key changesin the 2017 FDI Policy wasthe deletion of the 70-30 Rule wordings that existed under the 2016 FDI Policy. This development thereby allows Indian entities who are incapable of manufacturing their products in-house and that outsource more than 30% of its production to contract-manufacturers to avail 100% FDI via automatic route without any government approval or compliance under the SBRT FDI norms.
  1. Clarity on  the  brand owner-contract manufacturing structure of a product under the 2017 FDI Policy:- The 2017 Policy brings clarity on thebrand owner-contract manufacturer issue, wherein it is considered that a brand-owner may not be considered as a manufacturer under the underlying rationale of the 2017 policy even if it procures the raw materialsfor the manufacture of the products, retains the trademark of its brand over the products, exercises quality control over the manufacturing processand pays the cost of labour charges to the contract manufacturer, if its relationship with the contract manufacturer is on a principal-to- principal basis. However, if the brand owner were to assume the entire risk associated with the manufacturing process of the goods and did not reserve the right to reject the goods on the basis of non-compliance to the brand-owner’s product specifications, then it would indeed be considered as a manufacturer. Therefore the brand-owner must bear all risks associated with the manufacturing process so that it is a situation of a contract-manufacturer merely carrying out the manufacturing process on behalf of the brand-owner.
  1. Relaxation for manufacturers to manufacture Indian brands:-With the deletion of the 70-30 rule wordings which were framed under the 2016 FDI Policy, under the norms of the 2017 FDI Policy foreign companies/entities will be allowed to manufacture their foreign branded merchandise in India, perhaps through a subsidiary, and subsequently sell them through wholesale, retail or ecommerce without the requirement of any government approval from the DIPP.

 

Conclusion

The recent amendments and key changes in the 2017 FDI Policy, in particular with reference to the liberalization of norms in ‘Single Brand Retail Trading’sector would facilitate ease of doing business in India and put India as a global investment hotspot worldwide. It will provide stimulus to domestic manufacturing value addition and help in upgradation of our vibrant local small industry in the retail trading sector. The Cabinet has taken a conscious decision in approving the amendments in the SBRT sector to facilitate trade in the retail industry in India and to facilitate the emergence of global brands in the Indian markets in order to provide more variety of goods to the Indian consumers.

The secondary markets and retail trade associations have looked at this development in positive light. However, this Amendment does not provide the much required clarity regarding SBRT entities retailing sub-brands under the umbrella of the 'Single Brand'. While there have been certain global SBRT entities that have been under the scrutiny of the Government for selling products under sub-brand of its global brand. Further there has to be clarity on whether the SBRT FDI norms will be applicable to Indian companies who engage in SBRT of products manufactured by them through contract manufacturing.

Gautam Khurana
13 April 2018

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