Foreign multi-brand retailers not allowed to franchise stores

Foreign retailers entering India's multi-brand segment will not be allowed to franchise their stores and will have to put 50 per cent of their investments in back-end infrastructure specifically for the chain they are setting up.

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 said.

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 period?"

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.

DIPP said the entire investment in back-end infrastructure has to be an additionality and the foreign retail chain can invest only in greenfield (new) assets and it will not be possible to acquire supply/chain/backend assets or stakes from an existing entity.

It also that foreign direct investment in non-FDI approved states in back-end infrastructure will be counted for the compulsory 50 per cent investment norm provided it is an additionality.

It clarified that as per the conditions for wholesale cash & carry trading, such an entity is not permitted to undertake retailing of any form.

 "Therefore, both the businesses (wholesale cash & carry trading and MBRT) have to be kept separate through different entities," it said.

As regards supplies by MBRT company to franchisees run by its partners, it is clarified that the policy envisages multi-brand trading in retail and the MBRT entity is not envisaged to undertake wholesale activity i.e. B2B.

It said the cash & carry trading cannot be considered to be providing back-end infrastructure to the multi-brand retail store. "FDI in MBRT will require fresh investment in back-end infrastructure".

DIPP said investment towards back-end infrastructure can be made across all states irrespective of the fact that FDI in MBRT is allowed in that state or not.

On the query whether back and front-end infrastructure can be held by separate entities, it said the back-end entity may be 100 per cent owned by a foreign entity as long as the investor in MBRT has been able to satisfy the condition that 50 per cent of the FDI brought into the country for the multi-brand retail store has been utilised in back-end infrastructure as an additionality.

It also clarified that FDI policy in the sector is subject to the applicable state laws and the state governments have the prerogative of imposing additional conditions accordingly.

DIPP 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.

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".

On whether the back-end infrastructure could support front-end retail franchise stores in non-FDI states at arm's length, DIPP said, "the back end infrastructure, so developed, can be used across the states by any entity.

Franchisee model is not permissible as per extant FDI policy on MBRT". Lastly, on the matter of population restrictions on operations, it said Census data is the most authoritative source of population data, which is accepted by all the States.

"Therefore, no other data source or self-certification can be permissible," it added.

When contacted, Bharti Walmart Spokesperson said: "We are studying the government's clarification on FDI policy for multi-brand retail trading, issued today."