Retail: Range of back-end infra FDI to widen

The committee of secretaries has decided to expand the definition of 'back-end infrastructure' for the proposed policy to permit foreign companies in multi-brand retail.

The department of industrial policy and promotion, tasked by the CoS to work out a definition, has decided to include three new areas as part of back-end infrastructure investment.

The new areas of investment are design improvement, quality control and packaging of products. Earlier, the definition mainly included investment in logistics and processing of agricultural goods.

The move will provide foreign retailers greater flexibility in structuring their India investments in the sector.

After an intense debate, a consensus has emerged in the CoS that one of the key riders for permitting foreign direct investment up to 51 per cent in multi-brand retail will be that at least 50 per cent investment has to mandatorily be in back-end infrastructure.

The proposed policy, to be sent to the cabinet for final approval, stipulates the minimum investment required would be $100 million.

The DIPP's decision is in response to a proposal by the ministry of micro, small and medium enterprises, which contended it was essential that foreign retailers be made to invest a small percentage of their turnover, say one per cent, in design improvement, developing a quality control mechanism and creating innovations in packaging for their small-scale suppliers.

The DIPP has agreed to the proposal and indicated it would be included in the definition of back-end infrastructure to incentivise big players to invest.

It is still being discussed whether it should be made mandatory and a certain percentage of turnover fixed for it.

Discussions are also on to provide more flexibility to foreign retailers, including that investment in back-end

infrastructure not necessarily be undertaken by the company making foreign direct investment.

It is being discussed whether the government should permit such investment to be made separately by an outsourced entity specifically commissioned for the purpose.

Various departments have gone through a debate over the need to include this clause, under which 50 per cent investment would be decided by policy restriction.

The department of economic affairs in the finance ministry strongly opposed the stipulation, saying there may be several commodities for which 50 per cent back-end investment may not be required.

The ministry of statistics and programme implementation supported the view, saying such restrictions should not be put as retailers would make such investments in any case to run their businesses successfully.

The department of commerce seconded the view.

However, the department of consumer affairs wanted the restriction to be more stringent -- that 75 per cent investment be in back-end infrastructure instead of 50 per cent. It suggested FDI in working capital not be allowed.

DIPP rejected the proposal, terming it unreasonable. Money being fungible, distinguishing between capital expenditure and working capital would be a problem, it said.

Even the Reserve Bank of India representative argued that under the existing working conditions, data of investments were collected only for balance of payments purposes and post-investment monitoring was not undertaken.

Thus, the central bank would be in no position to monitor compliance of back-end investment conditions.

It was, thus, decided foreign companies must self-certify compliance with the condition and keep records the government could check, if necessary.