The regulatory regime on Foreign Direct Investment (FDI) in retail trading in India has seen multiple reforms over the last year. We set out below the regulatory position as of August 2013.
Foreign investment up to 100% is permitted in single brand retail trading (a form of retail trading wherein products should be branded as per a single brand during manufacturing and sold under the same brand internationally) subject to the approval and certain conditions as specified by the Government of India. FDI upto 49% is permitted without the prior approval of the Government of India whilst any investment in excess of 49% may be made with the prior approval of the Government of India. A foreign investor is not required to own the “brand” under which retail distribution is contemplated. Brand licensing/sharing arrangements between the entity owning the brand and the investing entity is now permitted. Previously only one non-resident entity (whether the owner of the brand or an entity which had a legally tenable agreement with the owner of the brand) was permitted to invest in single-brand retail operations. This restriction has been lifted and now more than one non-resident entity can invest in single-brand retail operations, regardless of whether such entity is the owner of the brand or the brand licensee.
Foreign investment upto 51% in multi-brand retail trading is permissible with prior approval of the Government of India. A minimum first tranche investment of USD 100 million is necessary and 50% of this investment has to be invested in back-end infrastructure within 3 years (i.e. a maximum investment required towards back-end infrastructure or operations is limited to USD 50 million). After the 3 years, a retailer is only required to invest in backend infrastructure depending upon its business needs. Back-end infrastructure will only include green field assets - acquisition of existing assets or equity investment in existing companies will not be counted towards the requirements in relation to investment in back-end infrastructure. The foreign investor is required to source at least 30% of the value of the products sold, from "micro, small and medium industries" (i.e., industries which have a total investment in plant and machinery not exceeding USD 2 million) and, agricultural co-operatives and farmers co-operatives in India, from the commencement of operations of the Indian company. The Government of India has specified that the sourcing must be for the front-end retail store and the Indian company cannot distribute the small industry products through other forms of trading. Front-end multi-brand stores/operations must be greenfield and not by way of foreign investment in existing front-end stores/operations.
Most recently the Government of India has approved the applications of IKEA, Pavers, Fossil, Decathlon and Le Creuset for foreign investment in single brand retail trading in India. However, to date there has been no information available about a formal application being placed by any foreign investor for investment in multi-brand retail in India.