FDI norms not for franchise deals: FinMin

Finance ministry officials are of the view that current restrictions that prohibit FDI in multi-brand retail cannot be extended to franchise agreements between an Indian company and an overseas partner.

Franchise agreements are basically service agreements and in the case of services there can be no distinction between retail and wholesale, hence the present guidelines can only apply to retail in goods and not franchise agreements, hold ministry officials.

This view is significant as there have been speculations about the government banning franchise arrangements, which many consider a loophole that single-brand and multi-brand retail giants have been leveraging to enter India.

For example, take the much-hyped case of Bharti Retail and Wal-Mart. This arrangement is at two levels: Wal-Mart is entering India as a wholesale trader, that is, as a cash-and-carry business giant, and secondly, as a back-end for Bharti Retail. If Bharti Retail were to use the name "Wal-Mart" for its shops, then it would pay a royalty to the American retailer and act as its franchisee.

While bigwigs like Tesco and Carrefour have decided not to enter India until FDI in multi-brand retail is opened up, there has been a view that they could always change their mind and appoint an Indian franchisee.

The finance ministry's view gains even more significance as the Department of Industrial Policy and Promotion is conducting an annual review of the FDI policy.