The Union finance ministry is pushing for an overhaul in government policy on foreign direct investment (FDI) in single-brand retail, to accommodate the demands of companies such as Scandinavian furniture giant IKEA, which has applied for clearance to set up stores in the country.
The move, if it goes through, is expected to open the floodgates for many other foreign retailers in the segment which have been waiting to enter India but have been stymied by the stiff sourcing requirements from the small-scale sector, as well as the definition of small industry in the policy.
A top finance official said the ministry was backing key changes in the policy that would make it easier for single-brand foreign retailers to invest. “We have had discussions with the DIPP (department of industrial policy and promotion) and have supported the changes suggested by IKEA in its application. We are of the view that DIPP should come out with changes in the current policy on single-brand retail to incorporate the suggestions made by IKEA.”
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The Cabinet had cleared the policy to step up FDI in single-brand retail to 100 per cent, from 51 per cent, in November 2011.
The notification was issued in January 2012. Since then, only two FDI proposals have come to the government, those of IKEA and Pavers (UK). IKEA has promised to invest ¤^1.5 billion (Rs 10,500 crore) in India by setting up 25 retail stores over a long-term period. With 336 stores (including franchisees) across the world, IKEA sources products worth $450 million, and wants to increase the value to $1 billion by 2016 and $2 billion by 2020.
The officials said the changes they endorse include substantial relaxation in the 30 per cent mandatory sourcing requirement from the small-scale sector, dilution in the definition of ‘small-scale’, as well as scrapping the condition that the foreign investor must also be the owner of the brand through which it wants to come into the country.
IKEA, for instance, in its application to the Foreign Investment Promotion Board, has sought a 10-year moratorium on mandatory sourcing from the small-scale sector. It has argued that it cannot meet the requirement from day one, as the gestation period of a typical IKEA store is three to five years. Instead, it has suggested the mandatory sourcing requirement be computed and certified over a 10-year period from the date of approval.
The finance ministry and DIPP agree. “We are fine-tuning the policy and we will soon take a call on this. It could be based on a cumulative period of, say, three years or so” said a top DIPP official.
In its application, the group has also asked for flexibility in the definition of small-scale sector. In the present single-brand FDI policy, global retailers have to source 30 per cent of their requirement from small industrial units, defined as having total investment in plant and machinery not exceeding $1 million (Rs 5.5 crore).
IKEA has said these units would very soon outgrow the stipulated valuation while working with the company and cease to supply under the current policy. It has instead asked that “this valuation shall apply to the industry at the time the IKEA group had first established a relationship with such industry and, thereafter, such industry shall continue to qualify as ‘small industry’ for this purpose”.
A top DIPP official said this clause was being redefined, too. “We have been working on this for some time now. We have already had initial discussions on this with the MSME (micro, small and medium enterprises ministry) but are yet to make a concrete proposal. They are fairly receptive of our concerns.”
IKEA also wants redefinition as to how the 30 per cent sourcing requirement based on the purchase value of the products would be calculated. It has argued that the definition would include products, components and materials sourced or exported by them, but would exclude all taxes and duties, transportation costs, warehousing and storage costs incurred by them.
It has also noted the value of purchases from small-scale units and not the value at which such products are ultimately sold would be considered for ascertaining compliance with the sourcing requirement. A DIPP official said they’re considering these changes.
IKEA has also sought a change in the rule that a foreign investor has to also own the brand name. In its case, the brand is held by IKEA Systems BV, while the Indian investment is routed through another company. IKEA Systems would get into a franchise agreement with the Indian venture. The top finance ministry official said: “This rule was put in so that there is no abuse (of it) in single-brand retail. However, we are planning to change it to offer flexibility.”
