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The government on Thursday approved the much-awaited relaxation of the foreign direct investment (FDI) policy on multi-brand retail trading (MBRT), by easing the three main contentious riders on such money.
These three, added as conditions to last year’s decision to open FDI in this segment, were on a mandatory 30 per cent sourcing from small domestic industries, 50 per cent of the investment to be in back-end infrastructure and outlets to be opened only in cities with population of more than a million.
On the 30 per cent sourcing, the government on Thursday expanded the definition of micro, small and medium enterprises (MSME), to include companies with a total investment of up to $2 million in plant and machinery will also be eligible for such sourcing of ‘manufactured and processed’ products.
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Further, even if such firms cross the $2-million threshold at a later stage, this will be ignored as long as the retailer keeps sourcing from that particular firm. “The ‘small industry’ status would be reckoned only at the time of first engagement with the retailer”.
According to Commerce Minister Anand Sharma, “further review was felt necessary for modification” of the FDI policy. Sharma, who briefed the media after the Cabinet meeting, also said “more clarity was required” for the benefit of retailers.
Relaxation of the sourcing norm would not only help arrest loss of business for such Indian small industries that outgrew the eligibility but would also help retailers develop a robust supply chain, official sources said.
“Foreign retailers had raised many concerns but the government has not agreed to all demands. Perhaps, once they come in, it would start giving them more concessions gradually. The government wants to be practical in allowing foreign chains. Foreign investors should start coming in and stop asking for more before that,” said Bijou Kurien, president and CEO, lifestyle, Reliance Retail, and chairman of the retail committee of the Federation of Indian Chambers of Commerce and Industry.
Also eased were the norms on back-end infrastructure investment. Since the policy got notified on September 14, 2012, retailers were unclear on whether the 50 per cent investment in this would have to be made from the mandatory minimum initial investment of $100 million or from the total amount brought in by investors.
Under the changed guidelines, that 50 per cent investment will be restricted only to the first tranche of $100 million, the mandatory initial investment amount, while subsequent investments into back-end will depend on the retailer.
However, the government did not clarify another point that had led to confusion among retailers — on whether such investment in back-end was to be made for new infrastructure or in existing back-end infra (Back-end infra refers to packaging, logistics, storage and warehousing, among others).
“The government spoke to foreign retailers recently and must have understood their concerns. But today’s changes are meant for food and grocery retail. I think the recent RBI notification which allowed foreign companies to invest in holding companies which in turn can invest in a downstream subsidiary is a much better way to get foreign investors in furniture, electronic retail and so on. There are no state-specific restrictions, no back-end restrictions there,” was the reaction of Kishore Biyani, chief and founder of the Future Group .
Finally, retailers are to now be allowed to open stores in all states that have agreed to implement FDI in multibrand retail, even if such states do not have cities of more than a million population. States will now have a choice of city for the location of the retail stores. Sharma said there were 53 cities having more than a million people each, while 12 states have so far have allowed FDI policy in MBRT.
“Tesco welcomes the proposed changes in the policy. We are in the process of reviewing the conditions, “ said the spokesperson of Tesco India.
