Download retail sector in india opened up to foreign brands

LIBERALIZING FDI: RETAIL SECTOR IN INDIA OPENED UP TO
FOREIGN BRANDS
The Indian Government has finally taken baby steps towards opening up the
retail sector to foreign investment. In a recent announcement, the
Government stated its intention to permit foreign investment in ‘single brand’
retail up to 51% with the remaining 49% to be owned by Indians. Permission
of the Foreign Investment Promotion Board, the agency responsible for
approving foreign investments into the country, is required before any
investment is made.
‘Single brand’ retail implies that a retail store with foreign investment can
only sell one brand. For example, if Adidas were to obtain permission to retail
its flagship brand in India, those retail outlets could only sell products under
the Adidas brand and not the Reebok brand, for which separate permission is
required. If granted permission, Adidas could sell products under the Reebok
brand in separate outlets. Retailers would be able to sell multiple products
under the same brand and not be limited to one or two products.
A lot of foreign retailers will be pleased to hear the news. Companies which
have a policy of owning its own outlets will just need to find an Indian
partner to own 49% of the equity and can expect to expand rapidly. In most
cases, it should not be a problem to find a way to keep control of the
operational aspects of the business. Indian partners would be most happy to
oblige if profits are generated.
For those brands which adopt the franchising route as a matter of policy, this
new announcement will not make any difference. They would have preferred
that the Government liberalize rules for maximizing their royalty and
franchise fees. They must still rely on innovative structuring of franchise
arrangements to maximize their returns. Consumer durable majors such as
LG and Samsung, which have exclusive franchisee owned stores, are unlikely
to shift from the preferred route right away.
For those companies which wish to take advantage of the new regulations,
there are a number of issues which they must be aware of while considering
an investment in this sector.
First, the foreign investor must make an application to the Government for
approval. While preparing this application, investors must understand the
various conditions which go along with this new policy. For one, foreign
companies will not be permitted to source goods locally and then retail them
in India by using their brand names. Also, permission will be granted to only
those brands that are regular product lines of foreign companies and
sold internationally, in effect meaning that foreign retailers cannot
experiment with new brands just for the Indian consumer. Lastly, an investor
must make separate applications for each brand it proposes to introduce with
an understanding that if permission is granted, there will be separate outlets
for each brand.
For those companies which choose to adopt this route, they must tie up with
a local partner. The key is finding a partner which is reliable and who can
also teach a trick or two about the domestic market and the Indian
consumer. Currently, the organized retail sector is dominated by the likes of
large business groups which decided to diversify into retail to cash in on the
boom in the sector - corporates such as Tata through its brand Westside,
RPG Group through Foodworld, Pantaloon of the Raheja Group and Shopper’s
Stop. Do foreign investors look to tie up with an existing retailer or look to
others not necessarily in the business but looking to diversify, as many
business groups are? The due diligence process and eventual arrangement is
crucial.
An arrangement in the short to medium term may work wonders but what
happens if the Government decides to further liberalize the regulations after
a couple of years? Will the investor decide to terminate the marriage and go
solo? Either way, the foreign investor must negotiate its joint venture
agreements carefully, with an option for a buy-out of the Indian partner’s
share if and when regulations so permit. They must also be aware of a
regulation which states once a foreign company enters into a technical or
financial collaboration with an Indian partner, it cannot enter into another
joint venture with another Indian company or set up its own subsidiary in the
‘same’ field’ without the first partner’s consent if the joint venture agreement
does not provide for a ‘conflict of interest’ clause. In effect, it means that
foreign brand owners must be extremely careful whom they choose as
partners and the brand they introduce in India. The first brand could also be
their last if they do not negotiate the strategic arrangement diligently.
There are no doubt huge positives in the long term for India, with vast
expectations for speeding up the growth of the organized formats, setting up
of supply chains, investment in food processing industry and manufacturing
units and increased productivity of agriculture. For the consumer, it should
lead to better quality of products, lower prices and wider choice of products.
For the investor, it is all about the profits which should be massive. However,
innovative structuring arrangements and careful due diligence are required to
ensure long term prosperity for the foreign retailer and the Indian partner. A
partnership which works will be almost as valuable in India as the products
itself.
Srijoy Das ([email protected], +91-11 26261302) is a Partner with the
law firm of Archer & Angel, based in New Delhi, India with offices in
Bangalore and Mumbai. The firm advises on franchising, intellectual property,
foreign investment, technology and corporate law.
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