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Retail Market In India And The Recent Liberalization Of FDI Policy

The introduction of goods and services tax (GST), is expected to have a positive impact on the retail sector in India

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The Indian retail market has immense potential with rising purchasing power, changing consumer preferences, increasing aspiration amongst Indian youths for international brands and evolving lifestyles. As per the reports of the Asian Development Bank, the Indian economy as a whole is expected to grow at 7.6 percent in 2018. This trend will help increase the size and disposable income of the middle class and encourage spending on non-essential items. This makes the retail sector in India a very promising market that can't be ignored.

The Department of Industrial Policy and Promotion (DIPP) has on 23 January 2018 issued Press Note 1 (2018 Series) to boost FDI inflows into the country. By virtue of this Press Note, the Government has further liberalized single brand retail trade (SBRT) sector, along with introducing certain other reforms. Under the extant FDI policy, FDI in excess of 49% of the paid-up capital of a company engaged in SBRT sector required prior approval of the DIPP. Further, in case of FDI beyond 51%, 30% of the value of goods purchased from India is required to be sourced from India.

Pursuant to the liberalization announced, requirement of government approval has been done away. Accordingly, 100% FDI is now permitted under the automatic route in the SBRT sector. The sourcing requirements have also been tweaked to permit SBRT entity to set off its incremental sourcing of goods from India for global operations during initial 5 years, beginning 1st April of the year of the opening of first store. After completion of this 5 year period, the SBRT entity will be required to meet the 30% sourcing norms directly towards its India's operation, on an annual basis.

By virtue of the relaxation, SBRT entities will be able to offset additional global sourcing (above current levels) to satisfy the local sourcing condition. This benefit will be available for SBRT entities which are entering India for the first time or by entities which have set up operations, but which have not yet completed 5 years from the date of opening of the first store (in which case for the balance term).

The additional conditions prescribed under the FDI Policy, in relation to FDI in SBRT, that is, products sold to be of a single brand, products sold to be branded during manufacturing, etc., continue to remain applicable.

The liberalization is intended to ease and quicken the process for foreign players proposing to set up wholly owned single brand retail operations in India. The liberalization has been announced in wake of the Government's wider agenda to introduce reforms with a view to ease of doing business in the country.

No changes have been proposed to the FDI policy with respect to multi brand retail trading for which 51% FDI is permitted with prior government approval, subject to certain conditions relating to local sourcing, minimum capitalization, commitment of investing in back-end infrastructure, etc.

Apart from this, the Government's Digital India initiative intends to make doing business in India more convenient. Mobile shopping is challenging the ways retailers think about global expansion, as well as about their role in the value chain. The growth of online retailers is reducing the barriers to entry for brands in the Indian market. These trends, combined with a very low market saturation in India, point to a huge potential for retailers in the Indian market, which makes the Indian retail market unique and difficult to ignore for the foreign players.

Also, the introduction of goods and services tax (GST), is expected to have a positive impact on the retail sector in India.

The current government's initiatives and policies towards its ambition of making India one of the preferred investment destinations and the gradual opening up/liberalization of various sectors has been commendable. This further liberalization of SBRT sector may cause the existing foreign players to expand and may also result in new entrants setting up shops, thereby resulting in an overall increase in FDI inflows into the country.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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retail market foreign direct investment

Rabindra Jhunjhunwala

Rabindra is a Partner and a senior member in the Corporate Law Practice at Khaitan & Co, Mumbai. Rabindra’s practice spans a range of areas, including domestic and cross border M&A, PE investment, transaction documentation work and advises his clients regularly on all aspects of foreign investments (both inbound and outbound) and regulatory approvals. He has advised several multinationals and Indian companies on complex and big-ticket M&A transactions. Rabindra has been acknowledged for his experience and expertise and been recommended as a leading lawyer by several leading publications including Asialaw Leading Lawyers, Chambers & Partners, IFLR 1000 and Legal 500 for Corporate/M&A work.

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Stuti Galiya

Stuti is a Counsel in the Corporate Law Practice at Khaitan & Co, Mumbai. Stuti’s practice spans a range of areas, including domestic and cross border mergers & acquisitions, joint ventures, private equity investments, foreign investments, technology collaborations, financial services and related regulations, commercial contracts, real estate, employment and general corporate laws. Her M&A and private equity work has been across sectors with a focus on retail, hospitality, construction and development, financial services, manufacturing industries, automobiles and service industries amongst others.

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