FDI Policy Brings Relief For Indian Single Brand Retailers

(Photographer: Prashanth Vishwanathan/Bloomberg)

Indian single-brand retailers will be happy to see the consolidated foreign direct investment policy released by the government on Monday. Because this annual compendium of all FDI policy changes reveals that the 70:30 rule has been deleted.

So far, certain restrictions applied to FDI in an Indian single-brand retailer unless the company complied with the 70:30 rule.

This rule stated that to qualify for FDI, without attracting conditionalities, an Indian single-brand retailer had to manufacture at least 70 percent of the product in-house. This made it tough for Indian companies that relied on contract manufacturing.

70:30 Rule: Rationale?

For more than a decade, the government's stand had been that a manufacturing entity, eligible for 100 percent FDI via the automatic route, can undertake wholesale as well as retail trading, without the retail trading conditionalities being applicable, Vaibhav Kakkar, a partner at law firm Luthra & Luthra told BloombergQuint.

The rationale was that a manufacturer of a product should not be curtailed or restricted from selling its produce to end consumers directly, he explained.

However, over a period of time, concerns had been raised on whether this principle, and as logical corollary this exemption from retail conditionalities, should be applicable, where an Indian company is procuring production from other third parties in India on a ‘contract manufacturing' basis.

Vaibhav Kakkar, Partner, Luthra & Luthra

And so, the 70:30 rule was introduced in June 2016. This meant that Indian manufacturers who were unable to manufacture at least 70 percent of the goods in-house were ineligible to raise FDI and thus remained cash starved, he added.

Further, many Indian manufacturers who had existing FDI and were outsourcing more than the rule permitted, had to consider restructuring their business operations.

Vaibhav Kakkar, Partner, Luthra & Luthra

70:30 Rule Deletion: Impact?

Monday's decision to do away with the 70:30 rule is a welcome move as it will now also permit FDI in those Indian single-brand companies that were trading and not manufacturing products in-house, said Paresh Parekh, a partner at consultancy firm EY to BloombergQuint.

This will ensure effective and optimal utilization of the Indian infrastructure for manufacturing activities, which was not being achieved in light of the curbs on ‘contract manufacturing', Kakkar said.

Besides the deletion of 70:30 rule, the consolidated policy has also relaxed an earlier restriction that applied to foreign investors desirous of making a more than 51 percent investment in an Indian single-brand retailer.

Single brand retail of products having ‘state-of-art' and ‘cutting-edge' technology have so far been exempt from the mandatory requirement of 30 percent local sourcing. But this exemption is only for the first three years.

The consolidated policy has opened the door for relaxation of this minimum local sourcing requirement. A committee comprising of the Department of Industrial Policy and Promotion (DIPP) Secretary, representatives of NITI Aayog, concerned administrative ministry and independent technical experts will hereon determine whether the product is ‘state of art' and ‘cutting edge technology' where local sourcing is not possible.

This in an attempt to address the concerns of many high profile technology intensive manufacturing companies which had expressed their intent of establishing manufacturing base in India without having to comply with the local sourcing norms, Kakkar said.