FDI policy in India in respect of e Commerce and Single Brand retailing

FDI  policy in India – Latest changes and emerging issues

FDI is a major source of Non Debt Financial Resource for Economic Development of India. There are a lot of positive aspects for FDI in India. Say India’s fiscals are in good shape, India has lower wages, Special incentives of Investment and tax exemptions, foreign companies invest in India. There is uniformity, and progress in policy making, witnessing implementation of GST, and then, debt resolution process been simplified through implementation of National Company Law Tribunal (NCLT). And the government is making this happen by introducing favourable FDI Policy and easing rules over various sectors like real estate, defence, e commerce, so that FDI flows in India and in turn achieving ease in doing business and Economic Development. The most recent changes which the Government have brought is through Press Note 1 (2018) which is effective from 23^rd January 2018. Startup ecosystem has been given a major transformation, thereby making a hot place to invest In India by foreigners.

Let us have a look at some Important Statistics:

Total FDI inflow during FY 2017-18	US$ 44.86 billion
FDI Inflow through Service Sector	US$6.71Billion
FDI Inflow through Telecommunications	US$6.21Billion

Latest Government Initiatives:

From Press Note No. 1 (2018 Series)

Initiatives effective from:	What is the reform all about?
23rd January 2018	Prohibition of restrictive conditions regarding Audit firms. It says that wherever the Foreign Investor wishes to specify a particular Audit/ Audit firm having international network for the Indian investee Company, then, audit of such investee companies should be carried out as Joint Audit wherein one of the auditors should not be part of same network.
	No government approval will be required for FDI up to an extent of 100 per cent in Real Estate Broking Services
	Foreign Investing companies registered as NBFC with the RBI, being overall regulated, would be under 100% Automatic Route.
	Investment By CIC (Core Investing Company) needs to take Government approval and also to take permission from RBI separately.
	Air transport Services/ Civil Aviation The amendment allows FDI upto 100% wherein upto 49% is permitted under Automatic Route and beyond 49% is permitted under the Government approval route. To understand this, lets see the real example; FDI In Air India: Earlier the sectoral cap of 49% was not applicable for FDI In Air India and that’s why the Foreign Airlines could not invest in the State Run Carrier. After this amendment, Government is to divest its stake in Air India
	Liberalisation of Foreign Investment in Power Exchanges It is basically online platform where the electricity is traded. Earlier to the reform, policy provided for 49% FDI allowed under Automatic Route in Power Exchanges. And also, FII/ FPI purchases were also restricted to Secondary market. Now, restriction has been done away with. Now, FII/ FPI are allowed to purchase from Primary market as well.
	Government of India allowed 100 per cent FDI in single brand retail through automatic route. This would attract more investments in production, marketing, thereby improving availability of products to consumers and encourage sourcing from India.

Meaning of Single Brand Retail

In layman terms, it means that the one in which one Single item is sold across all outlets. Products to be sold should be Single brand only. For example; Titan, Reebok, Nike, Sony, etc.

Under FDI Policy, 100% FDI is allowed under Single Brand Retail that through Automatic Route. However, please take note that 30% mandatory sourcing must be done by Single Brand Foreign Retailers for their India based operations from Indian businesses preferably from MSMEs, Village and Cottage Industries, Artisans and Craftsman, in all the sectors. It is also mandatory to source exclusively pertaining to Indian operations of that Foreign retailers.

Conditions:

·        Products to be sold should be Single Brand only

·        Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India

·        Single Brand Product retailing would cover only products which are branded during manufacturing

·        A non resident entity or entities, whether owner of the brand or otherwise, shall be permitted to undertake Single brand product etailing in the country of specific brand, either directly the brand owner or through a legal agreement between Indian entity carrying out the Single Brand etailing business and the brand owner.

·        In those cases where the FDI from Single brand etailing is more than 51%, it is mandatory to source 30% of the value of goods purchased from MSMEs, Village and Cottage industries, Artisans and Craftsman in all the sectors.

o   The domestic Sourcing will first be self certified by the company and then, certified by Statutory Auditors of the company

o   The requirement of sourcing has to be met like below;

§  Take Average of Five years total value of goods purchased from the beginning of 1^st April of the commencement year i.e. opening of first store. Thereafter to be met annually.

§  Also, make sure that the relevant entity is required to be a Company incorporated in India in which FDI inflow has been reflected for carrying out Single Brand etailing

o   E Commerce in Single Brand etailing is allowed if operated through Brick and Mortar Stores.

FDI in e commerce

As per FDI Policy, FDI in e commerce is allowed only in Marketplace Model and not permitted in Inventory model.

Recently, The Delhi High Court sought the stand at Centre wherein big e commerce giants like Amazon and Flipkart have been violating FDI policy.  The companies Amazon and Flipkart have created multiple name lending companies to evade the FDI norms and sell their products at cheap price.

AS per Press Note 3 of 2016, entities like Amazon and Flipkart are not allowed to exercise ownership over the stocking of goods nor directly or indirectly from manufacturers thereby influencing the prices in violation of FDI Policy.

Scenario before press Note 3(2016)

Scenario after Press Note 3(2016)

FDI in e commerce was allowed upto certain limit B2B: 100% allowed in an e commerce company under Automatic Route B2C: FDI was not allowed at all.

FDI in e commerce is allowed in Marketplace Model. Also, FDI is not permitted in Inventory based model (barring Food retail) B2B: 100% allowed in an e commerce company under Automatic Route B2C: No FDI is allowed. However, permitted only for below mentioned cases; a.     A manufacturer is permitted to sell its products manufactured in India through e commerce retail b.     A Single brand retailing through Brick and Mortar stores is allowed c.      Indian Manufacturer is permitted to sell its own single brand products through e commerce. 70% in house and 30% sourcing from MSMEs, Village and Cottage industries, Artisans and Craftsman in all the sectors

B2B model of e commerce is a Model where Manufacturer sells the goods to Distributor through Digital or Electronic platform and then, Distributor sells the goods to Consumers.

B2C model of e commerce is a Model where there is no middle men. The manufacturer directly sells to Consumers through Digital or Electronic Platform.

Here in this case, Amazon and Flipkart buy products in bulk at discounts from manufacturers and route this through name lending companies thereby violating the FDI norms.

It is important to note that FDI in retailing of Food products which are locally produced both online and offline is 100% allowed with Government approval.

FDI in Multi brand Retail Business

Simply, FDI under Multi brand retail is allowed upto 51% that too with Government approval

Lets understand Multi brand with a very recent real time example;

In May 2018, Walmart acquired a 77 per cent stake in Flipkart for a consideration of US$ 16 billion.

There are restrictions having upper limit of 51% on Foreign Companies who want to invest in India to do Multi Brand Retail business in India through Brick and Mortar Stores.

Since upper limit is 51%, therefore if a foreign company wants to do retailing in India, they need to tie hands with domestic players. Now, even that is not easy, prior approval is required since 51% allowed with Government Approval. It is very important that the government has also laid some conditions.

Important conditions under FDI in Multi brand Retailing

1)     Minimum Investment of atleast $100 million

One of the very important condition is the Foreign company who wishes to do retailing has to invest at least $100 million in the country, of which 50% has to be in back-end infrastructure.

2)     Procurement of 30% of value of total from MSMEs

Adding to this condition is that, the company has to procure 30% of the value of its total procurements from small enterprises preferably from Village Industry in India. Retail outlets cannot be located in small towns or villages; they can be located only in cities with a population of 1 million or more.

Since there are so many conditions and restrictions, foreign entry in multi-brand retail never took place in India.

Routing through FDI in e commerce

Walmart has been fixing its position in the World. But with the stringent FDI Policy on Multi brand retailing, Walmart routed its entry by acquiring Flipkart in India through FDI in e commerce which is 100% allowed in B2B under Automatic Route.

With so many benefits of investing in India and keeping in mind that India is best place to invest as Flipkart is one of the e commerce company which is fully equipped with the resources, expertise and experience, Walmart is entering Indian markets.

Now, when the acquisition of Flipkart took place, it clearly indicated the entry of Walmart into Retail market through online etailing in India. Since FDI in e commerce is 100% allowed, Walmart entered India’s e commerce market.

I see this as major positive transformation in Retail Business in India.

Benefits of acquisition;

-        For Walmart - Increasing online retail market

-        For Flipkart- Building Capital base, use of vast knowledge of Walmart and State of Art Technology

-        More employment

-        Much more choices that too at lower prices for Consumers

However, both the companies are getting benefitted. It is very important to safeguard the interests of domestic Brick and Mortar Stores and Consumers.

To know more please contact CS Neha Seth at 9540074449