FDI in Retail Legal Changes and Challenges Seminar

FDI in Retail- Legal Changes and Challenges Seminar on the Implications of Opening of FDI in Indian Retail PXV LAW PARTNERS

INTRODUCTION • Indian retail structure accounts for 22% (twenty two percent) of the country’s GDP and contributes to 8% of the total employment • Sector has shown a 6. 4% growth since 1998 • Only a small percentage of the market is organized retail- high growth potential • Retail market is expected to grow rapidly • India is the world’s fourth most attractive destination for retail investment • Government expects significant capital inflow, improvement in productivity and supply chain and greater utilization of Indian goods in imports 2

3 100% FDI permitted in single brand retail under the approval route 51% FDI permitted in multi-brand retail under the approval route Multi-brand retail implementatio n stopped under political pressure 2012 FDI in cash and carry brought under automatic route. 51% FDI in single brand permitted under the approval route 2011 FDI permitted in wholesale cash and carry under approval route 2006 No FDI in retail 1997 1990 s GRADUAL LIBERALIZATION OF THE RETAIL SECTOR Multi-brand Retail reinstated Amendmen ts to the rules in relation to single brand retail

INDIA’s FDI REGIME • Governing Legislation- Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange Management (Transfer or Issue of Securities to Persons Resident Outside India), Regulations 2000 Notifications of the Department of Industrial Policy and Promotion (DIPP) Notifications of the Reserve Bank of India (RBI) Consolidated FDI Policy (published once a year) Investment can be in equity shares or compulsorily convertible preference shares or debentures Subject to minimum valuation (DCF) Investment permitted in private companies, partnerships, LLPs, Project offices and liaison offices • • FDI Automatic Route Approval Route RBI 4 Foreign Investment Promotion Board (FIPB)

WHOLE SALE CASH AND CARRY • • FDI permitted under the automatic route Whether a transaction is a wholesale trade or not would depend on the type of customers to whom the sale is made and not the size and volume of the sale Sale of goods to retailers, industrial, commercial and other users and not for personal consumption List of valid buyers include holders of sales tax/ VAT licenses; holders of trade licenses indicating that the person is engaged in commercial activities; holders of permits/ licenses for undertaking retail trade etc. • • Record of transactions to be maintained on a daily basis Whole sales to group companies to not exceed 25% of the total turnover 5

SINGLE BRAND RETAIL • • • Press Note 4 of 2012 • Derivative brands/sub-brands may be considered FDI upto 100% permitted with FIPB approval Products should be sold under single brand name only and under the same brand internationally, i. e. in one or more countries other than India. Any additional brand would require separate FIPB approval. under a single application. • Covers only products which are branded during manufacturing • Only one non-resident entity is permitted to undertake single brand retail trading- the entity must demonstrate that it is either the owner of the brand or has a legally binding agreement with the owner of the brand 6

SINGLE BRAND RETAIL • In case the foreign participation exceeds 30%, the company must ensure that 30% of the value of the manufactured/ processed products purchased shall be sourced from India, preferably, MSMES, village and cottage industries, artisans and craftsmen (“local procurement requirement”) • The local procurement requirement must be met as an average of 5 years’ total value of goods produced, beginning April 1 of the year during which the first tranche of FDI is produced- thereafter required to be complied on an annual basis • Onus of compliance is with the entity carrying out retail trading- self certification • Changes brought about in 2012 regulations 7 Sr. No 2011 Regulation 2012 Regulation 1. Foreign investor should be the owner of the brand Foreign investor to be owner of the brand/ have an agreement with the brand owners 2. 30% sourcing from small industries, village industries mandatory 30% sourcing from MSMEs, village industries preferable 3. 30% local procurement requirement to To be met in 5 years be met immediately

Multi Brand Retail- PN 5 of 2012 • 51% FDI permitted subject to FIPB approval infrastructure etc. Land costs and rentals are • Enabling policy- Retail only in States which not included in back-end infrastructure permit multi-brand retail- states may impose • Local procurement requirement- 30%, to be additional conditions- so far no additional met over 5 years conditions have been notified • Government will have first right of refusal over • Minimum FDI amount US$ 100 million agricultural products • Only in cities with population of more than 1 • Self certification and compliance million, or the largest city of the state/union territory • At least 50% FDI to be invested in “back-end” infrastructure, i. e. processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehousing, agricultural market produce 8 • Retail trading in e-commerce not permitted

THE COMPETITION ACT – IMPACT • The Competition Act was legislated in 2002 - purpose of preventing anti competitive practices Merger control provisions notified in 2011 Competition Commission of India ("CCI”) - responsible for the enforcement of the • • Competition Act in India. • Combinations (acquisitions, mergers and amalgamations, transfer of assets) above certain turnover and asset based thresholds require pre-merger filings • “Trigger event”- 30 days of either execution of the agreement or approval of the acquisition by the board of directors 210 day wait period • 9

THE COMPETITION ACT Thresholds Operations Non Group In India Total value of assets more than US$ 330 million or turnover of US $ 1 billion. Total value of assets of more than US $ 1. 35 billion or turnover more than US $ 4 billion Aggregate value of assets more than USD 750 million (including US $ 165 million in India) or turnover more than USD 2250 million (including at least US $ 500 million n India). Aggregate value of assets more than USD 3 billion (including at least US $ 168. 75 million in India) or turnover more than USD ( billion (including US $ 500 million in India). In India or Outside India 10

Challenges to FDI in Retail • Political opposition and possible local issues • FIPB approval process- time consuming • State specific policies, compliance nightmare • Requirement to deal with several regulatory authorities • Multi-fold indirect tax implications • Threshold of US $ 100 million in multi-brand retail, will discourage all but the largest players- will also discourage private equity • Infrastructure gaps • Uneven economic development- requirement to pick and choose sites for new projects • 11 Funding the Indian joint venture partner

THANK YOU!! 12