Foreign Direct Investment in Retailing in Indiaby Udit Jain on June 20, 2007
Foreign Direct Investment in Retailing
Foreign direct investment (FDI) in retailing still remains a widely debated and a heated issue on India’s economic and political scene. The government stance of protecting local retailers and prohibiting 100 percent foreign direct investment in retailing continued in 2005, restraining international retailers’ entry. However, there was gradual economic reform, giving way to easier and faster franchising agreements as well as the loosening of zonal regulations on retail expansion. Prior to 1997, FDI was permitted in retailing on a case-by-case basis. This enabled a few foreign retailers such as Dairy Farm International to enter India with domestic tie-ups.
From 2005, foreign retailers can only enter Indian retailing through franchising agreements. This was the route taken by Marks & Spencer, Planet Sports and also by pharmacy chains such as The Medicine Shoppe and several others. Foreign companies such as McDonald’s Corp, Nike Inc and Tommy Hilfiger Corp are others that operate through franchising agreements. FDI is also permitted in wholesale trading. Metro Group obtained the government’s approval to enter wholesale trading and in late-2003 established two large wholesale complexes in Bangalore. Subsequently SPAR and Shoprite Holdings Ltd entered India in cash and carry wholesaling.
FDI up to 51 percent is also permitted with prior government approval for the retailing of single brand products. Foreign companies are therefore allowed to sell goods sold internationally under a single brand such as Reebok, Adidas and Nokia. Retailing of multiple brands by an FDI company, even if such products are produced by the same manufacturer, is not allowed. However, 100 percent FDI in real estate to include shopping malls and commercial establishments is permitted from March 2005.
FDI up to 100 percent is permitted for e-commerce activities, on the condition that such companies divest 26 percent of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world. These companies must engage only in business-to-business e-commerce and not in retail trading, suggesting that existing restrictions on FDI in domestic trading are applicable to e-commerce as well.