Foreign retailers need to invest in fresh infrastructure: Govt

Foreign multi-brand retail chains entering India must invest in new supply chain infrastructure, such as warehouses and cold storages, rather than buy existing assets, the government said in a clarification of FDI rules.

''The entire investment in back-end infrastructure has to be an additionality. The entity can invest only in greenfield assets and it will not be possible to acquire supply/chain/backend assets or stakes from an existing entity.

''Such investment in the equity of the existing infrastructure company will not be treated towards the fulfillment of the conditionality of 50 per cent investment in back-end infrastructure,'' the government clarified today.

The investment towards back-end infrastructure can be made across all states irrespective of the fact whether FDI in MBRT is allowed in that state or not.

While FDI in these activities is already allowed throughout the country, as far as multi-brand retail trade is concerned, FDI in non-FDI approved states in back-end infrastructure will be counted provided it is an additionality.

The government allowed global retailers to enter India in September, and stipulated at the time that at least 50 per cent of the investment made by the foreign company must be in supply chain infrastructure.

As per the conditions for wholesale cash and carry trading, such an entity is not permitted to undertake retailing of any form. Therefore, both the businesses have to be kept separate through different entities.

As regards supplies by multi-brand retail company to franchisees run by its partners, it is clarified that the policy envisages multi-brand trading in retail. The MBRT entity is not envisaged to undertake wholesale activity i.e. B2B. The front-end stores set up by MBRT entity will have to be 'company owned and company operated' only.

The wholesale trading/ cash and carry trading cannot be considered to be providing back-end infrastructure. FDI in MBRT will require fresh investment in back-end infrastructure.

The government also said global retailers have to source 30 per cent of their processed goods, not including fresh produce, from small industries and will only be allowed to sell these goods through retail stores, and not wholesale outlets

The 30 per cent sourcing will be reckoned only with reference to the front-end store. As such a multi-brand retailing entity cannot engage in any other form of distribution.

The phrase used in the FDI policy is 'small industries' with maximum investment in plant and machinery at $1 million. The sourcing condition pertains only to manufactured and processed products. Procurement of fresh produce is not covered by this condition.

Suppliers should have some form of authentication to confirm their status as 'small industry'. Certificate issued by District Industries Centre would be adequate authentication to confirm status of supplier as 'small industry'

For determining whether a city has a population of more than 10 lakh, it should not be limited to the data as per the 2011 census. When a city reaches such population level after 2011, it should be allowed to self-certify that it has achieved the population. Further, the population restriction should recognize that twin cities or co-located cities might be eligible based on their combined population.

Census data is the most authoritative source of population data, which is accepted by all the States. Therefore, no other data source or self-certification
can be permissible.

The policy should not give states that have approved FDI in multi-brand retail the ability to change the fundamental rules of the FDI policy, including but not limited to the 30 per cent 'small industry' sourcing and minimum investment in back-end infrastructure requirements.

States, which have opted for inclusion in the FDI policy have already been notified. Any amendment in the policy falls under the domain of the central government. However, state laws/regulations will apply.

FDI policy in MBRT is subject to the applicable state/union territory laws/ regulations. The state governments have the prerogative of imposing additional conditions accordingly.

If the foreign investor approaches a state government not included in the list of states supporting FDI in MBRT, consent from the state government would be sufficient, and a suitable amendment to the policy will be issued by the centre.

The government, however, said the following issues, including sourcing restriction amongst 'group companies', requirement of 50 per cent investment in 'backend infrastructure' within three years of the first tranche of FDI and requirement of 30 per cent sourcing from 'small industry', are under consideration.