India eases FDI norms for multi-brand retail business

The government has eased investment rules for the retail sector liberalising norms for investment, sourcing and location, in an attempt to attract foreign retailers such as Wal-Mart, Tesco etc.

The union cabinet approved a proposal to amend the existing FDI policy in multi-brand retail trading (MBRT) easing rules regarding investment in infrastructure, local procurement and location at its meeting today.

Accordingly, the 50 per cent FDI to be brought in as the first tranche of $100 million, to be invested in 'backend infrastructure' within three years, will now include capital expenditure on all activities, excluding that on front-end units.

Back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure etc.

Expenditure on land cost and rentals, if any, will not, however, be counted for purposes of backend infrastructure.

Subsequent investments in the back-end infrastructure should be made by the MBRT retailer as needed, depending upon his business requirements.

The policy that at least 30 per cent of the value of procurement of manufactured/ processed products purchased should be sourced from micro, small and medium industries in India, which have a total investment in plant and machinery not exceeding $2 million stands unchanged.

This valuation, however, refers to the value at the time of installation, without providing for depreciation. The 'small industry' status would be reckoned only at the time of first engagement with the retailer and such industry shall continue to qualify as a 'small industry' for this purpose even if it outgrows the said investment of $2 million, during the course of its relationship with the said retailer, the government clarified.

Sourcing from agricultural co-operatives and farmers co-operatives would also be considered in this category, an official release pointed out.

Also, the procurement requirement could be met as an average of five years' total value of the manufactured/ processed products purchased, beginning 1 April of the year during which the first tranche of FDI is received.

Thereafter, it would have to be met on an annual basis.

Retail sales outlets may be set up only in cities with a population of more than 1 million lakh as per the 2011 census or any other cities as per the decision of the respective state governments, and may also cover an area of 10 km around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the master/zonal plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.

The amendment in the extant FDI policy relating to multi-brand retail trading in respect of 'small industry' will bring in a balance between the business exigencies of the MBRT entity and intent of the policy, which is to extend the benefits of the FDI policy in multi-brand retail trading to a larger constituency of small industries, the official release said.

The amendment in the provision regarding 'back-end infrastructure' will give more clarity to the policy, it said, adding that the amendment to the provision regarding location of retail outlets will bring in parity in the policy as it is proposed to extend such dispensation to all states.

India, which threw open its supermarket sector to foreign retailers in September 2012, has not yet received a single application from foreign retailers, who cited ambiguity in entry rules.