RETAIL SECTOR IN INDIA OPENED UP TO FOREIGN BRANDS: …



LIBERALIZING FDI: RETAIL SECTOR IN INDIA OPENED UP TO FOREIGN BRANDS

The Indian Government has finally taken baby steps towards opening up the retail sector to foreign investment. In a recent announcement, the Government stated its intention to permit foreign investment in ‘single brand’ retail up to 51% with the remaining 49% to be owned by Indians. Permission of the Foreign Investment Promotion Board, the agency responsible for approving foreign investments into the country, is required before any investment is made.

‘Single brand’ retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for which separate permission is required. If granted permission, Adidas could sell products under the Reebok brand in separate outlets. Retailers would be able to sell multiple products under the same brand and not be limited to one or two products.

A lot of foreign retailers will be pleased to hear the news. Companies which have a policy of owning its own outlets will just need to find an Indian partner to own 49% of the equity and can expect to expand rapidly. In most cases, it should not be a problem to find a way to keep control of the operational aspects of the business. Indian partners would be most happy to oblige if profits are generated.

For those brands which adopt the franchising route as a matter of policy, this new announcement will not make any difference. They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred route right away.

For those companies which wish to take advantage of the new regulations, there are a number of issues which they must be aware of while considering an investment in this sector.

First, the foreign investor must make an application to the Government for approval. While preparing this application, investors must understand the various conditions which go along with this new policy. For one, foreign companies will not be permitted to source goods locally and then retail them in India by using their brand names. Also, permission will be granted to only those brands that are regular product lines of foreign companies and sold internationally, in effect meaning that foreign retailers cannot experiment with new brands just for the Indian consumer. Lastly, an investor must make separate applications for each brand it proposes to introduce with an understanding that if permission is granted, there will be separate outlets for each brand.

For those companies which choose to adopt this route, they must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer. Currently, the organized retail sector is dominated by the likes of large business groups which decided to diversify into retail to cash in on the boom in the sector - corporates such as Tata through its brand Westside, RPG Group through Foodworld, Pantaloon of the Raheja Group and Shopper’s Stop. Do foreign investors look to tie up with an existing retailer or look to others not necessarily in the business but looking to diversify, as many business groups are? The due diligence process and eventual arrangement is crucial.

An arrangement in the short to medium term may work wonders but what happens if the Government decides to further liberalize the regulations after a couple of years? Will the investor decide to terminate the marriage and go solo? Either way, the foreign investor must negotiate its joint venture agreements carefully, with an option for a buy-out of the Indian partner’s share if and when regulations so permit. They must also be aware of a regulation which states once a foreign company enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint venture with another Indian company or set up its own subsidiary in the ‘same’ field’ without the first partner’s consent if the joint venture agreement does not provide for a ‘conflict of interest’ clause. In effect, it means that foreign brand owners must be extremely careful whom they choose as partners and the brand they introduce in India. The first brand could also be their last if they do not negotiate the strategic arrangement diligently.

There are no doubt huge positives in the long term for India, with vast expectations for speeding up the growth of the organized formats, setting up of supply chains, investment in food processing industry and manufacturing units and increased productivity of agriculture. For the consumer, it should lead to better quality of products, lower prices and wider choice of products.

For the investor, it is all about the profits which should be massive. However, innovative structuring arrangements and careful due diligence are required to ensure long term prosperity for the foreign retailer and the Indian partner. A partnership which works will be almost as valuable in India as the products itself.

Srijoy Das (sdas@, +91-11 26261302) is a Partner with the law firm of Archer & Angel, based in New Delhi, India with offices in Bangalore and Mumbai. The firm advises on franchising, intellectual property, foreign investment, technology and corporate law.

*****************************************

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download