Little leeway for retail aspirants

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New Delhi, June 6: Foreign players entering India's multi-brand retail segment will not be allowed to franchise their stores and have to put 50 per cent of their investments in back-end infrastructure specifically for the chain they are setting up. In a clarification issued on queries from global players, including Walmart, Tesco and Carrefour, on the FDI policy for multi-brand retail, the department of industrial policy and promotion said the "front-end stores will have to be company-owned and company operated only". The mandatory 30 per cent sourcing from small industries would be counted only for sales through the front-end stores and apply for manufactured store-products only and not for the procurement of fresh produce. Retailers have to bring in a minimum capital of $100 million, of which 50 per cent have to be invested in back-end infrastructure, and source 30 per cent of their total wares from small and medium enterprises that are defined as enterprises having $1-million investment in plant and machinery. Analysts feel despite the clarifications by the government, companies such as Walmart and Tesco were likely to continue with their wait-and-watch policy. "We are studying the government's clarification on the FDI policy for multi-brand retail trading," a Bharti Walmart official said. However, Prashant Khatore, analyst with Ernst and Young, said, "Retailers would be waiting for continuity and stability in policy before coming in in a big way." Back-end ventures The multi-brand retailers will have to make fresh investment in back-end infrastructure and can only invest in greenfield assets. No acquisitions will be allowed for back-end assets, and the entity cannot take up any wholesale activity. The mere acquisition of supply chain or back-end asset from an existing company would not be counted as mandatory back-end investment. The investment towards back-end infrastructure can be made across all states irrespective of whether FDI in multi-brand retail is allowed in that state or not. Further, investments in multiple infrastructure companies would not be counted towards the fulfilment of the condition of mandatorily investing 50 per cent in back-end infrastructure. The sourcing for cash-and-carry or export for the foreign investor's international retail and trading operations would not be counted towards 30 per cent sourcing norm. The multi-brand retailing entity cannot engage in any other form of distribution, and the entire investment in back-end infrastructure has to be an additionality. Not liberal enough "The government has gone strictly by its September policy while coming out with the clarifications; it has not taken a liberal view even where there was some scope, like for back-end infrastructure/ brownfield activity," Vivek Gupta, partner with BMR Advisors, said. Analysts said the retailers had expected the government to allow them to pick up equity stakes in back-end infrastructure or acquisition of existing infrastructure. But that has not been allowed. "The FDI retail policy makes it clear that only serious long-term big retailers would be investing in the country," Gupta said. Online sales The department has clearly said "multi-brand retail trading by way of e-commerce is not permitted". A query was raised on whether the minimum investment of $100 million can be used to acquire existing stores or set up new retail stores or a combination of both. The department said 50 per cent of the investments "must be" in back-end infrastructure and any amount spent in acquiring front-end retail stores would not be counted towards the mandatory back-end infrastructure funding. "The front-end stores must also be set up as additionality and not through acquisition of existing stores," it added. The government announced that the policy has been communicated to states and added that the states were free to regulate multibrand retail trade and impose additional conditions. The clarifications also confirm that state's consent was sufficient for foreign companies to enter into multi-brand retail pacts. http://www.telegraphindia.com/1130607/jsp/business/story_16981026.jsp#.UbHuHtKBlA0