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The retail sector bargaining for FDI

Investments in the retail sector have been subject to scrutiny since the Parliamentary Standing Committee on Commerce (‘committee’) began its review in April 2007. The Committee finally tabled its report, on Foreign and Domestic Investments in the Retail Sector (‘Report’), on June 8, 2009.

The Report states “that a blanket ban should be imposed on domestic corporate heavyweights and foreign retailers from entering into retail trade in grocery, fruits, vegetables, and restrictions should be entered for opening large malls by them for selling consumer products”.

The Committee also recommends that the government should protect small and medium retailers by adopting a reservation policy, similar to the small scale industry policy. On trading in wholesale/cash and carry, the Committee has made somewhat sweeping observations and recommended that the “Government should stop issuing further licences for cash and carry, either to transnational retailers or to a combination of transnational retailers and the Indian partner, as it is a mere camouflage for doing retail trade through the back door”.

Immediate effects of these recommendations were felt with IKEA abandoning its proposed US $1 billion India investment. Unfortunately, this comes at a time when organised retail in India, due to the general economic crisis, is strapped for cash and is searching for new avenues of funding and partnerships. In such circumstances, one hopes the government responds quickly to curtail the ripple effect which the Report may have on investments waiting to cash in on India’s lucrative retail sector.

What is worrisome about the Committee’s recommendations is that they appear somewhat regressive. Currently, FDI policy for the retail sector is governed by Press Note 3 (2006). This Press Note liberalised FDI in the retail trade sector and permitted FDI up to 51%, with prior approval, in single-brand retail, subject to certain conditions.

At that time, the government believed these guidelines were necessary to attract investments in production and marketing, encourage sourcing of goods from within India and enhance competitiveness of Indian enterprises. Thus, one wonders whether the Indian retail landscape has drastically changed from the time of the aforementioned Press Note to when the Report was tabled in Parliament.

In wholesale/ cash and carry trading, currently 100% FDI is permitted under the automatic route. And while the Committee may suspect the same as being a disguise for doing retail through the back door, the law is fairly clear that to qualify as cash and carry trading, the sale must be made by a wholesaler to registered business customers (B2B sales) or retailers (having sales tax registrations) for resale. Caselaw suggests that it is the type of customer who determines whether the trade is wholesale or retail. The prerequisite is that the buyer must be carrying on a registered business and should not be the ‘ultimate consumer’.

First Published in the Economic Times on August 03, 2009



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