Reforms in India: Narendra Modi govt mulls 100% FDI in single-brand retail through auto route

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The government is weighing further easing of foreign direct investment (FDI) rules in single-brand retail to make it even easier for foreign companies to invest in India and cut delays in the flow of such investments, according to official sources.

The ministries of finance and commerce and industry have initiated discussions on allowing 100% FDI in single-brand retail through the automatic route, one of the sources told FE. Currently, although FDI up to 100% is permitted in single-brand retailing, such investments beyond 49% require the approval of the Foreign Investment Promotion Board (FIPB).

The discussion comes at a crucial time when US tech giant Apple has sent its wish-list to set up its outlets here, and others — including BRF Brasil — have evinced greater interest in the country’s retail story. At present, single-brand retailing is among the 18 sectors — including defence, mining, print media, air transport and banking — where FDI beyond stipulated levels needs FIPB approval.

In multi-brand retailing, FDI is allowed up to 51% with FIPB approval.

“The effort is to put as many sectors as possible under the automatic route,” said the official. “We have noticed that sectors under the automatic approval route have attracted the FDI the most. In fact, well over 90% of the total FDI currently comes through the automatic route,” he added.

However, the requirement that foreign retailers have to source 30% of materials locally to set up their own outlets is unlikely to be scrapped, ostensibly because of the concerns that any such move could hurt the government’s Make-in-India programme. “We haven’t yet come to that point (scrapping the local sourcing rule),” said the official.

Currently, only those foreign entities that sell products with “state-of-the-art” or “cutting-edge” technology will get an exemption from the mandatory 30% sourcing rule for the initial three years and have a “relaxed sourcing regime for another five years” for setting up their own outlets in India. For the rest, the annual 30% sourcing is mandatory right from the first year itself if the FDI level is higher than 51%.

 

fdi-l

“The approval process usually takes four to six months, and in some cases, it takes even more. So it’s (100% FDI under the automatic route) a fantastic move by the government, as lower regulatory impediments will encourage foreign investors to invest more. Although it’s difficult to quantify now the rise in FDI levels once any such decision is implemented, FDI in this space will definitely get a boost,: said Akash Gupt, partner and leader (regulatory) at PwC. Gupt said the government also needs to look at easing the local sourcing rule as well to enable many foreign brands to come into India.

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Reforms in India: Narendra Modi govt mulls 100% FDI in single-brand retail through auto route

The government is weighing further easing of foreign direct investment (FDI) rules in single-brand retail to make it even easier for foreign companies to invest in India and cut delays in the flow of such investments, according to official sources.

By: | New Delhi | Updated: January 18, 2017 7:08 AM
 
The ministries of finance and commerce and industry have initiated discussions on allowing 100% FDI in single-brand retail through the automatic route, one of the sources told FE. (PTI)

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The ministries of finance and commerce and industry have initiated discussions on allowing 100% FDI in single-brand retail through the automatic route, one of the sources told FE. (PTI)

 

The government is weighing further easing of foreign direct investment (FDI) rules in single-brand retail to make it even easier for foreign companies to invest in India and cut delays in the flow of such investments, according to official sources.

The ministries of finance and commerce and industry have initiated discussions on allowing 100% FDI in single-brand retail through the automatic route, one of the sources told FE. Currently, although FDI up to 100% is permitted in single-brand retailing, such investments beyond 49% require the approval of the Foreign Investment Promotion Board (FIPB).

The discussion comes at a crucial time when US tech giant Apple has sent its wish-list to set up its outlets here, and others — including BRF Brasil — have evinced greater interest in the country’s retail story. At present, single-brand retailing is among the 18 sectors — including defence, mining, print media, air transport and banking — where FDI beyond stipulated levels needs FIPB approval.

In multi-brand retailing, FDI is allowed up to 51% with FIPB approval.

“The effort is to put as many sectors as possible under the automatic route,” said the official. “We have noticed that sectors under the automatic approval route have attracted the FDI the most. In fact, well over 90% of the total FDI currently comes through the automatic route,” he added.

However, the requirement that foreign retailers have to source 30% of materials locally to set up their own outlets is unlikely to be scrapped, ostensibly because of the concerns that any such move could hurt the government’s Make-in-India programme. “We haven’t yet come to that point (scrapping the local sourcing rule),” said the official.

Currently, only those foreign entities that sell products with “state-of-the-art” or “cutting-edge” technology will get an exemption from the mandatory 30% sourcing rule for the initial three years and have a “relaxed sourcing regime for another five years” for setting up their own outlets in India. For the rest, the annual 30% sourcing is mandatory right from the first year itself if the FDI level is higher than 51%.

 

fdi-l

“The approval process usually takes four to six months, and in some cases, it takes even more. So it’s (100% FDI under the automatic route) a fantastic move by the government, as lower regulatory impediments will encourage foreign investors to invest more. Although it’s difficult to quantify now the rise in FDI levels once any such decision is implemented, FDI in this space will definitely get a boost,: said Akash Gupt, partner and leader (regulatory) at PwC. Gupt said the government also needs to look at easing the local sourcing rule as well to enable many foreign brands to come into India.

In October last year, US trade representative Michael Froman had said India needed to further open sectors, including retail, to improve the overall business environment. According to the Retailers Association of India, the country’s retail sector is likely to grow at a CAGR of 13% to reach a size of $950 billion by 2018.

Inflows of FDI (in equity) into India rose 29% in 2015-16 from a year earlier to $40 billion. Such inflows rose 30% in the first half of this fiscal from the previous year. In the trading space, FDI inflows rose almost 41% in the last fiscal from a year earlier.

The Narendra Modi government has already announced two big rounds of relaxations in the FDI regime, first in November 2015 and then in June last year, easing rules in over a dozen sectors ranging from real estate, pharmaceuticals, food marketing, aviation, defence to e-commerce and banking.

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