Author Name:   ritika.sharma

DIPP in its consolidated FDI policy, 2017 has prescribed significant changes to single brand retail trading sector to supersede the changes prescribed in the consolidated FDI policy, 2016. However, these changes in the 2017 Policy come with certain anomalies as well which consequently calls for a clarification from DIPP.

Single Brand Retail Trading: Anomalies in FDI Policy, 2017

Background
The government has lately demobilized the Foreign Investment Promotion Board (FIPB) and consequently all applications pertaining to Foreign Direct Investment (FDI) approval are routed to the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (DIPP).

DIPP in its consolidated FDI policy, 2017 (2017 Policy) has prescribed significant changes to single brand retail trading (SBRT) sector to supersede the changes prescribed in the consolidated FDI policy, 2016 (2016 Policy). However, these changes in the 2017 Policy come with certain anomalies as well which consequently calls for a clarification from DIPP.

Relinquishment of 70-30 Rule
Policy 2016 had offered some breather to an ‘Indian manufacturer’ and stated that an ‘Indian manufacturer’ is allowed to sell its own branded products through (a) wholesale trading, (b) single brand retail trading, (c) multi brand retail trading, (d) e-commerce retail trading and (e) food retail trading. Further, Policy 2016 stipulates that for an entity to be eligible to be classified as an ‘Indian manufacturer’, it is required to manufacture in India 70 % (in value) of its products ‘in-house’ and outsource the manufacturing of the remaining 30% (in value) of its products (70-30 Rule). However, the 70-30 Rule proved to be challenging for Indian manufacturers given the ambiguity around the interpretation of ‘in-house’ because manufacturing products without having recourse to outsourcing via contract manufacturing was a herculean task. Consequently, to uphold the interests of the stakeholders, the 70-30 Rule has been deleted from the 2017 Policy. Most stakeholders have perceived this deletion as a welcome change as it will attract more foreign investments in SBRT.

Exemption from 30% local sourcing norms
Furthermore, Policy 2017 provides the entities, an exemption for a maximum period of three years from sourcing up to 30% (in value) of its products locally, provided the FDI received by such entity is more than 51% (in value). It should however be noted that such products are required to comply with (a) state of art technology and (b) possess a cutting-edge technology at all times. Additionally, in order to discourage ingenuine and frivolous applications, a committee has been set up which shall be recommendatory in nature. This committee is required to ensure that the applications are evaluated by trained personnel from the Government. Furthermore, the committee is responsible to examine whether the products comply with state of art and cutting-edge technology and simultaneously ascertain whether the local sourcing of such products is primarily possible. A loophole which however remains is that there are no guidelines prescribed under the Policy 2017 to lay down any standardised method or approach to determine (a) what constitutes a ‘state of art’ technology and (b) what amounts to possessing ‘cutting edge’ technology.

Interpretation of ‘sub-brand’
Any entity which is engaged in retail trading of ‘single brand’ is permitted to have FDI infusion in it. However, the meaning of the term ‘single brand’ is unclear because there is no guideline prescribed in the Policy 2017 in relation to the same. Consequently, interpretation of ‘sub-brand’ becomes tricky. In the general parlance the term, ‘sub-brand’ is construed as being a part and parcel of its main brand or parent brand. However, in the absence of an explicit clarification from DIPP in this regard, the interpretation of ‘sub-brand’ remains a conundrum.

Conclusion
SBRT has been one of the major subject matters of debate amongst the sectors enlisted in the consolidated FDI policy, in this era of liberalisation and globalisation. While there has been an attempt on the part of the Government to bring about welcome and desired changes in the SBRT sector in the Policy 2017, there are certain anomalies which are yet to be addressed and acted upon. Amongst all the changes, one major change is the removal of 70-30 Rule in the Policy 2017 which hopefully will benefit the manufacturing sector in India. The logical nexus behind this statement is that the manufacturers who outsource products to contract manufacturers will now be included within the ambit of ‘manufacturers’ and will at the same time enjoy exemption from the prescribed local sourcing norms.

Furthermore, this change will also open prospects for more foreign investment in the SBRT sector in the Indian market.

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