: March 03, 2013 |
: Company Law
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Foreign Direct Investment In Retail Sector
The Government of India was initially very apprehensive of the introduction of the Foreign Direct Investment in the Retail Sector in India. The unorganized retail sector as has been mentioned earlier occupies 98% of the retail sector and the rest 2% is contributed by the organized sector. Hence one reason why the government feared the surge of the Foreign Direct Investments in India was the displacement of labour. The unorganized retail sector contributes about 14% to the GDP and absorbs about 7% of our labour force. Hence the issue of displacement of labour consequent to FDI is of primal importance.
There are different viewpoints on the impact of FDI in the retail sector in India, According to one viewpoint, the US evidence is empirical proof to the fact that FDI in the retail sector does not lead to any collapse in the existing employment opportunities. There are divergent views as well. According to the UK Competition Commission, there was mass scale job loss with entry of the hypermarkets brought about by FDI in the UK retail market. This paper highlight is Introduction & Definition of Retail, Division of Retail Industry, FDI Policy in India, FDI Policy with Regard to Retailing in India, Foreign Investor’s Concern Regarding FDI in Single and Multi Brand Retail, Major players, Future of FDI and Conclusions.
One of the most striking developments in the last two decades has been in the FDI in the global economic landscape. FDI provides a win-win situation both to the host as well as home country. The rapid expansion in the FDI by multi-national enterprises since the mid-eighties may be attributed to significant changes in technologies, greater liberalization of trade and investment regime, deregulation and privatization of markets in many countries including developing countries like India.
Initially FDI was not allowed in India in the retail sector because of the fear of the job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However the government later opened up the retail sector for FDI or FDI in retail sector was allowed. FDI in multi brand retailing is prohibited in India.
FDI at macro level is a non- debt creating source of additional external finances. At the micro-level, FDI is expected to boost output, technology, skill levels, employment and linkages with other sectors and region of the host economy.
Recently some of the political parties in India like Samajwadi Party and the left had urged Prime Minister Manmohan Singh not to let the FDI enter into the multi-brand retail sector, as this would destroy India’s retail sector. Example: Entry of one Wall Mart supermarket would displace 1300 small retail stores and render 3900 people jobless.
In India employment has always been a big problem. The rate of unemployment is higher than the rate of employment in India. Now if in such a situation when employment growth has slowed down, the entry of foreign supermarket would further add up to this problem.
Historical Background Of FDI:
FDI in India can be traced back with the establishment of East India Company of Britain. British capital came to India during the colonial era of Britain in India. However, researchers could not portray the complete history of FDI pouring in India due to lack of abundant and authentic data. Before independence major amount of FDI came from the British companies. British companies setup their units in mining sector and in those sectors that suits their own economic and business interest.
After Independence issues relating to foreign capital, operations of MNCs, gained attention of the policy makers. Keeping in mind the national interests the policy makers designed the FDI policy which aims FDI as a medium for acquiring advanced technology and to mobilize foreign exchange resources. The first Prime Minister of India considered foreign investment as “necessary” not only to supplement domestic capital but also to secure scientific, technical, and industrial knowledge and capital equipment. With time and as per economic and political regimes there have been changes in the FDI policy too.
During the 1970s period the government adopted a selective and highly restrictive foreign policy as far as foreign capital, type of FDI and ownerships of foreign companies was concerned. Government had setup Foreign Investment Board and enacted Foreign Exchange Regulation Act in order to regulate flow of foreign capital and FDI flow to India. The soaring oil prices continued low exports and deterioration in Balance of Payment position during 1980s forced the government to make necessary changes in the foreign policy. It is during this period that the government had encouraged FDI, allowed MNCs to operate in India. Thus, resulting in the partial liberalization of Indian Economy. The government introduced reforms in the industrial sector, aimed at increasing competency, efficiency and growth in industry through a stable, pragmatic and non-discriminatory policy for FDI flow.
India emerged as a strong economic player on the global front after its first generation of economic reforms. As a result of this, the list of investing countries to India reached to maximum number of 120 in 2008. Although, India is receiving FDI inflows from a number of sources but large percentage of FDI inflows is vested with few major countries. Mauritius, USA, UK, Japan, Singapore, Netherlands constitute 66 percent of the entire FDI inflows to India. FDI inflows are welcomed in 63 sectors in 2008 as compared to 16 sectors in 1991.
Definition Of FDI:
An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.
The investing company may make its overseas investment in a number of ways - either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture. The accepted threshold for a foreign direct investment relationship, as defined by the OECD, is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company. An example of foreign direct investment would be an American company taking a majority stake in a company in China. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile.
The Foreign Direct Investment (FDI) in any country abroad is the net inflow of investment (capital or other), in order to acquire management control and profit sharing (10% or more voting stock) or the whole ownership of an accredited company operating in the country receiving investment. The foreign direct investment generally encompasses the transfer of technology and expertise, and participation in the joint venture and management. Highly productive advantages of foreign direct investment have been constantly being harvested by both governmental and private companies and organizations of all over the world.
The foreign direct investment is profitable both to the country receiving investment (foreign capital and funds) and the investor. For the investor company FDI offers an exclusive opportunity to enter into the international or global business, new markets and marketing channels, elusive access to new technology and expertise, expansion of company with new or more products or services, and cheaper production facilities. While the host country receives foreign funds for development, transfer of new profitable technology, wealth of expertise and experience, and increased job opportunities.
Owing to the ever-increasing globalization of businesses of almost all sectors, liberalization of trade policies, and loosening of foreign investment restrictions, the foreign direct investment (FDI) has been quite revolutionary and vital for faster economic growth of most of the developing and developed countries of all across the world for last few decades. Supported by refinement in the information and telecommunication technology, and the increasing trend of Mergers and Acquisitions, the FDI is to receive tremendous impetus in various sectors in the future times to come, especially in the developing countries of the world. It has been observed that more than two-thirds (2/3th) of direct foreign investment is made in infrastructure, commercial and residential buildings, machinery, equipment, mines, and land.
Foreign direct investment reﬂects the objective of obtaining a lasting interest by a resident entity in one economy (‘‘direct investor’’) in an entity resident in an economy other than that of the investor (‘‘direct investment enterprise’’). The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a signiﬁcant degree of inﬂuence on the management 7of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among afﬁliated enterprises, both incorporated and unincorporated.
Definition Of Retail And Retail Sector:
Retail is the sale of goods to end users, not for resale, but for use and consumption by the purchaser. The retail transaction is at the end of the supply chain. Manufacturers sell large quantities of products to retailers, and retailers sell small quantities of those products to consumers. Example: A person who wants to obtain a product for their own personal use will usually purchase it at a retail store or from some other retail marketing channel.
Retail is derived from a French word with the prefix re and the verb tailer meaning "to cut again". It was first recorded as a noun with the meaning of a "sale in small quantities" in 1433 (from the Middle French retail, "piece cut off, shred, scrap, paring").Like the French, the word retail in both Dutch and German (detailhandel and Einzelhandel, respectively) also refers to the sale of small quantities of items.
Evidently, retail trade is one that cuts off smaller portions from large lumps of goods. It is a process through which goods are transported to final consumers. In other words, retailing consists of the activities involved in selling directly to the ultimate consumer for personal, non-business use. It embraces the direct-to-customer sales activities of the producer, whether through his own stores by house-to-house canvassing or by mail-order business. Manufacturers engage in retailing when they make direct-to-consumer sales of their products through their own stores (as Bata and Corona shoe companies, D.C.M. Stores, Mafatlals and Bombay Dyeing) by door-to-door canvass or mail order or even on telephone. Even a wholesaler engages in retailing when sells directly to an ultimate consumer, although his main business may still be wholesaling. A retailer is a merchant or occasionally an agent or a business enterprise, whose main business is selling directly to ultimate consumers for non-business use. He performs many marketing activities such as buying, selling, grading, risk-trading, and developing information about customer's wants. A retailer may sell infrequently to industrial users, but these are wholesale transactions, not retail sales. If over one half of the amount of volume of business comes from sales to ultimate consumers, i.e. sales at retail, he is classified as a retailer. Retailing occurs in all marketing channels for consumer products.
Retailing is “an act of making a sale to the final consumer”. According to this definition, the retail sector of India is prominently divided into organized and unorganized retail trade shops, with the latter making up 97% of it. The unorganized retail sector is largely composed of local kirana shops, owner manned general stores, pan/beedi shops, pavement vendors, convenient stores etc.; it is the kind of retailing an average Indian can relate to as it comes naturally to them hence it is the largest source of self-employment there. On the other hand, organized retailing refers to corporate-backed hypermarkets, retail chains and privately owned large businesses which are only allowed to retail under a license and are liable to huge sales and income taxes. The growth of retailing in India under the organized sector is such that in spite of owning a meager 2-3% of the sector, it is responsible for trade worth 180-394 (US$ billion), compared to 360 of China's. Statistically speaking, retail in India is growing at a rate of 46.64% annually.
In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale).A sale to the ultimate consumer.
Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.
Retail sector includes all the shops that sell goods to the ultimate customer, who buys them for personal and not business use. It encompasses all kinds of shops, from kiosks and small groceries to supermarket chains and large department stores. In addition to traditional bricks-and-mortar shops, the retail sector includes mail-order and online businesses.
FDI In Retail Sector:
Foreign direct investment (FDI) in the retail sector in India is restricted. In 2006, the government eased retail policy for the first time, allowing up to 51 per cent FDI through the single brand retail route. Since then, there has been a steady increase in FDI in the retail sector, and the cumulative FDI in single-brand retail stood at $195 million by the middle of 2010 (DIPP, 2010).
According to the Department of Industrial Policy and Promotion (DIPP) of the Government of India, single-brand retail comprises those retailers selling products “of a ‘single brand’ only, such that products should be sold under the same brand internationally; and single-brand product retailing covers only products which are branded during manufacturing. In this category, FDI is allowed to the extent of 51 per cent In contrast, no FDI is allowed in the multi-brand retail category. This includes all firms in organized retail that seek to stock and sell multiple brands, such as large international retailers like Wal-Mart and Carrefour. This is the sector that is most under dispute.
The Retail sector of India is vast, and has huge potential for growth and development, as the majority of its constituents are un-organized. The retail sector of India handles about $250 billion every year, and is expected by veteran economists to reach to $660 billion by the year 2015. The business in the organized retail sector of India, is to grow most and faster at the rate of 15-20% every year, and can reach the level of $100 billion by the year 2015. Here, it is noteworthy that the retail sector of India contributes about 15% to the national GDP, and employs a massive workforce of it, after the agriculture sector. India's growing economy with a rate of approximately 8% per year makes its retail sector highly fertile and profitable to the foreign investors of all sectors of commerce and economy, of all over the world.
Organized retailing entails trading conducted by licensed retailers and unorganized retailing includes all types of low cost trading like local shops, small roadside stores and temporary shops or door to door selling of various goods. Until now, according to the Indian retailing laws, Foreign Direct Investment in multi-brand retail market was prohibited. But government is thinking to open the FDI in retail in India which implies that foreign investment in retailing is possible up to 51%. Now the announcement of retail FDI in India has triggered a series of debates on both positive and negative notes and becomepolitical issue.
Advantages And Disadvantages:
Advantages of FDI in retail sector in India:
Ø Growth in economy: Due to coming of foreign companies’ new infrastructure will be build, thus real estate sector will grow consequently banking sector, as money need to be required to build infrastructure would be provided by banks.
Ø Job opportunities: Estimates shows that this will create about 80Lakh jobs. These career opportunities will be created mostly in retail, real estate. But it will create positive impact on others sectors as well. Read about career options in Retail sector…..
Ø Benefits to farmers: In most cases, in the retailing business, the intermediaries have dominated the interface between the manufacturers or producers and the consumers. Hence the farmers and manufacturers lose their actual share of profit margin as the lion’s share is eaten up by the middle men. This issue can be resolved by FDI, as farmers might get contract farming where they will supply to a retailer based upon demand and will get good cash for that, they need not to search for buyers.
Ø Benefits to consumers: Consumer will get variety of products at low prices compared to market rates, and will have more choice to get international brands at one place.
Ø Lack of infrastructure in the retailing chain has been one of the common issues in India for years which have led the process to an incompetent market mechanism.
Ø In the last years, the Public distribution system is proved to be significantly ineffective. In spite of the fact that the government arranged for subsidies, the food inflation has caused its negative impact continuously and it can be handled by FDI.
Disadvantages of FDI in retail sector in India:
Ø According to the non-government cult, FDI will drain out the country’s share of revenue to foreign countries which may cause negative impact on India’s overall economy.
Ø The domestic organized retail sector might not be competitive enough to tackle international players and might lose its market share.
Ø Many of the small business owners and workers from other functional areas may lose their jobs, as lots of people are into unorganized retail business such as small shops.
FDI Policy In India:
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a notification, which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.
The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).
The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be required.
FDI Policy With Respect To Retailing:
It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.
a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.
b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‘Single Brand’ products, subject to Press Note 3 (2006 Series).
c) FDI is not permitted in Multi Brand Retailing in India.
Single Brand And Multi Brand:
FDI in “single-brand” retail
While the precise meaning of single-brand retail has not been clearly defined in any Indian government circular or notification, single-brand retail generally refers to the selling of goods under a single brand name.
Up to 100 percent FDI is permissible in single-brand retail, subject to the Foreign Investment Promotion Board (FIPB) sanctions and conditions mentioned in Press Note 3. These conditions stipulate that:
· Only single-brand products are sold (i.e. sale of multi-brand goods is not allowed, even if produced by the same manufacturer)
· Products are sold under the same brand internationally
· Single-brand products include only those identified during manufacturing
· Any additional product categories to be sold under single-brand retail must first receive additional government approval
FDI in 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. For Adidas to sell products under the Reebok brand, which it owns, separate government permission is required and (if permission is granted) Reebok products must then be sold in separate retail outlets.
FDI in “multi-brand” retail
While the government of India has also not clearly defined the term “multi-brand retail,” FDI in multi-brand retail generally refers to selling multiple brands under one roof. Currently, this sector is limited to a maximum of 49 percent foreign equity participation.
Rational Behind FDI In Retail:
It is believed that foreign direct investment (FDI) can prove to be a powerful catalyst which can spur competition in the retail industry. This in turn will lead to supply chain improvement, development of skill and manpower, betterment in the agricultural segment as well as improved efficiencies in small and medium scale industries. Increasing FDI in the retail segment is also believed to help expand the market size, which in turn will help enhanced productivity. As a result the government also stands to gain by way of increased GDP, tax income and employment generation.
With the consistently growing demand pressure, the unorganized retail segment will have to make way for the organized markets. In addition, the unorganized segment will fall short of addressing the growing demand for retail given the relatively weak financial state of unorganized retailers as well as the space constraints which restrict their expansion plans.
Impact on Consumers
It is believed that the overall consumer spending has witnessed an increase backed by the entry of the organized retail. Even though unorganized retail markets come with their set of benefits which include consumer goodwill, credit sales, bargain potential, ability to sell loose items, convenient timings, and home delivery, the consumers most certainly stand to gain from the expansion in organized retail on multiple counts. In addition, proximity remains a major comparative advantage for the unorganized outlets. However, it has been witnessed that the organized retail outlets have proved to provide better savings to the less well-off consumers other than providing saving to all the income groups in general.
Major Key Players:
As India’s retail industry is aggressively expanding itself, great demand for real estate is being created. The cumulative retail demand for real estate across India is expected to reach 43 million square feet by 2013.
Around 46 per cent of the total estimated demand between 2009 and 2013 will be come from Tier-1 cities. For instance, Pantaloon Retail added 2.26 million square feet (sq. ft.) of retail space during the fiscal 2011 and booked over 9 million sq. ft of retail space to fructify its expansion plans in future.
Some of the key players in the Indian retail market, with a dominant share are:
1. Pantaloons Retail Ltd, a Future group venture: Over 12 mn sq. ft. of retail space spread over 1,000 stores, across 71 cities in India.
2. Shoppers Stop Ltd: Over 1.82 mn sq. ft. of retail space spread over 35 stores, in 15 cities.
3. Spencer’s Retail, RPG Enterprises: Retail footage of over 1.1 mn sq. ft. with approx 250 stores, across 66 cities.
4. Lifestyle Retail, Landmark group venture: Has approximately 15 lifestyle stores and 8 Home centres.
Other major domestic players in India are Bharti Retail, Tata Trent, Globus, Aditya Birla ‘More’, and Reliance retail. Some of the major foreign players who have entered the segment in India are–
· Carrefour which opened its first cash-and-carry store in India in New Delhi.
· Germany-based Metro Cash & Carry which opened six wholesale centres in the country.
· Walmart in a JV with Bharti Retail, owner of Easy Day store—plans to invest about US$ 2.5 billion over the next five years to add about 10 million sq ft of retail space in the country.
· British retailer Tesco Plc (TSCO) in 2008, signed an agreement with Trent Ltd. (TRENT), the retail arm of India’s Tata Group, to set up cash-and-carry stores.
· Marks & Spencers have a JV with Reliance retail.
Organized retail is a new phenomenon in India and despite the downturns, the market is growing exponentially, as economic growth brings more of India’s people into the consuming classes and organized retail lures more and more existing shoppers into its open doors. By 2015, more than 300 million shoppers are likely to patronize organized retail chains.
The growing middle class is an important factor contributing to the growth of retail in India. By 2030, it is estimated that 91 million households will be ‘middle class’, up from 21 million today. Also by 2030, 570 million people are expected to live in cities, nearly twice the population of the United States today. Consumer markets in emerging market economies like India are growing rapidly owing to robust economic growth. India's modern consumption level is set to double within five years to US$ 1.5 trillion from the present level of US$ 750 billion. Thus, with tremendous potential and huge population, India is set for high growth in consumer expenditure. With India's large ‘young’ population and high domestic consumption, the macro trends for the sector look favorable.
Online retail business is another format which has high potential for growth in the near future. The online retail segment in India is growing at an annual rate of 35 per cent, which would take its value from Rs 2,000 crore (US$ 429.5 million) in 2011 to Rs 7,000 crore (US$ 1.5 billion) by 2015. For instance the Tata Group firm Infiniti Retail, that operates its consumer durables and electronics chain of stores under the 'Croma' brand, is in the process of tapping net savvy consumers. Similarly, the Future Group, that operates a dedicated portal ‘Futurebazaar.com’ for online sales, has revealed that it is targeting at least 10 per cent of the company's total retail sales through the digital medium.
FDI can be a powerful catalyst to spur competition in industries characterized by low competition and poor productivity. Competition, in turn is the key to diffusing FDI-introduced innovation across an industry. Foreign direct investment, is also integrating the developing countries with the global economy. This in turn holds benefits for both the global economy as well as the developing countries. FDI also paves the way for industry restructuring, which enables global growth as it implies reduced production costs for companies and creation of new markets.
The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing.
It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their country’s GDP.
FDI in multi-brand retailing and lifting the current cap of 51% on single brand retail is in that sense a steady progression of that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of the entire country.
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