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New Indian government guidelines restrict foreign investment in organised retail.

UNEASE and uncertainty has been provoked amongst international food retailers by new restrictive guidelines issued by the Indian government, limiting foreign investment in the organised retail sector.

The move comes when the Indian retail sector generally was expecting a gradual liberalisation of rules on striking deals with foreign partners. Instead, the Congress-led government has taken an unexpected step backwards towards a closed economy policy by almost scrapping Indian retailers' rights to create joint ventures with foreign firms.

Issued on March 30 by the ministry of commerce an industry, this 103-page 'Consolidated FDI (Foreign Direct Investment) Policy' has rendered invalid the present corporate structure created by international retailers with Indian partners.

Its fifth chapter, 'Policy on Route, Caps and Entry', Conditions. (ii) Guidelines for Cash & Carry Wholesale Trading/Wholesale Trading (WT) (d)' prevents an Indian retailer from being an outlet for one dominant wholesale supplier. It states: 'WT of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture and the wholesale made to the group companies should be for their internal use only.' This clause, in effect, appears to restrict joint venture wholesale companies (including with foreign retailers) from becoming a dedicated backend supply chain provider for an Indian retail partner. Lawyers are crawling over the document. And no wonder. In 2007, American giant Wal-Mart entered into a joint venture with country's largest telecom provider Sunil Mittal's Bharti group that exploited the previous right of foreign companies to operate wholesale services in India. The deal involved the establishment of two separate companies: the first running a back-end supply chain--technically a wholesaling operation (called Bharti Walmart)--which was a 50-50 Wal-Mart/Bharti operation (NOTE SPELLINGS ARE CORRECT). A second company running the front-end retail operation is a franchise, solely-owned by Bharti that sources its supply from the first company and runs a chain of more than 59 'Easy Day' stores. Under the new regulations, Wal-Mart/Bharti's retail could have to look for additional suppliers--although lawyers are not yet sure.

'Prima facie it looks like that the models like that of Wal-Mart and Bharti would have challenges', said Akash Gupt, executive director, Leader Regulatory Services at PWC India, 'if they come under the definition of group companies then Bharti's retail network would have to look for additional suppliers'. He said that clarification about the term 'group company' within the guidance is still needed.

When contacted, Bharti Walmart spokesperson told just-food that, 'It is too early to comment on this. We are currently reviewing the new guidelines.' However its managing director and CEO Raj Jain told reporters during a recent function in Chandigarh that, 'we have asked the government to clarify certain points like what exactly is 25% of total sales and what exactly are group companies.'

According to Gupt, the new guidelines might actually restrain Indian retail entrepreneurs from participating in the business of the wholesale trading, rather than blocking the involvement of foreign firms in supply contacts. 'Assuming that Bharti does not have a joint venture in the wholesale company, which in that case is fully owned by Wal-Mart, then Bharti stores have no restrictions in sourcing goods from that company,' he suggested. Just-food also tried to get reactions from Tesco that has a joint venture with the Tatas; German group Metro Cash & Carry that opened its first Indian wholesale store in 2003; and India's biggest retailer Reliance, but did not get any response. A spokesperson at the Kishore Biyani's Future Group, which operates retail stores in 73 cities and 65 rural locations, told that the company does not comment on government policies.

Privately, insiders are being far more loose lipped, however. 'The big international retailers are shocked', said a senior manager in one international food retail company, 'they are lobbying hard and having hectic parlays with their legal advisors to look for ways to challenge the new guidelines, and that is why they are refusing to comment.' Speaking on condition of anonymity, the manager told that as foreign direct investment in organised multi-brand retail has always been banned in India, overseas retailers cannot challenge the new guidelines in court, because it would indicate they were attempting a back-door entry into the retail sector by exploiting their wholesale rights, he said. The political message is clear that the FDI in India's organised retail is not going to happen soon, said the executive. Gupt is however still hopeful: the government has been saying that it is not so that FDI in retail would not open but it needs to observe how much does the FDI brings the development in the farm to cash & carry infrastructure. Also Nupur Chakraborty of information portal India Retailing, said: 'If the big companies like Wal-Mart and Tesco look back at last 18 months they might be happy that they didn't get into retail right away'. She pointed to the financial setbacks suffered by most of the Indian retailers during the recession. Chakraborty added that, 'all of big international retailers sincerely believe that India is not a small European market where one can enter and exit with minimum noise and therefore they are willing to wait it out.' She said they are aware the number middle class branded food consumers has a log way to grow and these retailers are looking to be in position when the Indian market matures between 2015 and 2020.

Meanwhile, any presumption that Indian retail companies without foreign partners might be pleased with the new guidelines appears not to be true. Indeed companies that earlier opposed the entry of foreign companies are now lobbying for them. 'They thought that they can manage on their own, but now they have reached a level that they want more funds to expand, and foreign private equity and banks are not ready to lend money in the sector that has suffered big setbacks in the recent past', said the international executive.
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Author:Verma, Raghavendra
Publication:International News
Date:Apr 1, 2010
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