Govt eases FDI norms for muti-brand retail

India, which threw open its supermarket sector to foreign retailers in September 2012, has not yet received a single application due to ambiguity around existing entry rules.

Updated: Aug 02, 2013, 08:29 AM IST

New Delhi: Opening the floodgates to overseas investors, government Thursday relaxed investment norms in multi-brand retail and raised FDI caps in several sectors while making it 100 percent in telecom.

The Cabinet headed by Prime Minister Manmohan Singh diluted the mandatory 30 percent local sourcing norms for multi-brand retailers and permitted states to include cities with population less than 1 million for allowing multi-brand retailing.

Announcing the decisions taken by the Cabinet, Commerce and Industry Minister Anand Sharma said the relaxation in multi-brand retail norms will give "more clarity and more space to investors".

He made no reference to raising of FDI cap in insurance sector, over which an inter-ministerial group had last month agreed to raise it from 26 percent to 49 percent.

The Cabinet, he said, has by and large cleared the decisions taken at the inter-ministerial group meeting chaired by Prime Minister on July 16 to raise foreign direct investment caps and eased the route for some like oil refineries.

Sharma said multi-brand retailers like Walmart and Tesco will now have to source 30 percent of their products from small and medium enterprises only at the time of start of business.

With investment in back-end infrastructure, he said the investor will have to make the mandatory USD 50 million at the first engagement only. Thereafter, the investment would depend upon the business needs.

Economic Affairs Secretary Arvind Mayaram, whose recommendations for raising FDI in several sectors were by-and-large accepted, said: "We are expecting FDI flows will increase and the foreign investors will have much greater confidence in the Indian foreign investment policy.

"I certainly think it will have a positive impact on the forex flows in the current year," he added.

The second wave of reforms comes within 10 months of the government opening up foreign investment in sectors like civil aviation.

Elaborating on the proposal to relax norms for multi-brand retail, Sharma said: "50 percent of the FDI in back-end infrastructure, will be of the first tranche of USD 100 million. Thereafter, this would be need-based business decisions by the investor and their domestic partner."

He further said, "all states have now been allowed to add cities with a population of one million" for foreign investment in multi-brand retail.

While the FDI cap in defence sector remained unchanged at 26 percent, higher limits of foreign investments in 'state-of-the-art' technology manufacturing will be considered by the Cabinet Committee on Security, Sharma said, adding the changes will be incorporated in the FDI policy.

In single-brand retail, he said, FDI up to 49 percent will be under the automatic route and beyond that through the FIPB route.

In case of PSU oil refineries, commodity bourses, power exchanges, stock exchanges and clearing corporations, FDI will be allowed up to 49 percent under automatic route as against current routing of the investment through FIPB.

In basic and cellular services, FDI was raised to 100 percent from current 74 percent. Of this, up to 49 percent will be allowed under automatic route and the remaining through FIPB approval.

A similar dispensation would be allowed for asset reconstruction companies and tea plantations.

FDI of up to 100 percent was allowed in courier services under automatic route. Earlier, similar amount of investment was allowed through FIPB route.

In credit information firms, 74 percent FDI under automatic route has been been allowed.

These decisions come in the backdrop of country's economic growth plunging to 4.8 percent in the January-March quarter. It slumped to a decade's low of 5 percent for the 2012-13 fiscal.

The changes in the multi-brand retail policy, Sharma said, will benefit the small industry besides addressing the concerns of foreign investors.

The amendment in the provision regarding 'back-end infrastructure' will give more clarity to the policy and changes in the provision regarding location of retail outlets will bring in parity as far as states are concerned, he added.

The retailers will have to spend USD 50 million in three years in back-end infrastructure which will include processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc.

Expenditure on land cost and rentals, if any, will not be counted for purposes of back-end infrastructure. Subsequent investment in the back-end infrastructure would be made by the retailer as needed, depending upon his business requirements, Sharma said.

As regards the sourcing norms, he said, the retailer will have to mandatorily procure up to 30 percent of the products from Indian micro, small and medium industries which have a total investment in plant and machinery of USD 2 million. Earlier, the limit was USD 1 million.

The valuation of USD 2 million refers to the value at the time of installation, without providing for depreciation, he said.

The 'small industry' status would be reckoned only at the time of first engagement with the retailer and such industry shall continue to qualify as a 'small industry' for this purpose even if it outgrows the said investment of USD 2 million during the course of its relationship with the retailer, he added.

Moreover, he added, "sourcing from agricultural co-operatives and farmers cooperatives would also be considered in this category".

The procurement requirement would have to be met, in the first instance, as an average of five years' total value of the manufactured/processed products purchased, beginning April 1 of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis, Sharma added.