9 Nov 2017
India Enacts Major Shake-up to Overseas Retail Investment Regulations
Revised guidelines set to impact upon single-brand retailers, e-commerce operators and start-up funding requirements.
India has substantially revised its guidelines for overseas investors in the retail sector. The changes, which have come into immediate effect, have seen a number of investment obstacles removed, while also providing greater clarity with regard to the overall regulatory regime. Overall, according to the federal government, the changes have been introduced to make it easier for investors to do business in India. This is seen as a vital precursor to moves to establish the country as a primary global manufacturing hub, in line with the aims of the Make in India strategy.
The revised legislation has repercussions across a wide number of the country's business sectors. Most notably, it has a direct impact on start-ups, single-brand retailers, e-commerce operators and the prevailing regulatory bodies.
In the case of start-ups, they are now entitled to raise the whole of their funding from foreign venture capital investors (FVCIs) for the first time. With regard to securing such investment, the relevant funds must be registered with the Securities and Exchange Board of India (SEBI) or otherwise covered by the SEBI (Venture Capital Funds) Regulations of 1996.
In a big change for single-brand retailers, the mandatory requirement for retailers to source 30% of their stock from local suppliers is to be waived for up to three years, but only in the high-tech sector. This is seen as huge boon for such retailers as Apple and Tesla, the electric-car manufacturer, which would otherwise find meeting the local quota requirement almost impossible.
The new regulations have also removed an anomaly related to those single-brand retail businesses deemed to have Indian Manufacturer status. Previously any such business – defined as a company that owns an Indian brand, manufactures at least 70% of its product range in-house and sources a maximum of 30% of its products from other Indian manufacturers – could sell its products online without being required to operate a conventional bricks-and-mortar outlet. Any other single-brand retailer, however, was obliged to have at least a token high-street presence.
With the Indian Manufacturer status now being removed from the single-brand retailer equation, this freedom from the requirement to operate a minimal number of conventional retail outlets has been extended to all such retailers. Local sourcing norms, however, still have to be complied with by any local single-brand retailer with an FDI level in excess of 50%.
In terms of e-commerce overall, changes have been made to the existing requirement that any online trading entity can source only up to 25% of its sales from one vendor or from one of its own associated companies. Under the new regulations, the 25% requirement now refers to sales value – rather than volume –within any given financial year.
In a final move, clarification has also been provided with regard to the prevailing regulatory bodies. In all instances of investment relating to banking, mining, defence, broadcasting, civil aviation, telecoms or pharmaceuticals, for instance, approval needs to be secured from the relevant federal ministry.
In the case of any proposed financial services investments not regulated by a specific financial sector regulator, such as the SEBI or the Insurance Regulatory and Development Authority (IRDA), the Federal Department of Economic Affairs will be deemed to be the prevailing authority. In the case of retail investments, including those relating to start-ups, food outlets and single and multi-brand operators, all decisions will ultimately lie with the Department of Industrial Policy and Promotion (DIPP).
Mitra Dave, Mumbai Consultant