FDI in multi brand retail policy:

Mandatory investment in back-end infrastructure only for first tranche of investment

In the amendment to the FDI policy, the government has clarified that minimum 50 per cent of the
first tranche of $100 million (i.e. $50 million) would be required to be invested in the back-end
infrastructure. Subsequent investment in the back-end infrastructure can be made by the retailer
only if needed. Back-end infrastructure would include investment made in processing,
manufacturing, distribution, design improvement, quality control, packaging, logistics, storage,
warehouse, agriculture market or produce infrastructure, etc.

Impact: Only retailers operating in supermarket and hypermarket formats (where the share of
F&G is greater than 50 per cent) would be able to adhere to this clause. The F&G vertical needs
investments in the back-end as the supply chain is currently underdeveloped and inefficient.
Retailers operating specialty stores in verticals like apparel, electronics, etc. do not require
significant investments in back-end infrastructure.
Further, the amendment that the mandatory back-end infrastructure investment would be limited
to only the first tranche will bring clarity to foreign retailers planning to enter India. Mandatory
investments in back-end infrastructure for the subsequent FDI tranches would have been a
hindrance for foreign retailers as an investment of $ 50 million in the back-end infrastructure in the
F&G vertical can support a significant front-end space of around 15-18 mn. sq. ft. (125-150
hypermarkets).

Definition of MSMEs amended to include companies with

investment up to $2 million
The multi-brand policy states that the foreign retailers will have to source at least 30 per cent of the
merchandise from MSMEs (micro, small and medium enterprises). The definition of MSMEs has
been amended to include companies which have invested up to $2 million in plant and machinery,
without providing for depreciation. The earlier rider restricted sourcing from MSME to companies
that had invested a maximum of $1 million in plant and machinery. Further, the note clarifies that a
company will continue to be qualified as an MSME even if it outgrows the investment definition of
$2 million in the course of its relationship with the retailer. Another clarification issued is that
sourcing from agricultural co-operatives and farmer co-operatives will also be considered to meet
this clause. The earlier clause restricted sourcing only to manufactured and processed products.
Impact: Amendments pertaining to the sourcing clause will aid the foreign retailers to meet the
mandatory sourcing requirement of 30 per cent from MSMEs. As the foreign retailer can continue
sourcing from the same MSME, the sourcing process will become less cumbersome.
Foreign retailers can now operate in cities with population of less than 1 million
While the earlier policy stated that FDI in retail will be allowed only in cities that have a population
of more than 1 million, the amendment states that the state government, once they permit FDI in
retail, can allow foreign retailers to operate stores even in cities with less than a population of 1
million.

Impact: The organised retail market in India is highly concentrated in the larger cities. Larger cities
(with a population of over 1 million) will be the initial target market for foreign retailers as demand
for organised retail mainly emanates from these cities. Therefore, allowing retailers to operate in
smaller cities will not substantially impact the decision of foreign companies to invest in India.
Moreover, the operating environment for foreign retailers will continue to be restricted in India as
only 11 states and 2 union territories so far have agreed to allow foreign investment in the retail
sector.