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FDI in RETAIL INDUSTRY

DATE: April 4th, 2012

SUBMITTED BY: SOM SEKRAR GANGULY SWATI VIVEK RANJAN SPARSH DIMRI SYED NAYIER HASAN JIML-11-162 JIML-11-168 JIML-11-183 JIML-11-FS-055 JIML-11-RM-017

SUBMITTED TO:Mr. MOHD. IRFAN

Jaipuria Institute Of Management, Lucknow

INTRODUCTION

Foreign direct investment (FDI) provides a major source of capital which helps in bringing up-to-date technology within the country. For developing countries to generate capital through domestic savings, is a difficult aspect and even if it is not, it is still difficult to import the necessary technology from foreign countries. Foreign direct investment is an investment made by a foreign individual or company in productive capacity of another country. The Indian economy has reached in the orbit of high rate of economic growth. It is being widely acclaimed and considered as an emerging global economic power. The rate of growth recorded during the period 1950-51 to 2006-07 clearly indicated a tendency of steady upward trend. However, the decade of 80's emerged as a beginning of the high rate of economic growth or at least a dramatic departure from the past growth performance. This tendency had continued in the nineties and further growth stimulus has occurred in the early 21st century. As the third-largest economy in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI). Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and FDI. The future of Indian economy is brighter because of its huge human resources, rapidly upcoming service sector, availability of large number of competent professionals, vast market for every product, increasing impact of consumerism, absence of controls and licenses, interest of foreign entrepreneurs in India and existence of four hundred million middle class people. Today, India provides highest returns on FDI than any other country in the world. By altering India's comparative advantages and improving its competitiveness through technology transfer and the effects of myriad externalities, foreign as well as domestic investment can alter India's volume and pattern of trade in many income-enhancing directions. Foreign Direct Investment - Concept & Policy Foreign direct investment is an investment made by a foreign individual or company in productive capacity of another country. It is the movement of capital across national frontiers in a way that grants the investor control over the acquired asset.

Jaipuria Institute Of Management, Lucknow

Types of FDI

There are two types of FDI: Greenfield investment: It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries like India. Mergers and Acquisition: It occurs when a transfer of existing assets from local firms takes place. Forbidden Territories: FDI is not permitted in the following industrial sectors: Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Jaipuria Institute Of Management, Lucknow

Indian Retail Industry

The Retail Industry in India has come forth as one of the most dynamic and fast paced industries with several players entering the market. But all of them have not yet tasted success because of the heavy initial investments that are required to break even with other companies and compete with them. The India Retail Industry is gradually inching its way towards becoming the next boom industry.

The total concept and idea of shopping has undergone an attention drawing change in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. Modern retailing has entered into the Retail market in India as is observed in the form of bustling shopping centers, multi-storied malls and the huge complexes that offer shopping, entertainment and food all under one roof. A large young working population with median age of 24 years, nuclear families in urban areas, along with increasing workingwomen population and emerging opportunities in the services sector are going to be the key factors in the growth of the organized Retail sector in India. The growth pattern in organized retailing and in the consumption made by the Indian population will follow a rising graph helping the newer businessmen to enter the India Retail Industry. In India the vast middle class and its almost untapped retail industry are the key attractive forces for global retail giants wanting to enter into newer markets, which in turn will help the India Retail Industry to grow faster. Indian retail is expected to grow 25 per cent annually. Modern retail in India could be worth US$ 175-200 billion by 2016. The Food Retail Industry in India dominates the shopping basket. The Mobile phone Retail Industry in India is already a US$ 16.7 billion business, growing at over 20 per cent per year. The future of the India Retail Industry looks promising with the growing of the market, with the government policies becoming more favorable and the emerging technologies facilitating operations.

Jaipuria Institute Of Management, Lucknow

FDI Policy with Regard to Retailing in India

In 1999, India had 3 shopping malls, collectively measuring 0.2 million sqft. By the end of 2010, expected mall space is ~50 million sqft. As per the Foreign Investment Policy of India as of April, 2006 the sectors were FDI was allowed in different percentage ratios was ranging from 45% to 100%. 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 was not permitted in Multi Brand Retailing in India and it is still not permitted.

Entry Options for Foreign Players prior to FDI Policy Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players had been operating in the country. Some of entrance routes used by them have been discussed in sum as below:1. Franchise Agreements

It is an easiest track to come in the Indian market. In franchising and commission agents services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world. Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.

Jaipuria Institute Of Management, Lucknow

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Cash And Carry Wholesale Trading

100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.

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Strategic Licensing Agreements

Some foreign brands give exclusive licenses and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with RadhakrishnaFoodlandsPvt. Ltd

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Manufacturing and Wholly Owned Subsidiaries.

The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorized to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.

Jaipuria Institute Of Management, Lucknow

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.

Jaipuria Institute Of Management, Lucknow

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. In July 2010, the Department of Industrial Policy and Promotion (DIPP) and the Ministry of Commerce circulated a discussion paper on allowing FDI in multibrand retail. The Committee of Secretaries, led by Cabinet Secretary Ajit Seth, recommended opening the retail sector for FDI with a 51 percent cap on FDI, minimum investment of US$100 million and a mandatory 50 percent capital reinvestment into backend operations. Notably, the paper does not put forward any upper limit on FDI in multi-brand retail. Immediately following the release of this discussion paper, the shares of a number of retail companies in India grew; domestic retail giant, Pantaloon Retail gained 7 percent on the same day, while Shoppers Stop, an Indian department store chain and emerging retailer, gained 2.9 percent. The long-awaited scheme has been sent to the Cabinet for approval, but no decision has yet been made. There appears to be a broad consensus within the Committee of Secretaries that a 51 percent cap on FDI in multi-brand retail is acceptable. Meanwhile the Department of Consumer Affairs has supported the case for a 49 percent cap and the Small and Medium Enterprises Ministry has said the government should limit FDI in multi-brand retail to 18 percent. In terms of location, the proposed scheme allows investment in towns with populations of at least 10 lakh (1 million), while retailers with large space requirements may also be allowed to open shop within a 10 kilometer radius of such cities.

Jaipuria Institute Of Management, Lucknow

Benefits of FDI

Soaring inflation is one of the driving motives behind the governments move towards FDI in retail. Allowing international retailers such as Wal-Mart and Carrefour, which have already set up wholesale operations in the country, to set up multi-brand retails stores will assist in keeping food and commodity prices under control. It is also expected that allowing FDI will cut waste, as big players will build backend infrastructure. Moving away from intermediary-only benefits With organized retail, every intermediate step procurement, processing, transport and delivery adds value to the product. This happens because it uses international best practices and modern technology, ensuring maximum efficiency and minimum waste. Organized retail enables on-site processing, scientific handling and quick transport through cold storage chains to the final consumer. Once modern retailers introduce an organized model, other vendors, including small retailers, would mechanically copy this model to improve efficiencies, boost margins and stay in business. Organized retail would thereby bring more stability to prices, unlike the present system where hoarding and artificial shortages by profiteering intermediaries push up product prices. Job creation With the entry of branded retailers, the market will increase, creating additional employment in retail and other tertiary sectors. Given their professional approach, organized retailers will allot some quantity of resources towards the training and development of the resources they employ.This effect of branded retailing can already be seen with the Bharti-Wal-Mart collaboration, which has joined forces with state governments to open training and development centers in Amritsar, Delhi and Bangalore, preparing local youth for jobs in retail. Training is entirely free and more than 5,600 local youth have already been trained. Retail jobs dont require higher education or highly specialized abilities. No threat to kiranas (mom-and-pop stores) The Indian retail industry is generally divided into organized and unorganized retailing:

Jaipuria Institute Of Management, Lucknow

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Organized retailing Organized retailing refers to trading activities undertaken by licensed retailers, those who have registered for sales tax, income tax, etc. These include corporatebacked hypermarkets and retail chains, and also privately-owned large retail businesses. Unorganized retailing Unorganized retailing refers to the traditional forms of low-cost retailing, for example, local kirana shops, owner-operated general stores, paan/beedi shops, convenience stores, hand cart and street vendors, etc. The example of China demonstrates clearly that increased FDI in retailing does not necessitate the complete closure of local retailers. China first allowed FDI in retail in 1992, capping it at 26 percent, while India capped FDI in single-brand retail at 26 percent. Only in 2004 did China finally permit 100 percent FDI and local Chinese grocery stores have since grown from 1.9 million to more than 2.5 million. Organized retail has just 20 percent market penetration in China, despite a 20 year lapse since the initial introduction of FDI.

Jaipuria Institute Of Management, Lucknow

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Conclusion

It is generally said that future is always uncertain. This saying is correct to some extent. But at the same time it is also said that exceptions are always there. This exception is about India's certain higher rate of growth in the coming future. The future of Indian economy is brighter because of its huge human resources, rapidly upcoming service sector, availability of large number of competent professionals, vast market for every product, increasing impact of consumerism, absence of controls and licenses, interest of foreign entrepreneurs in India and existence of four hundred million middle class people. Even today, India is producing largest number of billionaires in a year, take over by Indian multinationals is amazing, the craze of Indians to go abroad is rapidly diminishing, and the Rupee is becoming stronger and stronger in relation to Dollar. India's say in the international diplomacy and political affairs has now become meaningful, thousands of foreigners are working as executives in India, packages are becoming lucrative and competitive and annual rate of growth is highest after China. This present picture gives some reflections of the future. But this is all in the absolute sense and not in the relative terms. A country can only grow if the Govt. policies allow more participation and is able to attract more and more foreign direct investment in India. Today, India provides highest returns on FDI than any other country in the world. India is poised for further growth in manufacturing, infrastructure, automobiles, auto components, food processing sectors, real estate development etc. In this context it is also worth mentioning that savings rate has also increased from 23% to 31% over the last year to this year. India's continuing ambivalence on FDI, as a result, exacts a heavy toll on the economy. Undoubtedly, India is ceding billions of dollars of FDI to its neighbors each year. While China achieved actual FDI inflows of around $45.3 billion in 1997, India settled for a mere $3.2 billion. India therefore stands to win in the next few years.

Jaipuria Institute Of Management, Lucknow