Don't expect Walmart, Tesco soon: FDI clarification raises questions

It seems the government’s four-page clarification to the multi-brand FDI policy of September 2012, following investors’ long list of concerns may have done more bad than good.

There are too many unanswered questions in the clarification and some new ideas that have been introduced make the guidelines even more stringent, reported Business Standard.

Indian retailers feel that the clarifications by the department for industrial policy and promotion (DIPP) on FDI in the multi-brand segment, which, among others, requires mandatory fresh investment in back-end infrastructure, will only create hurdles and will neither encourage foreign players nor domestic firms.

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“If the objective of the government is to encourage FDI in retail, I am not sure if they will be able to achieve it with these clarifications,” Retailers Association of India, CEO Kumar Rajagopalan told PTI.

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Clauses such as foreign players requiring to make fresh investment in back-end infrastructure will take lot of time and create hurdles for them, he added. “There are too many clauses. This will neither help foreign players nor domestic retailers. It will delay things,” Rajagopalan said.

Expressing similar views, Aditya Birla Retail Ltd CEO Pranab Barua said, “These clarifications are going to add more problems. It will make it difficult for foreign players to enter the Indian market. Government is trying to second guess what foreign players would do.”

Retail market is small and steps must be taken to grow the market and open the industry, he added.

A Bharti-Walmart spokesperson told Business Standard that like them other international majors such as French chain Carrefour and UK’s Tesco are studying the fine print of the clarification, more of which is expected in the coming weeks and months.

Besides confusion over back-end investment, there’s more to keep investors on the back foot now, the BS report notes.

Also the foreign retailers will not be allowed to franchise their stores and the multi-brand retail stores set up by them players will have to be company owned and operated. On the sourcing issue, DIPP had said: “The sourcing condition pertains only to manufactured and processed products. Procurement of fresh produce is not covered by this condition.”

According to a CRISIL research report, here are the major obstacles that the investors may face:

Retailers will have to restrict their spread to only the states that allow retail FDI as they cannot go for a franchise agreement with a local player anywhere else. Besides those strict norms, states will also retain the power to impose additional conditions, a provision that will keep the retailers on tenterhooks.

In fact, industry sources also predict that nothing is expected to move until the 2014 general elections as far as multi-brand retail is concerned. And with the clarifications that have come, no merger or acquisition is likely.

Investments to be confined to cities with population of over 1 million:

As per the 2011census, 53 Indian cities have a population of over 1 million. However, as only 10 states and 2 union territorieshave agreed to allow foreign investment in retail, only 21 cities in India qualify as potential locations where

foreign retailers can open retail outlets.

Minimum investment required at $100 million with 50 percent mandatory in back-end infrastructure:

The government is yet to clarify on whether the mandatory investment of 50 percent in back-end infrastructure would need to be on the cumulative investment basis or only on the minimum investment.

The reserach report states that an investment of $50 million can support10-15 hypermarket or departmental stores. Whereas, the minimum specified investmentof $50 million in back-end infrastructure can support a significantly larger front-end space of 15-18 millionsq ft. Hence this clarification is important before retailers can firm up their plans for entering India.

Moreover, as per the clarifications, foreign retailers entering India will have to commit green field investments

in both back-end and front- end for at least $100 million. This may involve a lead time of two

to three years for identifying appropriate store locations and rolling out back-end infrastructure before the

retailer can start operations on a sizeable scale, notes the research report.

So, Walmart and Tesco are not coming to India anytime soon.