Single-brand FDI could go against Indian brands

Has the measure to allow foreign direct investment in single brands in India created an unequal playing field for Indian companies with single brands?

When introducing this measure in January this year, the government included a clause that only the ‘owner of the brand’ would be allowed to invest in retail firms under a single brand in India. Worse, there is some confusion regarding the term ‘owner of the brand’, according to a report in The Economic Times.

In other words, it seems that private equity (PE) firms will not be allowed to invest in single-brand Indian companies. That effectively tilts the balance in favour of international players.

While an international brand like Nike could come in and invest as much as it wants in setting up/expanding operations in India, a local brand won’t be able to do so if it doesn’t access funds from PE firms.

Of course, it’s not as if private equity is highly desirable because they may just have funds, not expertise to run a business. There could also be clashes between PE investors and company managements, as the Lilliput case recently made clear. In that case, the PE investor had raised concerns about corporate governance issues of the company. In response, the promoter alleged the PE investors were using corporate governance as an issue to take over majority control of the company.

However, when the PE firm comes with needed experience, having regulations that block investments could hinder a company’s growth. For example, the investment by L Capital Asia, the PE arm of Louis Vitton, in Fab India makes sense because both brands belong to the same world of fashion.

The newspaper report notes that there is one way out of this problem: the current guidelines say that if a brand belongs to an Indian resident who manufactures products within the country, it split the business into two arms: manufacturing and retail. Then it can bring in foreign investment into the manufacturing arm as foreign investment is allowed there.