REVISED FDI POLICY IN SBRT: TWO STEP FORWARD ONE STEP BACKWARD?
On 18th of September, 2019 the Ministry of Commerce & Industry had reviewed the extant Foreign Direct Investment (“FDI”) policy and issued Press Note No. 4(2019 Series), thereby initiated the long-awaited reforms in Single Brand Retail Trading (“SBRT”) sector. The Union’s announcement on FDI appears to be one more push to make India a more attractive destination in the midst of economic slowdown, weak investment activity and GDP plummeting to a five year low of 5.8% in the March quarter. Moreover, last month, the Reserve Bank of India (RBI) had pointed out that net FDI flows had moderated to $6.8 billion over the past two months of the current fiscal year from $7.9 billion in April-May, 2018. To pull out the economy from the current slump, Cabinet decided to liberalize and simplify the FDI policy to provide ease of doing business in India leading to larger FDI inflows and thereby contributing to the growth of investment, income and employment. In this article, the author analyses the latest FDI reforms in SBRT sector and argues about the loopholes in ‘local sourcing’ norms.
LOCAL SOURCING’ REQUIREMENT
As per the proposed local sourcing norm, a single brand retail entity with over 51% FDI has to ensure that all procurements made from India by the SBRT entity shall be counted towards local sourcing of 30%, irrespective of whether the goods procured are sold in India or exported. Furthermore, under the extant policy, an entity is not mandatorily required to follow the above mentioned local sourcing norm annually from the commencement of business operations in India. Rather, the local sourcing requirement of 30% of value of goods can be met by the SBRT entity as an average during the first 5 years, and thereafter annually towards its India operations. As part of the proposed FDI relaxations in SBRT sector, sourcing of goods from India for global operations can be done directly by the single brand retailers undertaking SBRT or group companies (resident or non-resident) or indirectly through a third party under a legally tenable agreement. Therefore, the proposed FDI reforms will open door for Apple’s vendor Foxconn to source materials locally that could be considered as meeting Apple’s local sourcing requirement or if apparel giant H&M’s vendor sources stitching materials or the fabric that will also be counted as part of H&M’s local sourcing requirement.
Under the extant policy, only a part of the global sourcing shall be counted towards local sourcing requirement, which is over and above the previous year’s value. In contrast to the extant policy, the proposed FDI reforms will allow entire sourcing from India for global operations, and that will be considered towards local sourcing requirement (no incremental value) in line with government’s emphasis on expanding the scope of sourcing operations for retailers. This comes as a huge boost for some of the world’s largest retailers, who have always sourced locally from India, particularly in sports, apparel, furniture. Some of those retail giants include IKEA (furniture) and H&M (apparel), who are sourcing from India for more than 30 years for its international markets and welcomed the move that global sourcing is now part of the 30% local sourcing norms.
ANALYSIS OF ‘LOCAL SOURCING’ NORMS
Although the government approved slew of changes yet the much hyped ‘reforms in FDI policy’ seems to have disappointed many industry players. The proposed reforms in FDI policy did not clarify the meaning of ‘state-of-art’ and ‘cutting-edge-technology’, which has always remained a barrier for companies like Apple to seek exemptions from local sourcing norms for an initial period of three years from the commencement of business. It is pertinent to note whether a product would be in the nature of ‘state-of-the-art’ and ‘cutting-edge technology’ and where local sourcing is not possible, remains subject to the discretion of the government. Such was the situation that several companies, including Apple, Xiaomi and LeeCo, had earlier sought exemptions from it on ground of their technology being ‘state-of-art’. However, Apple’s application was rejected in 2016, while, Xiaomi and LeeCo had subsequently withdrew their applications, realising such a waiver was hard to come by due to stringent norms.
With Prime Minister Modi setting his sights of ensuring India becomes a $5 trillion economy within the next five years. It is imperative that the ambiguity with respect to interpretation of ‘state-of-art’ and ‘cutting-edge-technology’ are clarified with clear meanings or guidelines, otherwise Indian market will fail to attract multi-national single-brand retail companies to set up business in India. Thus, the hopes of achieving a $5 trillion economy will gradually fade unless the government addresses the concerns of foreign investors and ensures further relaxation from the local sourcing norms.
While the proposed reforms in FDI policy is a welcome step forward in sync with the idea of making India an investment-friendly environment for foreign investors, it still does not adequately address the concerns of single-brand retailers. Unless the government ensures further changes by interpreting the meaning of ‘state-of-art’ and cutting-edge technology, it will be interesting to see whether global single-brand retailers would accelerate their entry plans in India given the arbitrary rejection of Apple’s application for exemption from local sourcing.
About the Author:
SOUMYAJIT SAHA is a third year student at National University of Study and Research in Law, Ranchi