F.D.I.

in Retail Sector
SESSION 10 LEGAL ENVIRONMENT OF BUSINESS

Agenda
Retailing : An overview Indian retail FDI in Indian retailing Why FDI?

Retailing : An overview

Retailing: An overview

Retailing Worlds largest private industry US$ 6.6 trillion sales annually
Indian retailing Largest employer after agriculture - 8% of population Highest outlet density in world Around 12 mn outlets Still evolving as an industry Long way to go
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Retailing: An overview

Wal-Mart Topmost global Fortune 500 company(3 Consecutive Years) Annual Sales of over US$ 250 bn Fortune 100 9 Retailers Carrefour, Ahold, Home Depot, Kroger, Metro, Kmart-Sears, Target, Albertsons
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Evolution of Indian retail

Historic/Rural Reach Traditional/Pervasiv e Reach Government Supported

Modern Formats/ International

Exclusive Brand Outlets Hyper/Super Markets Department Stores Shopping Malls PDS Outlets Khadi Stores Cooperatives

Convenience Stores Mom and Pop/Kiranas Weekly Markets Village Fairs Melas
Source of Entertainment Neighborhood Stores/Convenience Availability/ Low Costs / Distribution Shopping Experience/Efficiency

Evolution of Indian retail

Informal retailing Sector

Typically small retailers. Evasion of taxes Difficulty in enforcing tax mechanisms No monitoring of labour laws

collection

Formal Retailing Sector

Typically large retailers Greater enforcement of taxation mechanisms High level of labour usage monitoring

Unorganized Retail 92%

Forced employment sector

Retail Scenario in India

14% of National GDP

Fragmented

Employment to 7% of workforce
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Size : $ 400 billion Growth Rate : 13% GDP contribution : 12% Major sector : Food and Grocery Employment : 2nd largest industry (35.06 million) Types: Organized ( 5%) Unorganized ( 95%)

 Corporates are increasingly coming into this sector Demand of branded goods on a large scale Demand of new and varied products High quality product is preferred Varied window display E-tailers increase the presence
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US Taiwan Malays ia Thailand Indones ia C hina India 0 20 40 60 80 100

O rg anis ed Unorg anis e d

US
Unorganised Organised 15% 85%

Taiwan
19% 81%

Malaysia
45% 55%

Thailand
60% 40%

Indonesia
70% 30%

China
80% 20%

India
92% 8%

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CATEGORIES OF INDIAN RETAIL

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Categories of Indian retail

Corporate Houses

Tatas: Tata Trent RPG group: Food World, Health & Glow, etc ITC: Wills Life Style Rahejas(Shoppers Stop), Hiranandani (Haiko), DLF(DT cinemas), etc. Nike, Reebok, Zodiac, etc Vijay Sales, Viveks, Ritu Wear, Sehgal Bro, etc. Bata, Weekender, Lilliput

Dedicated brand outlets

Multi-brand outlets

Manufacturers/ Exporters

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Classifying Indian retail

Modern Format retailers Supermarkets (Foodworld) Hypermarkets (Big Bazaar) Department Stores (S Stop) Specialty Chains (Ikea) Company Owned Company Operated
Traditional Format Retailers Kiranas: Traditional Mom and Pop Stores Kiosks Street Markets Exclusive /Multiple Brand Outlets

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Large Indian retailers

Hypermarket

Big Bazaar , Giants , Shoprite, Star

Department store

Lifestyle, Pantaloon, Piramyd, Shoppers Stop, Trent

Entertainment

Fame Adlabs, Fun Republic, INOX, PVR

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Organised retail formats in India

FORMAT Convenience Stores Discount Stores AVERAGE SIZE 800 sq. feet 1000 sq. feet

Category Killers Specialty Stores Shop-in-Shop Supermarket Department Stores Cash and Carry Hypermarkets

8000 sq. feet Single-category Within Large malls Large in Size, Typical in layout 10,000 60,000 sq. feet 75,000 Sq. feet 50,000 1,00,000 sq. feet
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Major Indian Retailers - Categories

Format Hypermarkets Cash and Carry Departmental stores Supermarkets Shop-in-shop Specialty stores Description Offering basket of product Bulk-buying requirement Large layout, Wide merchandise mix Retailers Spencers, Big bazaar Bharti - Walmart Lifestyle , Globus

Household product as well as food as Apna Bazaar , Food integral part of the service Bazaar Shops located in shopping malls Focus on individual product type Navras ( Big Bazaar) Brand Factory

Category killers
Discount stores Convenience stores

Particular segment
Branded product at discounted px. Small Retail stores

The LOFT
Levis Outlet In and Out
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Segmentation
Retail Segment Percentage Major Retailers holding in sector 63% 9% 5% 5% 4% Reliance Fresh, Caf Brio, Food Bazaar Westside, Shoppers Stop, Globus Tanishq IRCTC Viveks, Vijay Sales, Croma

Food and Grocery Clothing, Textile and Fashion Jewellery Catering services Consumer durable

Pharmaceuticals
Entertainment Furnishing, utensils Mobile handsets

4%
3% 3% 2%

Piramal Group
Bowling Co. Hometown, Tangent Concept The Mobile Store,
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US Sales: $374.5 bn

France

UK Sales: $102.6 billion

Germany

US Sales: $77.3 bn

Sales: $130 bn

Sales: $101 billion

Earnings: $12.9 billion Stores: 6,800 worldwide

Earnings: $5.2 billion Stores: 87,422 worldwide

Earnings: $5.5 billion

Earnings: $1.5 billion Stores: 2,221

Earnings: $4.2 billion

Stores: 3,729 worldwide

Stores: 2,258

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Pantaloons Reliance Bharti retail RPG Lifestyle K. Raheja Piramyd Trent Vishal group

GLOBAL

INDIAN

Tesco Walmart Metro Carrefour B&Q Target

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F.D.I.

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The commitment of money or

capital

to

purchase

financial

instruments or assets in order to gain profitable returns.

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Investment done by citizens and government of one country (home country) invest in industries of another country (host country).

Foreign Investment through

Foreign Direct Investments

Foreign Institutional Investors

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WHAT IS FDI?
Movement of capital across national frontiers in a manner that grants the investor control over the acquired asset.

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WHAT IS FDI?
As per Dictionary of Economics FDI means investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site.

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WHAT IS FDI?
Simply put, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.

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Automatic Route

Government

No permission required

Approval /License required.

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What was the Criteria for FDI?

1991-92 : Dr. Manmohan Singh, Finance Minister

referred to certain criteria for allowing Foreign

Direct Investment. These were : 1. Establishment of basic industries requiring huge capital and advanced sophisticated technology 2. Infrastructure projects like electricity generation,

road, building, etc.

3. Projects which would generate employment
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FDI Policy Initiatives

1991- FDI allowed selectively up to 51% in priority

sectors.
1997-FDI allowed up to 100% in sectors like mining, manufacturing, Cash and carry/wholesale (under Govt. approval route). It was brought under the automatic route in 2006.
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FDI Policy Initiatives

2000-06 FDI allowed up to 100% in specified sectors.
FDI limits increased.

Procedures further simplified

The top 3 Indian Regions attracting the highest FDI. Mumbai, Delhi and Karnataka. Account for nearly 62% of the total FDI.
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FDI Policy Initiatives

April 2006 - May 2010 : 94 proposals were
received 57 proposals approved= inflow of USD196 mn under single brand retailing

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As per 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 is NOT permitted in Multi Brand Retailing in India.

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Single Brand Retailing

Cash and Carry Model Multi Brand Retailing

51%
100% 100%
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 Complications in issuance of licenses like a hypermarket in Mumbai must apply for 29 unique licenses & then when it has to come up with second store it has to apply for same 29 licenses all over again

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By Target By Motive

Mergers and Acquisitions Horizontal FDI Vertical FDI. *Backward Vertical FDI *Forward Vertical FDI

Resource-Seeking Market-Seeking Efficiency-Seeking Strategic-Asset-Seeking

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FDI in Indian retailing

Current FDI is not permitted in retail trade sector, except in:

Private labels Hi-Tech items/items requiring specialized after sales service Medical and diagnostic items Items sourced from the Indian small sector (manufactured with foreign technology) For 2 year test marketing (simultaneous commencement of investment in production facility required)
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Entry Options for Foreign Players prior to FDI Policy

Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players had been operating in the country. Some of entrance routes used by them are: 1. Franchise Agreements
2. Cash And Carry Wholesale Trading

3. Strategic Licensing Agreements

4. Manufacturing & Wholly Owned Subsidiaries 5. Distribution
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1. Franchise Agreements

Foreign company gives name and technology to

local partner. Gets royalty in return.

Easiest track to enter Indian market

In franchising and commission agents

services, FDI is allowed with the approval RBI under FEMA E.g. Nike, Pizza Hut, Tommy Hilfiger, Marks and Spencer, Mango
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2. Cash & Carry Wholesale Trading

100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. E.g. Metro Cash & Carry Entities established prior to 1997 Allowed to continue with their existing foreign equity components. No FDI restrictions in the retail sector pre-1997 Foodworld 51:49 JV between RPG and Dairy Farm Inal (its leading food retailer in India now) Mc Donalds

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3. Strategic Licensing Agreements

foreign brands give exclusive licences and distribution rights to Indian companies Indian companies sell it through their own

stores,

or

enter

into

shop-in-shop

arrangements or distribute the brands to

franchisees
E.g. Mango with Piramyd, SPAR with
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Radhakrishna Foodlands Pvt. Ltd.

4. Manufacturing & Wholly Owned Subsidiaries Bata, Nike, Reebok, Adidas, etc. have whollyowned subsidiaries in manufacturing which are treated as Indian companies and are, therefore, allowed to do retail They sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. E.g. Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited

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5.Distribution

International company sets up local distribution

office

Supply products to Indian retailers to sell Also set up franchised outlets for brand

E.g. Swarovski, Hugo Boss

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On the last count

In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a

discussion paper on allowing FDI in multi-brand retail. The

paper doesnt suggest any upper limit on FDI in multibrand retail. If implemented, it would open the doors for global retail giants (Wal-Mart, Carrefour and Tesco) to enter and establish their footprints on the retail landscape

of India.

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Let the liberalisation be in steps rather than being a leap.

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PRESENT CONDITION OF TRADERS

Fringe Benefit Tax
LICENCES & PERMITS INDUSTRIAL DISPUTE ACT SHOP & ESTABLISHMENT ACT COSUMER PROTECTION ACT WEIGHT & MEASUREMENT ACT PACKAGING ACT PREVENTION OF FOOD ADULTRATION ACT

VAT
INEFFICIENT LABOUR
PREVENTION OF BLOCK MARKETING ACT ANTI-HOARDING & PROFEELING ACT MONEY LENDING ACT PROVIDENT FUND ACT MINIMUM WAGES ACT ESI ACT GRATUITY ACT BONUS ACT

ENTRY TAX FDI in Retail Trade

SERVICE TAX

Anti Socal Elements

OCTROI

WATER TAX
CENTRAL EXCISE

Political Interference PURCHASE TAX

POOR MARKET CONDITION

SALES TAX
POWER PROBLEM

INCOME TAX

Inspector Raj

STAMP DUTY WEALTH TAX HIGH BANK CHARGES PROFESSIONAL TAX

Cash Transaction Tax & Quarterly C Form

New Naka Complex

ESSENTIAL COMMODITIES ACT

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Aviation Telecom Infrastructure

Information Technology

Retail Traders
Banking Insurance

Pharma

Mining Steel

Professional
Education

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CONTRACT FARMING

COLLECTION OF AGRICALTURE PRODUCTS

TO OWN FACTORY

TO CUSTOMER

TO OWN DEPT. STORE

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