Regulations That Affect the Retail Industry

7/27/2019 Regulations That Affect the Retail Industry

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Regulations that affect the Retail Industry


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Regulatory Norms

Multiple laws and regulations are in force at the central, state and local levels for governing

the retail sector.

Absence of specific legislations controlling distribution trade and the existence of a plethora

of laws such as the Essential commodities Act, the Cold Storage Order, the Weights &

Measures Act, labor laws, the Shops Establishments Act and so on, leads to market distortion.

Timely and effective implementation of GST will help bring about market integration.

Streamlining the barriers for interstate movements and removal of all octroi and sales tax

check points is possible if the implementation of GST is done with a national, on-line tax

payment system.

There should be quick implementation of all the provisions of the APMC Act , in letter and

spirit, namely the institutionalization of market intermediaries, contract farming and so on.


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FDI IN Retail Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand retail,

forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets.

Even single-brand retail was limited to 51% ownership and a bureaucratic process.

In November 2011, India's central government announced retail reforms for both multi-brand stores and

single-brand stores. These market reforms paved the way for retail innovation and competition with multi-

brand retailers such as Wal-Mart , Carrefour and Tesco , as well single brand majors such as IKEA , Nike

and Apple .

The announcement sparked intense activism, both in opposition and in support of the reforms.

In December 2011, under pressure from the opposition, Indian government placed the retail reforms on hold

till it reaches a consensus.

In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovatein Indian retail market with 100% ownership


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Why FDI?

Improve competition Develop the market Greater level of exports due to increased sourcing by major players

Sourcing by Wal-Mart from China improved multifold after FDI permitted in China Similar increase in sourcing observed for Metro in India Provides access to global markets for Indian producers

Investment in technology Cold storage chains solve the perennial problem of wastage Greater investment in the food processing sector technology Better operations in production cycle and distribution

Better lifestyle Greater level of wages paid by international players usually More product variety Newer product categories Economies of scale to help lower consumer price Increased purchasing capacity of consumers


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FDI in Retail

The recent wave of reforms by the Government to incentivize Foreign Direct Investment

(FDI) in various sectors is bringing a new zeal to the investment climate in India. One of the

most debated reforms is the policy for allowing 51 per cent FDI in multi-brand retail.

In November 2011, the Government came out with its proposal for the new FDI policy.

However, unable to achieve political consensus on the issue, they had to shelve their plans for

the enactment of the policy. Finally the Government decided to pass the new FDI policy on

MBRT in September 2012.


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Implication of FDI policy on different sub-sectors of retail. The FDI policy conditions will

have a different impact on the various sub-segments of the retail industry in India. A policy

condition might have a low impact in one segment but could be a major stumbling block for

another segment.

Minimum FDI of USD 100 million and a constraint of maximum 51 per cent stake of the

foreign entity imply that the minimum investment required by both, the foreign and the Indian

partner together, is more than INR 1000cr.

Mass Grocery and Apparel are two of the fastest growing organized retail segments. In both

these segments there are large domestic retailers who could be potential joint venture partnersfor foreign retailers.


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Changes brought in by Dr. Manmohan Singh

The Ministry of Commerce and Industry, Government of India is the nodal agency formotoring and reviewing the FDI policy on continued basis and changes in sectoral policy/

sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for

Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).

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 withregard 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 till 23rd November 2006.

d) But on 24th November 2011, GOI cleared the proposal to permit 51% in Multi-Brand &

100% in Single-Brand Retail.


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FDI in Single Brand RetailFDI up to 100% is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and

subject to the conditions mentioned in Press Note 3 that:-

(a) only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by

the same manufacturer would not be allowed),

(b)products should be sold under the same brand internationally,

(c)single-brand product retail would only cover products which are branded during manufacturing and

(d) any addition to product categories to be sold under single-brand would require fresh approvalfrom the government.

While the phrase single brand has not been defined, it implies that foreign companies would be

allowed to sell goods sold internationally under a single brand, viz., Reebok, Nokia, and Adidas.

Retailing of goods of multiple brands, even if such products were produced by the same

manufacturer, would not be allowed

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 and not the Reebok brand, for which

separate permission is required. If granted permission, Adidas could sell products under the

Reebok brand in separate outlets.


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FDI in Multi Brand Retail

On 24th November 2011, Department of Industrial Policy and Promotion (DIPP), Ministry of

Commerce & GOI approved the proposal up to 51% in India

As implemented, it has opened the doors for global retail giants to enter and establish their

footprints on the retail landscape of India.

Opening up FDI in multi-brand retail has mean that global retailers including Wal-Mart,

Carrefour and Tesco can open stores offering a range of household items and grocery directly

to consumers in the same way as the ubiquitous kirana store.

Restrictions applied on FDI by GOI

Minimum invest of $100 million.

50% of investment has to be in back-end logistics

At least 30% of sourcing from Small scale Industries.

Stores can only be in cities with over 1 million population.

Government will have first right of procurement of farm produce


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Imports/Exports in Retail Industry


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Rise in Exports

The government is likely to allow foreign retailers to sell imported food items such as bread,

cookies, poultry and meat in their single-brand stores, easing the foreign direct investment

norms in the sensitive food sector.

The move comes in the wake of big-ticket economic reforms unleashed earlier this month that

included a relaxation in sourcing norms for foreign-owned single-brand retail chains.

Foreign retailers, however, are apprehensive of the local-sourcing norm as they want to

maintain the same standard of food products being sold at their stores globally.

As long as foreign retailers adhere to 30 per cent local sourcing, I don't see why they can't

import food items and sell the same in their stores in India.

Entry of foreign companies has been made easier with the local sourcing clause now making

it 'preferable' instead of 'mandatory' to source 30 per cent of the value of goods from Indian

small industries.


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Rise in Exports

More importantly, many foreign retailers are already sourcing from India. UK-based multi-

brand retailer Tesco, for example, has been steadily increasing sourcing of garments along

with other products from India. Tesco today sources goods worth 320 million from India

compared with 230 million two years ago. The large chunk is still garments but it has

bumped up the mixture to include kitchen and garden equipment, stationery and food items.

IKEA too sourced products worth nearly $450 million in 2011. The company is targeting

sourcing in excess of $1 billion in the next few years, says the Thorell. But Arvind Singhal,

chairman, Technopak Advisors, a consultancy, says it is fallacious to argue that just because

retailers are sourcing from India, the 30% clause is easy to meet.

India is a key sourcing country for some global retailers.

Entry of Foreign Players is likely to promote manufacturing and exports which will result in

Double Bonus for the Company.

Regulations That Affect the Retail Industry

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