CLR Important | Multi-Brand Retail FDI Policy- Clarification on queries of prospective investors/ stakeholders


Issue Clarification/ comment
30%  sourcing  from  Small  and Medium Enterprises:
(a) Can the Foreign Investor purchase the 30% of the total procurement of manufactured or processed goods by the  SME  but  distribute  them  either through the retail operation and/ or cash & carry operations and/ or export for the  Foreign  Investor™s  International retail & trading operations? (a) No. The 30% sourcing will be reckoned only with reference to the front end store. As such a multi-brand retailing entity cannot engage in any other form of distribution.
(b) Whether a ˜small industry™ referred to   the   actual   legal   entity   of manufactured / processed  products purchased with investment within USD 1 million which shall not include its parent company, subsidiaries, affiliates and/or  franchisor?  Whether  farmer, cooperative,  agro-business  including dairy, poultry and fresh, distributor and reseller of major branded companies will  be  counted  as  a  SME  if  its investment is within USD 1 million? (b) The phrase used in the FDI policy is ‘small industries’ with maximum investment in Plant & Machinery  at  USD 1  million.  The  sourcing condition  pertains  only  to  manufactured  and processed products. Procurement of fresh produce is not covered by this condition.
50%   investment   in   back-end infrastructure
(a) Can the new retail entity to beset up acquire supply chain/back-end assets  or  stake  from  an  existing company having such assets and will such assets /stake values be counted

towards   the   back-end   investment requirement?

(a) No.   Entire   investment   in   back-end infrastructure has to be an additionality. The entity can invest only in greenfield assets and it will not be possible to acquire supply/chain/backend assets or stakes from an existing entity.
(b) Would investment (equity stake less than 100%) in a company engaged in  development  of  back-end infrastructure be considered part of the investment in back-end infrastructure if one can certify its use towards back-end capacity? (b) No. Such investment in the equity of the existing infrastructure company will not be treated towards the fulfillment of the conditionality of 50% investment in back-end infrastructure.
(c) Whether investment in back-end infrastructure for instance for storage, warehouses,  agricultural  produce infrastructure  in  non-FDI  approved states   will   be   counted   towards investment in back-end infrastructure. (c)  FDI  in  these  activities  is  already  allowed throughout  the  country.  As  far  as  MBRT  is concerned FDI in non-FDI approved States in back-end infrastructure will be counted provided it is an additionality.
(d) Will  the  new  retail entity include back-end facilities that have the capacity to supply its own businesses  and other businesses. It should be free to supply  back-end  services (e.g. logistic supply, goods) to related or third party companies, including but not limited to the company™s existing wholesale   entity  and   the   retail franchisee operated by its partners. (d) As per the conditions for wholesale cash & carry trading, such an entity is not permitted to undertake retailing of any form. Therefore, both the businesses  have  to  be  kept  separate  through different entities. As regards supplies by MBRT company to franchisees run by its partners, it is clarified  that  the  policy  envisages  multi-brand trading in retail. The MBRT entity is not envisaged to undertake wholesale activity i.e. B2B.    The front-end stores set up by MBRT entity will have to be ˜company owned  and  company operated™ only.
(e) Would a company operating in wholesale trading / cash & carry trading be considered as a company providing back-end  infrastructure  in efficiently distributing  the  goods  to  the  small retailers  and  professional/  business users? (e) No. The wholesale trading/ cash & carry trading cannot be considered to be providing back-end infrastructure. FDI in MBRT will require fresh investment in back-end infrastructure.
(f) Would the minimum investment of 50% of the total FDI in back-end infrastructure be mandatorily invested in the same state where the retail store is proposed to be set up? (f) The investment towards back-end infrastructure  can be  made  across  all  states irrespective of the fact whether FDI in MBRT is allowed in that state or not.
Investment in Front-end / back-end infrastructure
(a) If the same foreign investor is an investor in various companies for logistics, services etc., will the back- end investment made by such investor be aggregated? (a) No. Investments in multiple infrastructure companies  would  not  be  counted  towards fulfillment of condition of investing 50% in the back end infrastructure.
(b) Can  back-end  and  front-end infrastructure  be  held  by  separate entities? Can the back-end entity be100% owned by a foreign entity since 100%  FDI  is  permitted  under  the automatic route for a company engaged in back-end infrastructure related? (b) The back-end entity may be 100% owned by a foreign entity as long as the investor in MBRT has been able to satisfy the condition that 50% of the FDI brought into the country for MBRT has been  utilized  in  back-end infrastructure  as  an additionality.
Small industry certification:
Suppliers should have some form of authentication to confirm their status as ˜small industry™. Certificate  issued  by  District  Industries  Centre would be adequate authentication to confirm status of supplier as ˜small industry™.
Population Restrictions on operations
(a) For determining whether a city has a population of more than 10 lakh, it should not be limited to the data as per  the 2011  census.  When  a city reaches  such  population  level  after 2011,  it  should  be allowed  to  self-certify  that  it  has  achieved  the population.  Further,  the  population restriction should recognize that twin cities  or  co-located  cities  may  be eligible  based  on  their  combined population. (a) Census data is the most authoritative source of population data, which is accepted by all the States. Therefore, no other data source or self-certification can be permissible.
State Discretion:
(a) The  policy  should  not  give states that have approved FDI in multi-brand retail the ability to change the fundamental rules of the FDI policy including but not limited to the 30% ˜small industry™ sourcing and minimum investment in back-end infrastructure requirements. (a) States which have opted for inclusion in theFDI  policy  have  already  been  notified.  Any amendment in the policy falls under the domain of the Central Government. However, State laws/ regulations will apply.
(b) In  case,  the  foreign  investor approaches  a  State  Government  for setting up a retail store, can the state Government put additional conditions to operate in that state? (b) FDI policy in  MBRT  is  subject  to  the applicable State/Union Territory laws/ regulations. The State Governments have the prerogative of imposing additional conditions accordingly.
(c) In  case,  the  foreign  investor approaches  a  State  Government  not included in the list of states supporting FDI in MBRT, would the approval of such new state be valid before they are notified to the DIPP for addition in the list? (c) If the foreign investor approaches a State Government  not  included  in  the list  of  states supporting FDI in MBRT, consent from the State Government would be sufficient, and a suitable amendment to the policy will be issued by the Central Government.
Policy on E-commerce
Allowing online sales will enable the Company  to  better  serve  Indian customers  through  enhanced convenience and assortment as well as improve the site customer experience. This will allow the company to make significant investments in Logistics. Multi-brand retail trading by way of e-commerce is not permitted.
Front end retail franchise stores in non- FDI states:
Whether  the  back-end  infrastructure could support front end retail franchise stores in non-FDI states at arm™s length price. Back end infrastructure, so developed, can be used across the states by any entity. Franchisee model is not permissible as per extant FDI policy on MBRT. The front-end stores set up by MBRT entity will have  to  be ˜company  owned  and  company operated™ only.
Investment in greenfield or brownfield front-end entities
Can the minimum investment of US$ 100 Million be used to acquire existing retail stores or setting up new retail stores or a combination of both? 50%  of  the  investments  brought  in,  must  be invested in back-end infrastructure, and any amount spent in acquiring front end retail stores would not be counted towards back-end infrastructure. The front-end retail stores must also be set up as an additionality and not through acquisition of existing stores.

Following issues are under consideration:
i. Sourcing restriction amongst ˜group companies™.
ii. Requirement of 50% investment in ‘backend infrastructure’ within three years of the first tranche of FDI.
iii. Requirement of 30% sourcing from ˜small industry™. Whether sourcing from such ˜small industry™ can be allowed towards fulfillment of this conditionality, if it outgrows, and if so, till what period?

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