Francisco A. Laguna & Annapurna Nandyal
Foreign Direct Investment (FDI) has played a dominant role in the global economy, even more so for developing economies. Countries hope that foreign inflows will help create local jobs, modernize technology / infrastructure, update distribution and supply chains, and reduce prices paid by end consumers. In addition, FDI shows a certain confidence in the country by external investors, hopefully making it an attractive venue for others. India is no exception: the government seeks to promote FDI to improve the competitiveness of the country’s industries and services and to prove that investing in India is a sound global strategy.
Historically, India has had more restrictive FDI rules than other BRICS countries, particularly Brazil and China. To attract foreign investors, as part of liberalization, privatization and globalization initiatives, India began to revise its foreign investment policies in the early 1990s.
Currently, the Foreign Investment Promotion Board (FIBP), a dependency of the Department of Industrial Policy and Promotion (FIBP), is the primary agency in India that deals with matters relating to FDI. Certain major investments (exceeding ~ US$ 200 million), require approval by the Indian Cabinet Committee on Economic Affairs (CCEA).
Retail is a major sector that has experienced substantial liberalization in terms of FDI. The Indian retail market includes street / cart retailers working on pavements, small family run businesses and modern malls housing all major international luxury brands. Stemming from the Industrial Policy of 1991, the Indian government has incrementally opened the retail sector to FDI. The following are important milestones in the evolution of the current FDI policies of India:
- 1995: the World Trade Organization (WTO) General Agreement on Trade in Services, which includes both wholesale and retailing services, comes into effect
- 1997: Government allows investors to apply for approval of FDI in “cash and carry” (wholesale) with 100% rights
- 2006: FDI in “cash and carry” (wholesale) is brought under the FDI automatic approval route; Up to 51% investment in single brand retail outlets permitted
- 2011: 100% FDI in Single Brand Retail is authorized
- 2012: Government approves 51 % foreign investment in multi-brand retail.
In 2011-2012, Indian government relaxed certain existing laws like to allow single brand retailers to own 100% of their retail operation as opposed to 51% in 2006 and to allow 51% foreign ownership in retailers such as supermarkets or warehouse stores, which sell multiple brands, something previously prohibited.
Earlier this year, the FIPB approved IKEA’s proposed investment of $1.9 billion in India to set up 25 retail stores. However, since the proposed amount exceeded the Board’s authority, the investment had to be reviewed by the CCEA, which approved it just last week. Similarly, Wal-Mart announced also announced plans to open retail outlets in India.
According to India’s FIPB, at present, the most lucrative business sectors for FDI in India are: infrastructure (power, steel, railways); telecommunications; hospitality; education; retail; real estate; petroleum and petroleum products; biotechnology; and alternative energy.
TransLegal assists clients with FDI projects in India and throughout the world. We help our clients understand applicable FDI rules as well as regulations governing joint ventures, dispute resolution and rules governing the specific sector or product in question. Call us to discuss India or other countries of interest.