14 May 2020
Introduction
In an attempt to liberalise retail trading in India, the Government of India (“GoI”) has introduced intermittent reforms in the past decade, with a view to make the sector investor friendly and to ensure that India remains an attractive investment destination from the Foreign Direct Investment (“FDI”) perspective. The measures introduced have enabled foreign players to set up brick and mortar stores and operate in the e-commerce space to facilitate the transformation of the retail landscape in India.
One of the important segments of the retail sector is single brand retail trading (“SBRT”). As part of the GoI’s initiatives to improve ease of doing business in India, on January 10, 2018[1], the Central cabinet approved amendments to liberalise the SBRT regime. Subsequently, on January 23, 2018, DIPP issued the Press Note 1 of 2018[2] which was made effective by issuance of a notification by RBI on March 26, 2018, amending the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017, whereby 100% FDI under the automatic route was permitted[3] (“2018 Reforms”). Prior to the introduction of such liberalisation, approval from the Secretariat for Industrial Assistance (“SIA”) in the Department of Industrial Policy and Promotion was required for FDI in SBRT over 49% and such application mandated specific indication of the product/ product categories, which were proposed to be sold under a ‘single brand’. Further, for any addition to the product/ product categories to be sold under ‘single brand’, a fresh approval from the GoI was required.
The SBRT regime allows a person resident outside India, whether owner of the brand or otherwise, to undertake SBRT in India for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between an Indian entity undertaking the SBRT and the brand owner. FDI in SBRT is subject to certain other conditions, which include, product(s) (a) should be of a ‘single brand’ only, (b) which are sold under the same brand internationally, in one or more countries other than India, and (c) must be branded during manufacturing. However, certain exemptions are available while undertaking SBRT of Indian brands.
In respect of FDI in SBRT beyond 51%, 30% of the value of the goods procured should be sourced domestically, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors. Such local sourcing requirement, as per the 2018 Reforms was required to be met, in the first instance, as an average of 5 years’ total value of goods purchased, at the beginning of April 1 of the year of opening of the first store by the SBRT entity and, thereafter, such condition was to be met on an annual basis. Further, the 2018 Reforms permitted the SBRT entity to set off its incremental sourcing[4] of goods from India for its global operations during the initial five years, beginning April 1 of the year of the opening of the first store against mandatory sourcing requirement of 30% of purchases from India. After completion of this 5-year period, the SBRT entity is required to meet the 30% sourcing norms directly towards its India operations, on an annual basis.[5]
The Department for Promotion of Industry and Internal Trade (“DPIIT”) brought forth further clarifications on September 18, 2019, vide Press Note 4 of 2019[6] (“PN4 2019”), which clarified that the sourcing requirement shall be met, in the first instance, as an average of five years’ total value of the goods procured, beginning April 1 of the year of opening of first store or start of online retail, whichever is earlier. Further, all procurements made from India by the SBRT entity for that single brand would be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported. The SBRT entity is also permitted to set off sourcing of goods from India[7] for global operations against the mandatory sourcing requirement of 30%. After completion of the five-year tenure, the 30% requirement shall have to be complied with on an annual basis.
The SBRT entity operating through brick and mortar stores was permitted to operate in the e-commerce space as well prior to introduction of 2018 Reforms. This position was further relaxed by PN4 2019 which stipulated that retail trading through e-commerce can also be undertaken prior to opening of brick and mortar stores, subject to the condition that the entity opens brick and mortar stores within two years from the date of start of online retail.
The 2018 Reforms and the PN4 2019 also relaxed the sourcing norms for entities that have ‘state of the art’ and ‘cutting edge’ technology, where local sourcing is not possible, by providing that the sourcing norms will not be applicable up to three years from the commencement of the business. Similar to the aspects underlined in the foregoing paragraphs, in the context of such relaxation, the 2018 Reforms clarified that the three year period will commence from the opening of the first store, whereas, PN4 2019 further clarified that it will commence from the opening of the first store or start of online retail, whichever is earlier, for such SBRT entities. In order to examine the claim of applicants on the issue of the products being in the nature of ‘state of the art’ and ‘cutting edge’ technology, where local sourcing is not possible, a committee under the chairmanship of Secretary, DPIIT, with representatives from NITI Aayog, concerned administrative ministry and independent technical expert(s) has been constituted.
Whilst the PN4 2019 introduced further clarifications and relaxations, the same were to be made effective from the date of Foreign Exchange Management Act (“FEMA”) notification. Accordingly, it was anticipated that the notification of the FEMA (Non-Debt Instruments) Rules, 2019 (“NDI Rules”)[8] on October 17, 2019, will cover the changes set out under the PN4 2019. However, the NDI Rules instead retracted the SBRT reforms introduced by 2018 Reforms and PN4 2019 and required that any FDI in SBRT under the automatic route was permitted only till 49% and for FDI beyond 49%, government approval was required under approval route (as was the case prior to the 2018 Reforms), amongst other stipulated conditions. The same was later rectified vide amendment to the NDI Rules, dated December 5, 2019[9], and the amendment was made applicable retrospectively from October 17, 2019, thereby bringing the NDI Rules in harmony with the reforms introduced by the 2018 Reforms and PN4 2019. There was, however, one more miss while introducing the amendments to the NDI Rules, to bring them in-line with the PN4 2019 i.e. the position under PN4 2019 that the local sourcing requirements will not be applicable for up to three years from the opening of the first store or start of online retail, whichever is earlier, in the event local sourcing is not available for SRBT entities with ‘state of the art’ and ‘cutting edge’ technology, which was not notified under such amendment to the NDI Rules. Therefore, to address this additional discrepancy, in addition to introducing other amendments, the NDI Rules were further amended on April 27, 2020[10]. With this latest change, the NDI Rules are now completely in harmony with the FDI Policy and, in particular, 2018 Reforms and PN4 2019.
While the changes to the NDI Rules in the context of SBRT are now aligned with 2018 Reforms and PN4 2019, this tale highlights that a lot of time and confusion could have been easily avoided if due care was taken to ensure that all the changes proposed by PN4 2019 were accurately covered on October 17, 2019, itself, i.e. the date of notification of the NDI Rules. In any case, the good news is that as of April 27, 2020, the NDI Rules and FDI Policy in the context of SBRT are thankfully in complete harmony!
For further information, please contact:
Ravi Shah, Partner, Cyril Amarchand Mangaldas
ravi.shah@cyrilshroff.com
[1] Amendments approved by the Union cabinet on January 10, 2018. Can be accessed at: https://pib.gov.in/PressReleseDetail.aspx?PRID=1516115.
[2] Press Note 1 of 2018. Can be accessed at: https://dipp.gov.in/sites/default/files/pn1_2018.pdf.
[3] Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2018. Can be accessed at: https://rbidocs.rbi.org.in/rdocs/content/pdfs/GNOT26032018_AN.pdf. The same was made effective from June 2, 2018 vide notification dated June 1, 2018. Can be accessed at: https://rbidocs.rbi.org.in/rdocs/content/pdfs/FEMA20R201062018.pdf.
[4] ‘Incremental sourcing’ is defined as the increase in terms of value of such global sourcing from India for that single brand (in INR terms) in a particular financial year over the preceding financial year, by the non-resident entities undertaking SBRT entity, either directly or through their group companies.
[5] Press note dated January 10, 2018. Can be accessed at: https://pib.gov.in/newsite/erelease.aspx?relid=175501
[6] Press Note 4 of 2019. Can be accessed at: https://dipp.gov.in/sites/default/files/pn4_2019.pdf
[7] ‘Sourcing of goods from India for global operations’ shall mean value of goods sourced from India for global operations for that single brand (in INR terms) in a particular financial year directly by the entity undertaking SBRT or its group companies (resident or non-resident), or indirectly by them through a third party under a legally tenable agreement.
[8] NDI Rules http://egazette.nic.in/WriteReadData/2019/213332.pdf
[9] Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2019. Can be accessed at: http://egazette.nic.in/WriteReadData/2019/214520.pdf
[10] Foreign Exchange Management (Non-Debt Instruments) (Second Amendment) Rules, 2019. Can be accessed at: http://egazette.nic.in/WriteReadData/2020/219200.pdf
