FDI in Retail: Arduous Approvals
India’s FDI chapter was opened in 1991, when then Prime Minister Narasimha Rao eased regulations to allow foreign players to invest in India. From then till now, FDI has come a long way in the country. But, the journey has been choppy overall, peppered with setbacks. Norms have been relaxed to various degrees across sectors such as defence, pharmaceuticals, civil aviation, stock exchanges, state-owned oil refineries, telecom and retail to the most recent ‘Other Financial Services’ carried out by Non-Banking Financial Corporations (NBFC). Yet, measured against advanced open economies, India is still work in progress.
To understand why, here’s a recap of two foreign retail brands’ journey in India which pretty much epitomise the FDI story in the retail sector that has been a political “hot potato” of sorts for long.
IKEA – the Swedish Furniture Brand
Simple figures first: In single-brand retail, the government’s green signal to Swedish furniture purveyor IKEA, is slated to bring in investments of over Rs.100 billion to India. IKEA plans to inaugurate its first store in Hyderabad by 2017-end, post which it wishes to open another 25 across cities in India by 2025. Each of the stores would employ anywhere between 500 to 700 people, and also generate job opportunities for 1,500 people, indirectly. Further, the company, which has been sourcing many products from India for more than 25 years now, plans to double it by 2020.
Winning approval, however, was fraught with difficulties. IKEA on Indian soil almost didn’t happen. Seven years back, in 2009, the global furniture behemoth, shelved its plans to invest in India. At that point in time, India allowed 51 per cent FDI in single-brand retail. But there was a hitch. Norms required the remaining 49 percent to be invested by a local partner. IKEA’s characteristic spacious showrooms, which require high investments, saw none in India willing to put in capital in what they perceived then as a “high risk bet.” Conditions were also placed on the kind of goods that could be sold. After many rounds of parleys, frustrated with the situation, IKEA decided to wait till norms became more conducive. It felt the nation was not yet ready for big retailers.
This brought about a severe backlash from the media and other quarters, which felt the episode would send out a wrong message about the business environment in the country, thereby deterring other big ticket investments. It would lead to missed opportunities vis-à-vis skill transfers, doing business with a global brands and employment generation.
Under pressure, the Indian government relaxed norms. In 2012 it allowed 100 percent FDI in single-brand retail from an earlier 51 percent. After hectic lobbying, IKEA was given permission to open home furnishing stores in India in 2013. Considered as one the biggest foreign investment in retail segment, it was also allowed to run cafes and restaurants within its single brand stores in India. But it still isn’t allowed to sell packed food items – something that continues till date.
It was an epic journey to approval – a ray of light for other international brands wanting to test the Indian waters. Since then, many single-brand retailers have set up shop in India.
Wal-Mart – the American Multinational Retail Corporation
No other brand has had a tougher journey in India, than perhaps Walmart. This is partly because of the government’s misgivings against FDI in multi-brand retail and partly because of the international retail giant’s shady deals to gain a foothold in India and other countries.
Wal-Mart forayed into the Indian market in 2007, by forging partnership with Sunil Mittal-led Bharti Enterprises for wholesale cash-and-carry and back-end supply chain management operations in India, as per norms. The business-to-business model was meant to serve kirana stores, fruit and vegetable resellers, restaurants and other business owners. By supplying them a wide array of quality products at competitive wholesale prices, it was supposed to be profitable for both the seller and buyers. Down the line, in 2012, 51 percent FDI in multi-brand retail was finally allowed in India after a dramatic battle. A bunch of conditions, however, were attached to it. Wal-Mart, the retailing giant, tried its luck, but drew a blank eventually. Multi-brand retail has been a bone of contention in India for long as many feel it would hurt the 250 million plus eking out a living through mom-and-pop retail stores.
Meanwhile, Wal-Mart also got embroiled in legal issues. An investigation was launched to find out if the US retailer broke rules by investing in the Indian retail sector via Cedar investment, before the market was opened to global players. The events happened like this: In 2007 Bharti group formed Bharti Retail Holdings Ltd, which in turn owned a subsidiary called Bharti Retail Ltd that operated supermarkets and hypermarkets. Curiously, in 2009, Bharti Retail Holdings officially declared itself as a consulting services and not a retailer anymore. Just about a month later, which was next year, it changed its name to Cedar. The change in name and business, generated suspicion, because when Wal-Mart invested in Cedar in March 2010, foreign companies could legally own 100 percent of an Indian consulting firm but not retail. Doubts were raised into whether Wal-Mart’s money was actually being used in the retail business.
There was more trouble brewing. Wal-Mart’s disclosure to the US authorities that it had spent around USD 25 million on its various lobbying activities, which also included money spent on gaining increased access to the Indian market, since 2008, raised doubts again. Lobbying, legally permitted in US is disallowed in India. A three-year-long probe by the US government revealed that Wal-Mart had in fact paid bribes to local officials in India to help move goods through customs or obtain real estate permits. They were mostly below $200, and some were as low as $5. But, they totalled to millions of dollars. Those opposed to FDI in India, lapped up the opportunity to protest against opening up of the Indian market.
All such controversies dogging Wal-Mart, took a toll on its partnership with Bharti Enterprises in 2013. Today, Wal-Mart operates 21 wholesale outlets in the country, which is about a fourth of the number of stores it owns and operates in tiny Honduras. But there’s a silver lining – the Modi-government has recently sprung a surprise by allowing 100 percent FDI in multi-brand processed food retailing.