FDI in Trading Activities in India

1. Introduction

Foreign Direct Investment in Retail Trading has been a subject matter of hot debate over the past few years. With United Nation’s recognition of India as part of the BRIC (Brazil, Russia, India and China) economies which are likely to overtake present leading economies of the world by 2045, multinationals world over are planning huge investments in India. “Trading” has been a traditional form of attractive business model which is perceived to be hassle free compared to manufacturing. World leaders in retail trading like “Wal Mart” are eager to enter India.

Back home in India, we find strong protest from political parties with communist philosophies as well as retail trade associations against opening up of retail sector for FDI. The fear of being ruled by foreigners still looms in minds of people. And possibility of the same cannot be ruled out looking at the deep pockets of such foreign investors. Therefore, the domestic entrepreneurs are demanding level playing field. Government being alive to these facts has been cautious in opening up this sector in a phased manner.

It may be recalled that prior to 1997, when the current policy for retail trading was laid down, approvals had been given to two companies for FDI in retail trading. The first approval was given to Nanz Food Products in1992, followed by Spencer and Company Ltd. in 1996. Subsequently, a policy decision was taken not to allow FDI in retail trading subject to recent liberalisation of allowing 51% FDI for a “single brand” product.

In this back drop let us discuss the present regulations pertaining to retail trading in India.

2. Investments in a Trading Company under Automatic Route1

2.1 Investments in a Status Holder Export Company:

2A trading company incorporated in India is permitted to issue shares or convertible debentures to the extent of 51 per cent of its capital, to non-residents (other than citizens of Bangladesh and Pakistan) or an entity incorporated outside India (other than an entity in Bangladesh and Pakistan). However, where such investment is made, remittance of dividend to the non-resident shareholders would be allowed only after the company has secured registration as an Export/Trading/Star Trading/Super Trading House from the Directorate General of Foreign Trade, Ministry of Commerce, Government of India New Delhi.

The fact that the dividend remittance is allowed to companies predominantly engaged in exports, indicate that the intention was not to encourage domestic trading or retail trading. The intention is further fortified by the recent developments3 whereby “Retail Trading” (except for single brand) is included in Annexure A , Part B(1), which lists industries wherein FDI is prohibited.

2.2 Wholesale /Cash and Carry Trading:

FDI in a company engaged in “cash and carry wholesale trading” is now permitted up to 100 per cent under the automatic route4. The difficulty here is that the term “cash and carry wholesale trading” is not defined in the FEMA Regulations. The dictionary meanings of the term are as follows:

The Concise Oxford Dictionary: “Cash and Carry” = “a system of wholesaling in which goods are paid for in cash and taken away by the purchaser”.

The Concise Oxford Dictionary: “Wholesale” = “the selling of things in large quantities to be retailed by others”.

The Law Lexicon Dictionary: “Wholesale” = “Of, relating to, or engaged in the sale of goods in quantity for resale”; “Wholesale is sale in a whole or unbroken quantity; opposed to retail sale”.

From the above dictionary meanings one would tend to interpret that the term “cash and carry wholesale trading” would not even include the normal credit period. Even the FIPB official has informally confirmed this view in the bulletin board on its web site. However, way back in August, 2001 a view was taken by the Under Secretary (DIPP) that “under the cash and carry wholesale trading, product sourced from domestic and international markets to be sold in domestic market on wholesale basis also include trade on credit basis”.

Coming to the meaning of the “Wholesale Trading”, what is permitted under the automatic route is sale on wholesale basis to an entity (not the end user) having a valid sales tax registration as clarified by the FIPB official.

The Press Note issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India has clarified that:

“The present policy only permits FDI up to 100 % in Cash and Carry Wholesale trading, which is quite distinct from retail trading, involving sale to individual customers through normal retail shopping outlets.

In this context, it would be useful to reiterate that Cash and Carry Wholesale business and retail trading are qualitatively and distinctly different. The wholesale trader sells his goods to retailers and not to consumers, and retailers are identified as those having a valid Sales Tax Registration. The Cash and Carry Wholesaler cannot open retail shops to sell to consumers directly. The advantages of cash and carry wholesale business are quick delivery of goods to retailers and saving of time and money in indenting and warehouse facilities, thus giving them the benefit of Just-in-Time supplies”.

2.3 Trading for Exports5:

FDI is permitted up to 100 per cent on automatic route for export trading.

2.4 Power Trading5:

FDI is permitted up to 100 per cent on automatic route for power trading subject to compliance with Regulations under the Electricity Act, 2003.

3. Investments in a Trading Company under FIPB Route6

Foreign Direct Investments in a company engaged in following activities would be subject to prior approval from FIPB:

1. Exports7

2. Bulk imports with exports/ export bonded warehouse sales

3. Cash & carry wholesale trading7

4. Other import of goods and services provided at least 75% is for procurement and sales of the same group and not for third party use or onward transfer/distribution/sales.

The following kinds of trading activities are also permitted under the FIPB route subject to provisions of EXIM Policy:

1. Companies for providing after sales services (that is not trading per se)

2. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their Joint ventures in which they have equity participation in India

3. Trading of hi-tech items/ items requiring specialized after sales service

4. Trading of items for social sector

5. Trading of hi-tech, medical and diagnostic items

6. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name

7. Domestic sourcing of products for exports

8. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing.

1. Retail Trading up to 51 per cent
   
   It appears that sale of products to end users also would be permitted when one obtains a specific permission from FIPB. For example, trading of hi-tech items or items requiring specialized after sales service would not normally be sold on a wholesale basis.

4. Investment in E-commerce Activities8

FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would engage only in business to business (B2B) e-commerce and not in retail trading.

5. Investment in Trading Activities by NRIs

Non-resident Indians enjoy a special privilege to invest in India on non-repatriation basis9 in India except in case of investment in Chit Fund or a Nidhi company or in a company which is engaged in agricultural/plantation activities or real estate business or construction of farm houses or dealing in Transfer of Development rights. Thus prime facie it appears that there is no restriction for NRIs to invest in trading companies on non-repatriation basis.

6. FDI in Retail Trading up to 51 per cent10

In a landmark departure from the earlier policy, the Government of India permitted FDI subject to SIA/ FIPB approval up to 51 % in Retail Trade of ‘Single Brand’ Products with the aim to attract investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices subject to the following conditions:

1. i) Products to be sold should be of a ‘Single Brand’ only.

2. Products should be sold under the same brand internationally.

3. ‘Single Brand’ product retailing would cover only products, which are branded during manufacturing.

Before consideration by FIPB, applications seeking permission of the Government for FDI in retail trade of ‘Single Brand’ products are required to be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The application should specifically indicate the product/ product categories, which are proposed to be sold under a ‘Single Brand’. As per the policy guidelines, any addition to the product/ product categories to be sold under ‘Single Brand’ requires a fresh approval of the Government. Gist of liberalization in trading as per item No. 26 under Press Note No. 4 (2006 Series) dated 10th February, 2006 is as follows: —

1. Wholesale/cash & 100% Automatic Subject to guidelines for FDI in carry trading trading issued by Department of Industrial Policy & Promotion vide Press Note 3 (2006 Series).

2. Trading for exports 100% Automatic

3. Trading of items sourced 100% FIPB from small scale sector

4. Test marketing of such items 100% FIPB for which a company has approval for manufacture

5. Single Brand product retailing 51% FIPB

7. Investment in Partnership/Sole Proprietorship Firms engaged in Trading Activities11

Non Resident Indians and Persons of Indian Origin are allowed to make investment on non repatriation basis in Partnership or Sole Proprietorship also engaged in trading activities provided the firm or the proprietary concern are not engaged in any agricultural/plantation activity or real estate business, i.e. dealing in land and immovable property with a view to earning profit or earning income there from.

Though, not expressely prohibited under the Notification, RBI has viewed that this Notification is not aimed at permitting investment in retail trading.

NRIs/PIOs are permitted to invest in sole Proprietorship Concerns/ Partnership Firms with Repatriation benefits with prior approval of Secretariat of Industrial Assistance (SIA), Government of India and the RBI12.

8. Trading Activities through a Branch in India

A Non-resident (other than citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China) who has been permitted by the Reserve Bank of India to establish a branch in India is permitted to undertake only following two types of trading activities in India as prescribed in Schedule-1, Regulation 6 under Notification No. 22:—

4. Export / Import of Goods, and

5. Representing the parent company in India and acting as buying/selling agent in India

9. Conclusion

Opening up of retail trading beyond 51 % may have been put on back burners by the Government for the time being, however, its only a matter of time when the retail trading sector would be opened up totally, India being part of WTO. With one billion plus population in India and purchasing power being in young generation there is no doubt that retail trading activities in India have bright future. In these days of globalisation and border less world business considerations would certainly drive political wills in the long run.