Starbucks Corp., the American owner of the global coffee chain, will change the partnership structure of the entity through which it planned to enter the country after the Indian government refused to approve the application because the venture failed to conform to the existing foreign investment regulations.
While unrelated, Starbucks is the second high-profile entry that has run into issues with definitions of whether minority stakeholders are Indian or foreign. The government has also held up Vodafone Group Plc.’s purchase of a majority stake in Hutchison Essar Ltd over questions involving stakes held by Indian investors that it considers as foreign holdings.
Indian regulations currently allow 51% overseas ownership in single-brand retailing, the route opted for by Starbucks to enter India. In December, Starbucks filed for approval from the Foreign Investment Promotion Board (FIPB) in partnership with New Horizons Retail Pvt. Ltd, a company co-owned by the US coffee chain’s Indonesian franchisee V.P. Sharma and Future Group’s Kishore Biyani, India’s top retail firm.
“We understand from their legal representative that now they are restructuring the proposal,’’ said an official at the ministry of commerce and industry who did not wish to be identified, but is aware of the situation. “Because the earlier partner they have chosen happens to be an NRI (non-resident Indian) and under Indian Fema (Foreign Exchange Management Act) laws we treat NRI investment as foreign investment and not domestic.”
The ministry official said Jakarta-based Sharma is an NRI. However, it was unclear whether Starbucks’ new application will include Sharma as a partner as whatever stake Sharma will hold in the venture will represent the overseas holding limit. A representative for Sharma as well as Biyani declined to comment.
Starbucks has applied to open coffee chains and retail outlets for its products, including the company’s espresso machines and branded packed coffee. According to the December application, Starbucks will initially hold 18% of the stake in that business, which will later be later scaled up to the permissible foreign ownership limit of 51%.
(Monica Gupta contributed to this story.)