BackTesco-Trent JV to face FIPB questions
Finance ministry arm set to take up Tesco's proposal to invest $110 million in Trent Hypermarket on 30 December
PremiumPhoto: Reuters
New Delhi: UK retailer Tesco Plc’s plan to buy a 50% stake in Tata group-owned Trent Hypermarket Ltd (THL) faces tough questions from the Foreign Investment Promotion Board (FIPB) about the nature of the transaction—the first investment proposed by an overseas supermarket chain in multi-brand retail in India.
The FIPB’s reservations essentially centre around one issue: would Tesco’s $110 million investment lead to the creation of new assets, which was the government’s aim when it allowed 51% foreign direct investment (FDI) in supermarket chains, or does it involve the purchase of Trent’s existing assets?
The board, an arm of the finance ministry, is set to take up Tesco’s proposal on 30 December.
In a proposal submitted to FIPB through the department of industrial policy and promotion, Tesco Overseas Investment Ltd has sought to buy 50% of the “issued and paid-up equity share capital of Trent Hypermarket Limited, a Tata group enterprise, to engage in the activities of multi-brand retail trading".
FDI rules clearly say a foreign retailer has to invest a minimum of $50 million in back-end infrastructure and cannot buy into the existing stores of an Indian partner.
To be sure, in a statement issued while announcing Tesco’s plan, Trent said: “THL currently operates 16 stores across the Southern and Western regions of India. The proposed partnership will operate and build on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka. The application envisages a minimum foreign direct investment in line with the applicable multi-brand retail trading policy."
A finance ministry official said questions will still be asked about Tesco’s proposal in the backdrop of the FDI rules.
“FDI represents ownership in the company. Ownership cannot distinguish between existing and new assets. When you put money into a company through FDI, then you have equal share in all the assets proportionately. Trent is also proposing to issue shares to Tesco at a premium only because it has existing stores," the official said.
This person added that under the existing rules, the local and foreign partner would have to set up a separate subsidiary and put money into it.
The Tesco proposal said the joint venture (JV) will operate in India through a chain of stores under various banners including Star Bazaar, “Star Daily" and “Star Market", with a tag line stating “A Tata and Tesco Enterprise". The products the stores will sell include vegetables and fruits, meat, textiles, wine and liquor, jewellery and books.
“As far as we are concerned, the company has complied with the existing policy for multi-brand retail," said a Tesco spokesperson. Having submitted its application, the company is waiting for the FIPB’s green light, he said.
The proposal should pass the test of scrutiny, experts said.
“It is correct that with the JV, Tesco will technically acquire 50% of Trent’s shareholding and consequently its existing assets in that proportion (including the 16 stores), which is not a problem as long as at least 50% of the foreign funds go into creating new back-end infrastructure and not towards development of these existing assets," said Lalit Kumar, a partner at law firm J Sagar Associates.
Kumar said the FDI policy was quite clear on channelling of funds in the company to back-end infrastructure and places the onus of compliance on the company through a self-certification mechanism that the government can cross-check as and when it requires.
As long as money from the foreign investor is used for the development of new stores, the JV should be compliant with the existing policy, said Akash Gupt, an executive director at PricewaterhouseCoopers said.
“The intent of the clarifications is to ensure investment happens in the back end as well as in investment on new stores. Investment might go to new stores or in the running of those stores, but not in developing these stores," he added.
Tesco was the first foreign retailer to propose FDI in multi-brand retail after the government liberalized rules in September 2012. Most foreign retailers have preferred to stay on the sidelines because of political opposition to the policy.
Trade minister Anand Sharma said in a statement on 17 December that his ministry will back the Tesco proposal.
“To begin with, they propose to establish their stores in Maharashtra and Karnataka. We hope that this will mark a new beginning in transforming India’s retail industry. I am sure that the other global leaders will also look at investing in India," he added.
The Indian retail market is valued at $490 billion (nearly ₹ 3.4 trillion), according to the estimates by Technopak Advisors Pvt. Ltd, a New Delhi-based retail consultancy firm. Of this, the share of organized retail is around 8%. By 2023, this share is estimated to grow to 24% of the total retail market in India.
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