Fendi, Christian Dior, Louis Vuitton...the list goes on. Name almost any brand and chances are that you could walk across to a store in India and pick it up. No more browsing websites and asking friends or relatives to pick up the coveted item on a foreign jaunt.
The shopping scene only promises to get better, with big brands intending to lay claim on their share of the retail pie in India. Today many international brands operate under the franchising/licensing arrangement model, while some are actually using the foreign direct investment (FDI) route.
Illustration: Jayachandran / Mint
Broadly, foreign investments into India are either through the automatic route or the approval route.
Under the approval route, approval from the Foreign Investment Promotion Board (FIPB) is required prior to the investment. In approving an investment proposal, FIPB typically considers factors such as inflow and outflow of foreign exchange, general benefit to the Indian economy, potential for employment, etc.
For purposes of FDI, the trading sector in India can be subdivided into (a) wholesale/cash and carry trading, (b) trading for exports, (c) trading of items sourced from the small-scale sector, (d) test marketing of such items for which a company has approval for manufacture and (e) single-brand product retailing.
FDI up to 100% is permitted under the automatic route (that is, without approval) in the case of wholesale/cash and carry trading and in the case of trading for exports.
FDI of 100% is also permitted for trading of items sourced form the small-scale sector and the test marketing of such items for which a company has approval for manufacture under the approval route. Until 2006, FDI in any other form of trading activities including retail trading was prohibited.
The government of India attempted its first step towards partially liberalizing the retail trading sector in the form of Press Note 3 of 2006 amid protests from both the Left and Right wings. By Press Note 3, an exception was carved so that FDI up to a maximum of 51% in the single-branded retail sector under the approval route became permissible.
However, do not mistake this as any actual liberalization, as the path to retail nirvana comes with a whole bunch of conditions and stipulations, some of which are not entirely clear.
To qualify under single-brand retail, first, the products to be sold should be of a single brand only. Second, the products should be sold under the same brand internationally and third, single-brand product retailing covers only products that are branded during manufacturing.
Under the approval route for entry into the single-brand retail market, the applicant is required to make an application to the secretariat for industrial assistance in the department of industrial policy and promotion (DIPB). The application would then be processed in DIPB to determine whether the products proposed to be sold satisfy the notified guidelines, after which the application would be considered by FIPB for government approval.
Press Note 3 has had far-reaching implications, as it raised more questions than answering them, the fundamental question being: How does one define a “single brand”?
It is pertinent to note that while making an application, the applicant is required to specify the product(s) to be sold under the brand, and any addition to the list would require prior approval.
The government’s intention is unclear. On the one hand, it seems to suggest that it wants to regulate the number and kind of products coming in by way of brand retail, while on the other it seems to suggest that the product can be expanded, with no indications of parameters.
Further, does this imply that by virtue of the “single brand” definition, a brand like Tag Heuer, largely known for watches, and a brand such as Harrods, which offers everything from chocolates to evening gowns under its brand name, are subject to the same conditions?
With emphasis on the products being branded at the manufacturing stage and being sold under the same brand internationally, brands which outsource the manufacturing process to a third party or brands that work on the distributorship model are out of the reckoning. And, since products to be sold in India should be sold under the same brand internationally, India-specific products seem to be ruled out.
Luxury brands that face hurdles such as lack of quality space, high import duties, counterfeiting, etc., continue to hope that the government will sooner instead of later clarify its stance and enable them to invest more time and money in their India plans rather than enter into licensing or franchising arrangements for use of their operating name and trademark for a fee, a tactic typically adopted by foreign retail firms.
However, given the issues arising from Press Note 3 and in the absence of concrete clarifications by the government, the ambiguity still continues and several of these brands continue to operate under franchising/licensing arrangements.
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This column is contributed by Rita Patnaik of AZB & Partners, Advocates & Solicitors