Why govt eased 30% outsourcing rule in single brand retail?

The Union Cabinet late Friday changed two key conditions for permitting foreign direct investment in single brand retail.

Key among them is the rule requiring that retail chains in which more than 51% was held by a foreign investor, 30% of the value of goods purchased would have to be from India, preferably from micro, small and medium enterprises, village and cottage industries, artisans and craftsmen. Many foreign retail chains were opposed to this rule as it was difficult to comply with, in case of very specialized/high technology items.

Under the new rule, 30% of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, "where it is feasible".

"In niche products, it may not be viable for the foreign investors to build capacities wherever they engage in retailing, owing to the specialized requirements of quality and precision which the local small industry may not be able to provide. The other category of products relate to the entire range from household appliances, utensils, furniture, crockery to furnishings, etc. These products are far more amenable to sourcing from MSMEs, village and cottage industries, artisans and craftsmen," the government release said.

While the new rule mandates that 30% of the good be sourced domestically, there is no compulsion to engage MSMEs, village and cottage industries, artisans and craftsmen.

"The fact that 30% domestic sourcing is being mandated would imply that the single brand retailers would have to build production capacities in the country, either in existing units, or set up new ones, catering specifically to their sourcing requirements. Hence, even the 30% domestic sourcing is expected to develop production capacities in the country, with the attendant global best practices, relating to design, production and quality," the government release said.

The other change in rule relates to the owner of the brand. Earlier, the rule required the foreign investor to be the owner of the brand.

Under the new rule:
"Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner."

According to policy makers, the amendment in the condition was necessary as globally, single brand retailers often adopted a variety of business models, wherein the brand owning entity and investor entities were kept separate.

"Some single brand retailers adopt models where there is no link between the investing arm and the brand owning arm. In such cases, the brand owner entity could issue an exclusive licence/franchise to the investor entity, to use the brand for the purpose of retail trading, either globally or for a specific region, through appropriate agreement," the government release said.

Also read: What you need to know about FDI in multi-brand retail