Apple, IKEA Looking to Set Up in India – The Sourcing Clause Obstacles

April 10, 2012 Posted by India Briefing Reading Time: 3 minutes

Obstacles remain over precise definitions over sourcing clauses in single brand retail

Op-Ed Commentary: Chris Devonshire-Ellis

Apr. 10 – Apple and Ikea are another pair of huge global brands that wish to enter the India market in the advent of the liberalization of single brand retail. Both, however, are facing difficulties in overcoming clarifications concerning the souring clauses inserted into the SBR FDI route.

This clause, seen below, is causing headaches as there is no definition of what constitutes or qualifies as “small industries/village and cottage industries, artisans and craftsmen.”

“In respect of proposals involving FDI beyond 51 percent, mandatory sourcing of at least 30 percent of the value of products sold would have to be done from Indian small industries/village and cottage industries, artisans and craftsmen.”

It is in fact an excellent example of how, in India, a carefully drafted policy then translates into opaque legislation due to last minute changes made due to political pressures in getting it on the statute.

It should be remembered, however, that China often has similar problems – laws are drafted and released, yet ambiguity remains until the “implementing rules” are published. In some cases, this happens even 12 or 24 months after the original regulatory legislation is released.

Here, foreign investors should always be reminded that, in emerging countries, some tweaking should be expected after laws are passed. The difficult thing is to get the policy generally agreed upon and, in the case of retail, India has shown its intent. Both clarifications of the clause above in single-brand, and a time period to minimize political interference in multi-brand, are required. Foreign investors need to be patient.

In the case of the definition concerning sourcing, the ambiguity concerning this was caused by the legislation being rapidly amended to ease concerns that small manufacturers – especially the poorer cottage industries – would be able to share in single brand retail production. That’s a noble cause. However in including it, the Commerce Ministry omitted to inform or consult with the Ministry of Micro, Small and Medium Enterprises.

That circle is now having to be closed in order to get clarification into the terminology. India will get there when it comes to opening up its retail sector as the intent is there. Where it falls down is in clarifications – but emerging market economies such as India and China have always behaved in this way. However, the prevarications are not reasons to shy away from investing, as the early bird catches the worm, and I look forward with no doubt to seeing Apple and Ikea in India very soon.

Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates, a specialist foreign direct investment firm with 20 offices throughout Asia, including 5 in India. The practice advices on foreign direct investment regulatory issues, law, tax, due diligence and business advisory services. Please contact the firm at india@dezshira.com or visit their web site here.

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