Foreign Single Brand Retailers in India Can Source from SEZs to Satisfy FDI Requirements

Posted by Written by Nishtha Yadav Reading Time: 4 minutes
  • Single brand retailers in India with foreign investment can fulfil their local sourcing requirements by buying goods produced in units based in SEZs.
  • Government announced the clarification as SEZ sourcing was not clearly defined in previous framework.

In a bid to attract more foreign investment and improve ease of doing business in the country, India recently relaxed its local sourcing norms.

The Department for Promotion of Industry and Internal Trade (DPIIT) – erstwhile Department of Industrial Policy and Promotion (DIPP) – recently clarified that single brand retailers, owned by foreign companies, can fulfill their local sourcing requirements by procuring goods produced in units based in special economic zones (SEZs).

For single brand retail – 100 percent foreign direct investment (FDI) is allowed. However, if the foreign investment exceeds 51 percent, then sourcing 30 percent of the value of goods procured is mandatory from India.

The clarification issued by DPIIT, clarification added that the goods proposed to be sourced by a single-brand retailer from SEZ units will have to be manufactured in India. The government issued this statement as the SEZ sourcing was not clearly defined, leading to confusion within the industry.

Single brand retail sector in India

According to India’s FDI policy for single brand retail, 100 percent FDI is allowed. Until 2018, firms needed permission from the DPIIT to invest above 49 percent in this sector.

In 2019, the FDI policy was amended to allow single brand retailers to sell their products online without setting up a physical store in India. This amendment provided companies with an opportunity to test the market without making a large investment.

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Foreign retailers with more than 51 percent FDI in this sector have to source a minimum of 30 percent of the value of purchased goods domestically. However, retailers can meet his requirement incrementally within the first five years of their operations in India.

Easing of FDI norms in this sector comes after foreign companies expressed disappointment regarding the strict regulations around e-commerce.

Regardless of a the new changes, single brand retailers complain about the lack of government assistance for procuring land and local sourcing and setting up manufacturing facilities. Foreign companies cite lack of skilled labor and weak infrastructure as reasons that dissuade them from investing more in India’s single brand retail sector.

Why foreign brands approach India despite murky regulations

Through the intermittent relaxations in the country’s FDI policy, India’s retail sector has attracted increasing foreign investment in the past five years. It is of course helped in no small part by the size of the Indian market. Globally known retailers like H&M, Starbucks, Walmart, Nokia, Sony, and IKEA have established their presence in India or reinforced their presence.

Premium technology company Apple announced it will open its first retail store in 2021 and its e-store towards the end of 2020. Currently, Apple merchandise is sold through third-party sellers in India. With a market share of 75.6 percent in the fourth quarter of 2019, Apple occupies three-fourths of the premium smartphone segment in India. The segment includes phones priced above INR 35,000 (US$500).

One of the reasons of Apple’s success in the Indian market is the price cut on the iPhone XR model made possible by the fact that it is assembled in India at Foxconn’s manufacturing unit. Nevertheless, Apple is reportedly not keen on shifting its production from China to India, due to the lack of supply chain, infrastructure, and availability of skilled labor. However, India presents a huge opportunity and a key market for growth as sales continue to decline in the much-touted China market.

The Swedish furniture seller, IKEA, also welcomed the recent ease in sourcing norms and reiterated its commitment to increase sourcing from India.

IKEA generated revenue worth INR 4.07 billion (US$55.34 million) in FY19 from its first store in Hyderabad that opened in August 2019. The Foreign Investment Promotion Board (FIPB) also cleared the retailer’s investment proposal of INR 105 billion (US$1.45 billion) to open 25 stores in India by 2025.

With nearly 4 million visitors in its first year of opening, IKEA has tweaked their business strategy to take advantage of their popularity and opened online stores in Mumbai and Pune. Further, the company has plans to open online stores and small format stores in Delhi and Bengaluru. IKEA’s second store is expected to open in summer 2020 in Navi Mumbai.

Alternatives to the FDI route

In the past, single brand retailers, such as Zara and Marks & Spencer, have also partnered with Indian retail conglomerates through license agreements instead of taking the FDI route. For instance, Forever 21 recently filed for bankruptcy in the US – with plans to exit international locations in Asia and Europe. Its India operations, however, will continue but as a franchise operation run by Aditya Birla Fashion and Retail Limited.

In 2013, French sporting goods retailer Decathlon won the government’s approval for 100 percent FDI in single brand retail. With a promised initial investment of INR 7 billion (US$95.6 million), the company had plans to open up to 60 outlets in India over five years. In 2020, the retailer owns over 75 stores in the country, with plans to open another 25 stores.

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Decathlon’s journey as a single brand retailer has been a mixed bag. Despite the FDI approval, the company’s request to enter the e-commerce space to sell their goods directly was rejected in 2014. However, seven years later and with constant changes in the single brand retail policy, Decathlon has brick and mortar stores as well as its own website in India. It still continues to operate as a single brand retailer, and does not offer franchise model options.

In fact, despite the much-touted relaxations it would appear that several single-brand retailers might prefer entering the Indian market through partnerships – this gives them access to local expertise in navigating India’s highly segmented though vast market.

At the same time, with US-China trade tensions in play, foreign retailers might pressure India into easing FDI norms further.

FDI policy in India

In January 2012, the government allowed 100 percent FDI in single brand retail under the automatic route, permitting foreign investors to set up shop in India without the government’s approval.

It was reported that India was among the top 10 recipients of FDI in 2019, attracting US$49 billion inflows. This was a 16 percent increase from 2018.

India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for business support in India.