The Government of India today issued rules raising the limit on foreign investment in single brand retail trading businesses from 51% to 100%.
Under the new rules, foreign investment in single brand retail trading businesses would require prior approval from the Government, and would be subject to the following conditions.
- The products sold should be of a "single brand" and should be sold under the same brand internationally;
- The products sold should be branded during manufacture and the foreign investor should own the brand; and
- A local content requirement that applies if a foreign investor seeks more than 51% ownership in the Indian venture.
The local content requirement states that if foreign investors seek to hold more than 51% in the Indian venture, at least 30% of the value of products sold would have to "done from" (sic.) small, village and cottage industries, and artisans and craftsmen in India. A unit will qualify as "small" if its total investment in plant and machinery (before depreciation) does not exceed US$ 1 million at any time. Compliance with this condition will need to be certified by the Indian company's auditors on a regular basis.
Clearly, the phrase "done from" is likely to lead to confusion with regard to how the local content requirement will be met (since under India's current investment rules foreign investment in a manufacturing company that also retails its products in India is not regarded as investment in a trading company). One only hopes the government will clarify this requirement soon.
Starting the New Year off on a positive note, the Indian Government has decided to allow "Qualified Foreign Investors" (QFIs) (a group that will include most foreign individuals) to directly invest in India's equity markets. QFIs were previously allowed to access Indian mutual funds and the present move broadens the investment diversification options and available to foreigners.
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are expected to announce rules to implement the government's decision by January 15, 2012. This said, the Indian government's New Year's Day policy announcement suggests that the rules will be similar to those that apply for QFI access to Indian mutual funds.
Accordingly, to qualify as a QFI the foreign investor will need to meet two conditions. First, the investor should be resident in a country that is compliant with the Financial Action Task Force's (FATF) standards and is a signatory to the International Organization of Securities Commission's (IOSCO's) Multilateral Memorandum of Understanding. Second, the investor should meet SEBI's know-your-customer requirements.
The individual and aggregate investment limits for QFIs in each listed Indian company (as a percentage of that listed company's paid up capital) will be 5% and 10%, respectively. (These limits will apply over and above the caps that currently apply to portfolio investment by foreign institutional investors and non-resident Indians.)
Each QFI will be allowed to invest and trade in Indian equities through accounts held with a single SEBI-registered Depository Participant (DP). QFIs will have to remit money through normal banking channels in freely convertible currencies directly to the DP's single rupee pool bank account maintained with an Indian bank. The DP will be responsible for complying with Indian withholding tax requirements in relation to the QFIs' investment proceeds.
The recent policy moves should help widen the investor base, deepen India's capital markets and increase foreign fund flows to India (which might help strengthen the rapidly falling Indian rupee).