51% FDI in Multi-Brand retail may include Foreign portfolio investments

Union Government says the 51% foreign direct investment in Multi-brand retail is likely to include foreign portfolio investment as well i.e. both FDI and FII.

The government made this decision to ensure that the restriction on foreign ownership is not breached. This composite cap could restrict the options of existing listed multi-brand retailers that may be keen to sell stake to multinational stores.

As per the existing rules, investment by foreign institutional investors can go up to 24% in a listed company and can be further raised with a shareholder resolution to up to the sectoral limit cap. Which implies that a listed multi-brand retail player that has FDI could have foreign ownership much more than 51% cap as stipulated in the policy, a situation the government is keen to avoid.

Sectors such as telecom, banking, information and broadcasting also have composite caps wherein the cap is applicable on all forms of foreign investment and not just FDI. The policy on multi-brand retail mentions 51% cap on FDI but the view across the stakeholder ministries is that the intent was to allow foreign investment upto that limit.

India had opened the sector in September 2012 but is yet to see any FDI in the sector. Till now only 11 states have allowed FDI in the sector.

Following are the rules for FDI in multi-brand retail:

• Foreign institutional investors (FIIs) investors will not face the sector conditions imposed on foreign retailers that invest in India.

• Those foreign retailers who want to set up retail stores in India have to mandatorily invest at least 50% of the total FDI brought in has to be invested in 'backend infrastructure' within three years of the first part of FDI wherein back-end infrastructure includes capital expenditure on agriculture market produce infrastructure and others.

• At least $100 million FDI has to be brought in by the foreign investors.

• Foreign retailers also have to adhere to minimum sourcing requirement from small and medium enterprises.

• Any entity with FDI can only set up shop only in those states that have allowed FDI in retail.