The 51% Foreign Direct Investment (FDI) in Multi-Brand Retail is likely to include Foreign Portfolio Investment as well, as the government is keen to ensure that the restriction on foreign ownership is not breached.
The government is wary that any breach in the limit will give more fodder to those opposed to opening of the sector to foreign investors, a hard fought reform for the UPA government that lost some key allies on the issue.
” There will be a composite 51% cap for both FDI and FII investment in multi-brand retail,” a government official privy to the development told ET. The composite cap could restrict the options of existing listed multi-brand retailers that may be keen to sell stake to multinational stores.
Under the current 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.
This 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 & 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. The government is concerned about the sensitivities attached to the sector and wants to tread with caution. Only 11 states have allowed FDI in the sector.
However, Foreign Institutional Investors ( FIIs) investors will not face the sector conditions imposed on foreign retailers that invest in India.
Foreign retailers that 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 ” Back-End Infrastructure” within 3 years of the first tranche 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. Moreover, any entity with FDI can only set up shop only in those states that have allowed FDI in retail.
India had opened the sector in September 2012 but is yet to see any FDI in the sector.