23 Jan 2012

UK retailers could gain as India removes barriers to inward investment

Retailers stand to gain as India relaxes its rules on inward investment but care is still needed to ensure that local compliance requirements that vary from state to state are met, says Shakespeares.

In a highly significant move, the Indian Government is allowing single brand retailers such as Marks and Spencer, Debenhams and The Body Shop, which already operate in the country, to do so without an Indian partner for the first time. Both existing players and new entrants will now be able to acquire, invest or increase their shareholding up to 100% - beyond the previous limit of 51% on Foreign Direct Investment (FDI) in the sector, which has been in place since 2006 subject to certain compliances.

Opportunity

The move presents an excellent opportunity for UK retailers and global brands already operating in India to increase their investment and also presents an opportunity for retailers such as Next, Ikea, Tesco and John Lewis to enter the market before the multi-brand retail sector officially opens up.

Viplavi Mahendra, head of the India team at Shakespeares, said:

“India ‘s decision to open the door wider to retail investors is a significant opportunity when you bear in mind that the country has a growth rate of around 10% - much higher than in the UK or in other more traditional export markets, such as Europe and North America.

“Most people don’t realise that the Indian retail market is valued at $450bn and is expected to rise to $825bn by 20151. With a population of 1.2 billion, the country has a thriving consumer base, which is expected to exceed 300 million by 2015 - equivalent to the entire population of the US. As a result, demand for luxury and international, branded goods is growing.

“However, compliance regulations for retailers in India are detailed and complex, applying at both national and federal levels. Retailers thinking of expanding their operations, increasing their investment or investing there for the first time, need to take expert legal advice.”

Conditions

Among the conditions for single brand retailers with retail outlets in India, is the need to ensure that at least 30% of their goods are sourced from small or village industries in India, which are branded at the point of manufacture. Further introduction of new product lines under the same branding may also be possible. For example, when entering the market, retailers are required to complete an application detailing their product offering and it may be beneficial to be as inclusive as possible to eliminate the need to make a further application if they later decide to extend their branded ranges. Retailers considering entry to the market for the first time are also likely to want advice on how to minimise costs and risks.

Viplavi Mahendra added:

“Local knowledge is an important consideration and retailers should be seeking business advisers that have an up-to-date picture of the commercial and regulatory landscape. Some Indian businesses are also ready to provide the real estate and infrastructure if foreign retailers are willing to bring in their products and know-how. For some, running a wholly-owned operation in India may be a step too far initially and it may be best to consider a joint venture arrangement or an acquisition strategy in order to get a foothold in the marketplace first.”

Questions?

For further information please contact Viplavi Mahendra on 0121 631 5417 or email viplavi.mahendra@shakespeares.co.uk