The Foreign Investment Promotion Board of the Government of India (“GoI”) has finally agreed that the restriction imposed by the foreign direct investment policy (“FDI Policy”) on foreign investment in single brand retail, namely that the foreign investor shall be the brand name owner, does not apply to the Indian brands.
The FDI Policy revision, introduced in 2006, permitted foreign investment up to 51% in single brand retail trading subject to various conditions including that the brands should be “sold internationally”. During subsequent FDI Policy revisions, the following conditions/clarifications, relevant to the present discussion, were added:
A. “Sold internationally” means the products should be sold under the same brand in one or more countries other than India; and
B. The foreign investor should be the owner of the brand.
By these, the FDI Policy effectively shut the door for private equity (“PE”) investments in Indian home grown brands, as the foreign PE investor(s) were obviously not the brand name owners, even if any Indian brand could satisfy the definition of “internationally sold” in the first place.
The objective of the FDI Policy in retail trading has always been to protect Indian businesses. Interestingly, the above set of revisions financially suffocated the very Indian businesses the FDI Policy was meant to protect. LexCounsel brought this and other related issues to discussion in November 2009 (click “Press Note maze in retail trading not getting simpler” published by Legally India).
The GoI seems to have now realized the net effect of the FDI Policy. It has accordingly, while examining an application from Fabindia (an Indian clothes, home furnishing, personal care and organic food brand), held that no GoI approval was required for change in foreign equity in Indian branded businesses, so long as the ownership of such brands continued with companies owned and controlled by Indians.
The GoI stance has brought cheer to the Indian brand owners. The next few months are expected to witness PE investments in Indian branded businesses.