Tesco application shows rules now flexible enough
Given UK retailer Tesco’s decision to put in an FIPB application for a $110 million investment in a joint venture with Trent Hypermarket Limited, the government can take heart that its multi-brand FDI policy is finally working—after the initial failure with the world’s largest retailer WalMart refusing to invest despite several rounds of clarifications, the impression was that India’s rules were way too restrictive. And in many ways they still are, since the permission to foreign multi-brand retailers continues to be something individual state governments are to decide upon. But given that was the only way to dilute the BJP’s opposition, it seemed a worthwhile concession to make. Apart from this, however, while the rules were initially designed to keep out investment, these were watered down to realistic levels as foreign retailers including WalMart petitioned the government. So, while the initial rules stipulated that half of all investments had to be in the back-end infrastructure—and greenfield infrastructure at that—this was modified to it being applicable to only the first investment tranche of $100 million and not to all the investment made during the JV’s lifetime; in other words, within 3 years of the application, the joint venture would have to invest at least $50 million in creating new greenfield back-end infrastructure. Whether an existing joint venture—like the Tesco one with Trent—can use existing stores to begin with, and invest $50 million in fresh back-end infrastructure within a period of 3 years remains a bit of a grey area, and presumably will get clarified when Tesco’s proposal is examined by the FIPB.
There is, as yet, little in writing that suggests this is allowed, but government sources say this is allowed and several retailers who have had discussions with the government on the rules confirm there could be some wiggle room here. So, in Tesco’s case, the JV will initially use Trent’s existing 16 stores but will, within 3 years, invest another $50 million in creating new facilities. As for the 30% SME sourcing rule, this too has been made realistic. The earlier rule defined SMEs as those with a plant and machinery investment of $1 million. This meant that once an SME invested more—as a result of putting in new machinery to meet the foreign retailer’s needs—the JV would have to look for another set of SMEs to meet its 30% sourcing norm. The rule has been revised to say that, even if an SME outgrows the $1 million rule, sourcing from it will continue to be counted under the 30% rule. Given that Tesco’s decade-old India investment already employs more than 6,500 persons and does 370 million pounds of sourcing out of India—that’s 7% of Tesco’s global sourcing—meeting the 30% norm shouldn’t pose too much of a hurdle as Tesco, and its partner Trent, both know how to build local supply chains. For a beleaguered government, that’s the second piece of good news in as many days, after GlaxoSmithKline offered to spend up to $1 billion to buy back its shares at a 26% premium to its existing price.