Centre opens doors to foreign investment in multi-brand retail

Mega retailers like Walmart and Carrefour will finally be able to invest in India’s multi-brand retail through the foreign portfolio investment (FPI) route.

In a major turnaround, the BJP-led government, so far opposed to foreign investments in multi-brand retail, has decided to allow FPI up to 49 per cent or up to the sectoral cap (whichever is lower) through the automatic route.

“This means that foreign investors in multi-brand retail can bring in investments in the form of FPI up to 49 per cent without government approval,” a Department of Industrial Policy & Promotion official clarified.

This clarification was made in a press note released by the Department on Thursday, based on the foreign investment composite caps approved by the Union Cabinet earlier this month.

Foreign portfolio investment includes foreign institutional investments (FII), sub-accounts and qualified foreign investments (QFIs).

However, foreign retailers will not be able to have direct management control of an Indian venture. FPI does not provide investors with the option of management participation.

Another interesting spin-off from the clarification is that brownfield pharma projects will be allowed foreign investments through FPIs up to 49 per cent through the automatic route. Foreign investments in brownfield projects have so far been allowed only through the government approval route.

The only exceptions to the composite cap rule are the defence and banking sectors.

In the defence sector, portfolio investments by FPIs/FIIs/NRIs/QFIs and investments by Foreign Venture Capital Investors (FVCIs) together cannot exceed 24 per cent of the total equity of the investee/joint venture company, while the FDI cap is at 49 per cent, the note said.

In the private banking sector, where the sectoral cap is 74 per cent, FII/FPI/QFI investment limits will continue to be within 49 per cent of the total paid-up capital of the company.

Observers say that this could be the first step towards opening up various sectors for foreign direct investment. The government had so far held that it is not in favour of allowing foreign investments in the multi-brand retail sector and that it would not give any approvals despite the foreign investment policy allowing FDI up to 51 per cent (approval route) in the sector.

But, now, with the latest changes to the FDI policy, foreign investors will not have to approach the government at all to enter the multi-brand retail sector as long as they bring in their investments through the foreign portfolio investment route.

Since the policy continues to allow foreign direct investment up to 51 per cent through the automatic route, the government may decide to soften its stand on multi-brand retail further and take up such proposals as well.