Unease and uncertainty has been provoked among international food retailers in India by new restrictive guidelines issued that limit the already-restricted foreign investment in the country’s organised retail sector.India’s retail sector has held back foreign direct investment (FDI) but many in the sector was expecting a gradual liberalisation of rules on the ability of local players to strike deals with overseas partners.

Instead, the Congress-led government has taken an unexpected step back towards a closed economy policy by almost scrapping Indian retailers’ rights to create joint ventures with foreign firms.

Issued late last month, by the Ministry of Commerce And Industry, a 103-page Consolidated FDI (Foreign Direct Investment) Policy has rendered invalid the present corporate structure created by international retailers with Indian partners.

The policy’s fifth chapter* prevents an Indian retailer from being an outlet for one dominant wholesale supplier. It states: “Wholesale trading (WT) of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture and the wholesale made to the group companies should be for their internal use only.”

This clause, in effect, appears to restrict joint venture wholesale companies (including with foreign retailers) from becoming a dedicated back-end supply chain provider for an Indian retail partner.

Lawyers are crawling over the document. And no wonder. In 2007, American giant Wal-Mart entered into a joint venture with India’s largest telecom provider Bharti, a venture that exploited the previous right of foreign companies to operate wholesale services in India.

The deal involved the establishment of two separate companies: the first running a back-end supply chain – technically a wholesaling operation called Bharti Walmart – which was a 50-50 Wal-Mart/Bharti operation.

A second company running the front-end retail operation is a franchise, solely-owned by Bharti. The company sources its supply from the Bharti Walmart and runs a chain of more than 59 ‘Easy Day’ stores. Under the new regulations, Wal-Mart/Bharti’s retail operation could have to look for additional suppliers – although lawyers are not yet sure.

“Prima facie it looks like that the models like that of Wal-Mart and Bharti would have challenges”, said Akash Gupt, executive director, leader for regulatory services at PWC India.

“If they come under the definition of group companies, then Bharti’s retail network would have to look for additional suppliers.” Gupt said, however, that clarification about the term “group company” within the guidance is still needed.

A Bharti Walmart spokesperson told just-food that it was “too early to comment”. The spokesperson said: “We are currently reviewing the new guidelines.”

However, Bharti Walmart’s managing director and CEO Raj Jain told reporters during a recent function in Chandigarh that the company had asked the Indian government to “clarify certain points like what exactly is 25% of total sales and what exactly are group companies”.

According to Gupt, the new guidelines might actually restrain Indian retail entrepreneurs from participating in the business of the wholesale trading, rather than blocking the involvement of foreign firms in supply contacts.

“Assuming that Bharti does not have a joint venture in the wholesale company, which in that case is fully owned by Wal-Mart, then Bharti stores have no restrictions in sourcing goods from that company,” Gupt suggested.

Tesco, which has a joint venture with the Tatas; German group Metro Cash & Carry, which opened its first Indian wholesale store in 2003; and India’s biggest retailer Reliance Retail all refused to comment when contacted by just-food.

A spokesperson at Kishore Biyani’s Future Group, which operates retail stores in 73 cities and 65 rural locations, told just-food that the company did not comment on government policy.

Privately, insiders are far more open, however. “The big international retailers are shocked,” said a senior manager in one international food retail company. “They are lobbying hard and having hectic parlays with their legal advisors to look for ways to challenge the new guidelines, and that is why they are refusing to comment.”

Speaking on condition of anonymity, the manager told just-food that, as FDI in organised multi-brand retail has always been banned in India, overseas retailers cannot challenge the new guidelines in court, because it would indicate they were attempting a back-door entry into the retail sector by exploiting their wholesale rights.

The political message is clear, the executive said. FDI in India’s organised retail is not going to happen soon.

Gupt, however, is still hopeful. He argues that the government has not said that FDI in retail would not open but that the authorities need to observe how much FDI helps develop the infrastructure from farms to cash & carry stores.

Meanwhile, any presumption that Indian retail companies without foreign partners might be pleased with the new guidelines appears to be misguided.

Indeed, companies that earlier opposed the entry of foreign companies are now lobbying for them. “They thought that they can manage on their own, but now they have reached a level that they want more funds to expand, and foreign private equity and banks are not ready to lend money in the sector that has suffered big setbacks in the recent past”, said the international executive.

*‘Policy on Route, Caps and Entry”, Conditions. 5.39.1.1 (ii) Guidelines for Cash & Carry Wholesale Trading/Wholesale Trading (WT) (d)’

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