Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
FDI in retail — only time will tell
● Under the FEMA Act of 2000, the government is allowed to make
changes in the FDI policy via press notes (executive decision).
Thus, post the CoS approval for 51% FDI in multi-brand retail,
now only the Cabinet needs to approve for FDI to start.
● The issue is important for the strategic India-US relationship: it
was a key agenda item during President Obama’s visit in Nov-10
and then of Secretary Clinton’s last week (timeline: Fig 1). That
said, due to political sensitivities, and esp. as opposition parties
openly oppose it, we feel further progress is unlikely in near term.
● Even post approval, it will likely be a challenge to roll out retail
chains organically. Indian retailers faced challenges in getting real
estate and in dis-intermediating supply chains. Case studies of
FDI in retail in other markets also indicate a mixed track record.
● Nevertheless, once approved, there is likely to be an initial surge
of investments that add to order-books of cold storage equipment
providers (Blue Star, Voltas) and provide potential exits to some
incumbents (CESC). However, it will be a while before this
improves infrastructure and cuts wastage to bring down inflation.
Figure 1: Timeline of events on the FDI in retail issue
Date Event
24-Jan-06 Cabinet approves 51% FDI in single brand retail
26-Jan-06 World Economic Forum in Davos
06-Jul-10 DIPP issues discussion paper on FDI in multi-brand retail
25-Oct-10 Walmart CEO Mike Duke visits India before President Obama
27-Oct-10 Planning Commission approves FDI in multi-brand retail
6-Nov-10 US President Obama visits India
19-Jul-11 US Secretary of State Hillary Clinton visits India for three days
22-Jul-11 Committee of Secretaries approve FDI in multi-brand retail
Source: News Reports, Credit Suisse estimates
The Committee of Secretaries (CoS: top officials from 10 ministries)
gave its nod for 51% FDI in multi-brand retail on Friday, 22 July.
These recommendations came after a year of the Department of
Industrial policy and promotion (DIPP) floating the concept of opening
up of the sector for foreign direct investment. We seek to address
some common questions on the topic:
The whys and wherefores of FDI in retail
● Does this need to go to the Parliament for approval? It does
not. Just Cabinet approval will suffice. Under an amendment to
the Foreign Exchange Management Regulations in 2000, the
government is allowed to make changes to its FDI policy via Press
Notes. These are then notified by the RBI. This is effectively a
blanket approval for the government to do as it deems fit in
matters of foreign ownership.
● What are the riders? Approval by the CoS has been given with
riders: (1) Foreign retailers will have to dedicate at least 50 per
cent of their proposed investment to back-end supply-chain
infrastructure; (2) They have to commit a minimum FDI of US$100
mn; and (3) They will have to limit expansion to cities with >1 mn
in population – this is 35-40 cities. Simultaneously, the CoS (1)
rejected the proposal requiring foreign retailers to sell at least 30%
of their total turnover to local retailers, either as wholesale or in
the a cash-and-carry model; and (2) did not take any stand on the
issue of forcing foreign retailers to source at least 30% of their
merchandise from domestic small and medium units (if approved
this would have raised questions on compliance with WTO norms).
● What happens next? We expect significant delays. The note is
being prepared for Cabinet consideration, post which it can
become effective. The issue is of importance for the strategic
India-US relationship, and it was a key agenda item during
President Obama’s visit in Nov-10. However, given the political
sensitivities involved, and esp. as the principal opposition party –
the BJP – has openly opposed it, we believe further progress is
unlikely in the near term. Past progress is as per below (Figure 1).
Case studies in other countries
The discussion paper floated in July 2010 highlights some interesting
case studies in other countries:
● China: FDI in retail was permitted in 1992. Foreign retailers were
initially permitted to trade only in six Provinces and Special
Economic Zones. Foreign ownership was initially restricted to 49%,
with restrictions being lifted in 2004. Though FDI started in 1992, it
took years for organised retail to capture 20% market in 2006. FDI
inflows into retail amounted to US$ 2.68 bn in 2007 alone.
● Thailand: Allowed 100% foreign equity in retail in 1997. For the
retail business, it has a capital requirement of Bh100 mn (US$3.3
mn) and Bh20 mn (US$0.7 mn) for each additional outlet, while it
has a capital requirement of Bh100 mn for each wholesale outlet.
The entry of foreign players, coupled with recession due to the
Asian crisis, significantly affected the existing domestic players in
the short term. However, in the long term, it led to growth of the
local agri-food processing industry.
● Indonesia: Permitted 100% foreign equity in retail in the late
1990s. However, most of the growth came from local chains. The
sector is still fragmented and foreign chains did not have more
than a 20% share of the market in 2010.
Implications if implemented
While we believe it is unlikely that this will get approved by the
Cabinet anytime soon, even post approval, it will likely be a challenge
to roll out multi-brand retail chains organically. This is due to the
experience of Indian retailers – they faced challenges in getting real
estate and in dis-intermediating supply chains. Nevertheless:
● An initial surge of investments is likely, and will benefit cold
storage equipment suppliers such as Blue Star and Voltas
● Some foreign chains are likely to acquire existing brands –
companies like CESC (Spencer retail chain) may benefit.
● It will be a while before this really adds to investments or improves
cold chain infrastructure and cuts wastage of food in transit.
Though this news can be seen positively by markets as a sign of
reforms starting, we feel it is a tad early to jump to any conclusion
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
FDI in retail — only time will tell
● Under the FEMA Act of 2000, the government is allowed to make
changes in the FDI policy via press notes (executive decision).
Thus, post the CoS approval for 51% FDI in multi-brand retail,
now only the Cabinet needs to approve for FDI to start.
● The issue is important for the strategic India-US relationship: it
was a key agenda item during President Obama’s visit in Nov-10
and then of Secretary Clinton’s last week (timeline: Fig 1). That
said, due to political sensitivities, and esp. as opposition parties
openly oppose it, we feel further progress is unlikely in near term.
● Even post approval, it will likely be a challenge to roll out retail
chains organically. Indian retailers faced challenges in getting real
estate and in dis-intermediating supply chains. Case studies of
FDI in retail in other markets also indicate a mixed track record.
● Nevertheless, once approved, there is likely to be an initial surge
of investments that add to order-books of cold storage equipment
providers (Blue Star, Voltas) and provide potential exits to some
incumbents (CESC). However, it will be a while before this
improves infrastructure and cuts wastage to bring down inflation.
Figure 1: Timeline of events on the FDI in retail issue
Date Event
24-Jan-06 Cabinet approves 51% FDI in single brand retail
26-Jan-06 World Economic Forum in Davos
06-Jul-10 DIPP issues discussion paper on FDI in multi-brand retail
25-Oct-10 Walmart CEO Mike Duke visits India before President Obama
27-Oct-10 Planning Commission approves FDI in multi-brand retail
6-Nov-10 US President Obama visits India
19-Jul-11 US Secretary of State Hillary Clinton visits India for three days
22-Jul-11 Committee of Secretaries approve FDI in multi-brand retail
Source: News Reports, Credit Suisse estimates
The Committee of Secretaries (CoS: top officials from 10 ministries)
gave its nod for 51% FDI in multi-brand retail on Friday, 22 July.
These recommendations came after a year of the Department of
Industrial policy and promotion (DIPP) floating the concept of opening
up of the sector for foreign direct investment. We seek to address
some common questions on the topic:
The whys and wherefores of FDI in retail
● Does this need to go to the Parliament for approval? It does
not. Just Cabinet approval will suffice. Under an amendment to
the Foreign Exchange Management Regulations in 2000, the
government is allowed to make changes to its FDI policy via Press
Notes. These are then notified by the RBI. This is effectively a
blanket approval for the government to do as it deems fit in
matters of foreign ownership.
● What are the riders? Approval by the CoS has been given with
riders: (1) Foreign retailers will have to dedicate at least 50 per
cent of their proposed investment to back-end supply-chain
infrastructure; (2) They have to commit a minimum FDI of US$100
mn; and (3) They will have to limit expansion to cities with >1 mn
in population – this is 35-40 cities. Simultaneously, the CoS (1)
rejected the proposal requiring foreign retailers to sell at least 30%
of their total turnover to local retailers, either as wholesale or in
the a cash-and-carry model; and (2) did not take any stand on the
issue of forcing foreign retailers to source at least 30% of their
merchandise from domestic small and medium units (if approved
this would have raised questions on compliance with WTO norms).
● What happens next? We expect significant delays. The note is
being prepared for Cabinet consideration, post which it can
become effective. The issue is of importance for the strategic
India-US relationship, and it was a key agenda item during
President Obama’s visit in Nov-10. However, given the political
sensitivities involved, and esp. as the principal opposition party –
the BJP – has openly opposed it, we believe further progress is
unlikely in the near term. Past progress is as per below (Figure 1).
Case studies in other countries
The discussion paper floated in July 2010 highlights some interesting
case studies in other countries:
● China: FDI in retail was permitted in 1992. Foreign retailers were
initially permitted to trade only in six Provinces and Special
Economic Zones. Foreign ownership was initially restricted to 49%,
with restrictions being lifted in 2004. Though FDI started in 1992, it
took years for organised retail to capture 20% market in 2006. FDI
inflows into retail amounted to US$ 2.68 bn in 2007 alone.
● Thailand: Allowed 100% foreign equity in retail in 1997. For the
retail business, it has a capital requirement of Bh100 mn (US$3.3
mn) and Bh20 mn (US$0.7 mn) for each additional outlet, while it
has a capital requirement of Bh100 mn for each wholesale outlet.
The entry of foreign players, coupled with recession due to the
Asian crisis, significantly affected the existing domestic players in
the short term. However, in the long term, it led to growth of the
local agri-food processing industry.
● Indonesia: Permitted 100% foreign equity in retail in the late
1990s. However, most of the growth came from local chains. The
sector is still fragmented and foreign chains did not have more
than a 20% share of the market in 2010.
Implications if implemented
While we believe it is unlikely that this will get approved by the
Cabinet anytime soon, even post approval, it will likely be a challenge
to roll out multi-brand retail chains organically. This is due to the
experience of Indian retailers – they faced challenges in getting real
estate and in dis-intermediating supply chains. Nevertheless:
● An initial surge of investments is likely, and will benefit cold
storage equipment suppliers such as Blue Star and Voltas
● Some foreign chains are likely to acquire existing brands –
companies like CESC (Spencer retail chain) may benefit.
● It will be a while before this really adds to investments or improves
cold chain infrastructure and cuts wastage of food in transit.
Though this news can be seen positively by markets as a sign of
reforms starting, we feel it is a tad early to jump to any conclusion
No comments:
Post a Comment