Insight into Foreign Investment [FDI] in Retail

Indian Mall BakeryWith the Government allowing foreign participation in retail, this opens up opportunities for local companies to access cheaper foreign capital which will allow them to simultaneously build front end retail space as well as back end infrastructure. While the proposal is cleared now, it will still take at least six-eight months more for companies to have foreign partners in place.

Excerpts from the Fine Print of the FDI in retail as follows,

1.Companies will have to invest a minimum of $100mn or more
2.At least 50% of the investment has to be in back end infrastructure – warehouses and cold chains
3. States will have the final say as stores have to comply with the local legislation
4. Permitted only in Cities with over 1 Mn Population as per 2011 census

This will be positive for the sector as a whole, where capital is severely constrained and companies have had to take on significant debt to put up front end stores as well as invest in back end infrastructure.

The current penetration of organized retail is 6-7% of overall retail trade in India, which can increase significantly once capital is available at cheaper rates over the next few years. Indian retail companies have already been in talks with interested foreign retailers, so this final clearance gives them the chance to finalize their partnerships.