Taking a Retail Business into India
The Indian market is an exciting one with great potential for many foreign retailers. Many of the UK’s High Street retail brands such as Marks & Spencer, Monsoon and Hamleys have entered the subcontinent. However, the retail sector in India is heavily protected from direct foreign investment. This is especially so for multi brand retailers, despite recent moves to liberalise it.
By Dr Mark Abell, Field Fisher Waterhouse
As a result, for many foreign retailers the most attractive market entry strategy is one which involves a third party relationship of some kind.
Single brand retailers are subject to no restrictions on their ability to hold shares in an Indian company. Nevertheless experience shows that direct investment into the Indian market is not for the faint hearted or those with capital or resource restraints. Despite its great commercial promise, India is a hostile environment for foreign retailers who are not “chaperoned” by an Indian partner. Local operators jealously guard their domestic market through a cocktail of legal, logistic, political and commercial devices, some of which can , at best, be described as exceedingly robust and would generally not be permitted in markets such as the US and the EU.
There is no denying that the black market is in rude health in India, which can create real problems for US companies under the Corrupt Foreign Practices Act and British companies under the Anti-Bribery Act. Add to that restrictions on the import of textiles and a judicial system that is slow, expensive and at times unpredictable and it is perhaps easier to understand why few foreign retailers go it alone in India.
Joint ventures are sometimes used by foreign retailers entering the Indian market. These can make it much easier for foreign retailers to exploit the Indian market, if the local partner has the appropriate expertise, capital and connections. However, the bigger , wealthier and better connected the local partner the more difficult it will be if the joint venture breaks down and the reality is that retail joint ventures do not have a record of being particularly long lived in India. There are also legal restrictions on the number of shares that can held by foreign retailers, which unbalance the terms of the joint venture or sub-ordinate equity arrangements.
In 2011 the present Government made efforts to allow large international supermarket chains and other multi-brand retailers to enter the Indian market without an Indian partner, but had to withdraw the proposed legislation due to vigorous opposition from political parties, middle men involved in retail trade and small family businesses. As a result direct investment in multi-brand retail remains prohibited for foreign retailers with the exception of wholesale cash and carry operations.
The “single brand retail” sector was opened up to foreign direct investment in 2006, and again at the beginning of this year. However, it is subject to various complex “hidden restrictions” on sourcing and the like which make such a market entry very complicated to implement.
It is perhaps because of these undeniable difficulties that many retailers entering the Indian market chose to do so by way of a franchise arrangement – sometimes combined with a manufacturing or retail joint venture or sub-ordinated equity arrangement.
This is especially so since 2010, when restrictions on royalties and other forms of payments that Indian franchisees are able to make in foreign exchange,were removed. The structuring of franchising or licensing arrangements in the retail sector in India require careful consideration and must take into consideration not only the diverse cultural, religious, linguistic , political and economic differences in the country but also the myriad of of legal restraints and requirements that impact upon retailers. Nevertheless, it is the author’s experience that with the right advice retailers can develop and implement an effective strategy for the Indian market using a franchising or licensing based approach and so establish a long term vigorous income stream in one of the world’s fastest growing economies.
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