What cemented the foundation for FDI in retail?

The UPA government announced a number of reform measures by the end of the C.Y. 2012. The announcements indicate a willingness to take political risks to push the reform process. The measures are signals for investors, domestic as well as foreign, that the Indian government is willing to undertake reform. An important reformative measure was to allow 51% FDI in multi-brand retail and 100% FDI in single-brand retail in organized retail sector. In addition, the government also opened up the aviation sector and put up four PSUs for disinvestment.

India removed barriers to trade in goods in the 1990s. Removing protection brought global competition and raised productivity. But introducing global competition in services is harder. In certain services that are tradable, like legal or financial services, the removal of trade barriers can introduce competition and increase productivity. In other services that are not tradable, like retail trade, global competition can be introduced and improvement in productivity can be achieved by opening up the sector to Foreign Direct Investment (FDI).

Sectors of the economy whose productivity is low can benefit from this. For instance, though modern retail has grown in India, especially in the last decade, the sector remains largely informal and this growth has been limited. Unlike trade in goods, the advantages of FDI in retail, such as better technology, management and the move to a modern, formal, tax-paying sector, will probably unfold slowly. There are many hurdles retail businesses have to cross before investment spending can begin.

For FDI in retail, Government instituted a study, on the subject of “Impact of Organized Retailing on the Unorganized Sector”, through the Indian Council for Research on International Economic Relations (ICRIER), which was submitted to Government in 2008. The ICRIER study indicated significant benefits for various stakeholders, such as consumers, farmers and manufacturers, arising from the growth of organized retail. Based upon the study the Government decided to allow FDI in organized retail sector, in order to facilitate greater FDI inflows into front and back-end infrastructure; technologies and efficiencies to unlock the potential of the agricultural value chain; additional and quality employment; and global best practices.

Looking out for silver-lining amidst global gloomy scenario.

India is an excellent long term investment option. It has sectors and companies that have sound fundamentals and good growth prospects. It has a banking system that is not going down the drain like that in the developed countries. The country has a rich demographic dividend that can yield high returns in the long

term. All it lacks is a good regulatory and policy framework that makes the environment predictable. Getting this part right will provide the insurance to investors that that their investments in the country are not going to vanish.And by opening up the retail sector to FDI, the Government is expecting that it will benefit consumers and farmers in the long run, in terms of quality and price. The 30% mandatory sourcing condition has been incorporated to encourage local value addition and manufacturing.

The Government is expecting for improved situations on various facades. To mention a few:

1. Employment: The increased level of activity, in the front-end, as well as in the back-end, resulting from greater FDI inflows, is e x p e c t e d t o c r e a t e a d d i t i o n a lemployment opportunities for rural and urban youth.

The recently announced Foreign Direct Investment (FDI) guidelines in the Indian retail sector are likely to create 10 million jobs over the next 10 years, according to Indian Staffing Federation(ISF).The report also mentioned that the new job opportunities in the sector will make it the largest sector in organized employment.

The ISF said that FDI in retail sector will have a much wider impact on organized employment as compared to what happened in the IT sector over a decade back.The federation also said that the country still needs to gear up to provide enough skilled labours to manage the spurt in demand that the Indian retail sector is expected to witness in the coming years. These measures will open doors for the less skilled and less educated people also.

Aspects of FDI in Retail Sector

InteliGenMONTHLY

JOURNAL OF

FINANCIAL

MARKETS

ISSUE

JANUARY2013

08

In this issue

Aspects of FDI in Retail Sector P . 1 - P . 2 Financial Jargon’s P.2Knowledge bank-Dynamicsof FDI P.3Key Global Indicators P.4Market Overview (Dec 2012) P.4

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2. Ancillary Services: It is worth noting here that logistics and supply chain companies are also expected to make rapid progress considering the fact that they will be the link between small manufacturers, farmers and the organized retail chains.

It is believed that the close integration within the organized retail chains will support the small producers in gaining access to the l a t e s t p r o c e s s e s , s y s t e m s a n d technologies available in the market.

3. Consumer, the ultimate king: A striking fact is that there is little sympathy for the Indian trading community outside its members. This is not surprising. For decades, the trading c l a ss h a s b e e n i n ca h o o t s w i t h manufacturers and has p lundered consumers with both hands. Over the decades, it had been three-dimensional loot—high and ever rising prices, shoddy quality, and often, cheating on weight and purity. It was only after liberalization in 1991 that Indians learnt that the producer could care for their tastes, that the seller could be solicitous, that they can demand quality as a matter of right, that prices can come down just as they go up.

Even today, India's distribution system is regarded as one of the most inefficient in the world, especially for food and other essential commodities. The price that a consumer pays is several times higher than what the farmer gets. There is a lot of wastage. Any rise in wholesale prices is quickly passed on to the retail consumer, but any fall in the same takes along time and much diminution before reaching him, if at all. So when the trading community says its survival is under threat, consumers show little sympathy.

4. Global Competitiveness: It is, further, expected to encourage existing traders and retail outlets to gear-up, upgrade and become more efficient, there by providing b e t t e r services to consumers and better remuneration to the producers from whom they source their products.

Dealing with the apprehensions

The fact is that multi brand retail has existed in India for a long time; visit any mall and you will see it is multi brand. The local grocery stores, or kiranawalas, have survived. There is no reason to fear that if the domestic owner of a multi brand mall is replaced by a foreign owner, the kiranawala would become threatened. These apprehensions are bogeys, and more in the nature of political posturing.

Though, on a different note, in the midst of the ruckus, General V K Singh made an interesting point. Instead of going in for FDI in retail, he favoured the Amul model. According to him, the Amul co-operative model has the ability to empower farmers. The strength of the Amul model lies in the fact that it has helped farmers get rid of the iron grip of middlemen. This is unlikely to happen in corporate contract farming as it is not feasible for large companies to buy directly from farmers.

Of course, the success of Amul has brought about its own problems. The Gujarat Co-operative Milk Marketing Federation (GCMMF), the owner of the Amul brand, has grown tremendously in its reach. So much so that its members account for about one-third voters in Gujarat! This has resulted in increasing political interference with the co-operative. So, it is true that the co-operative model has many advantages over large foreign retailers. But such initiatives should be protected from political opportunism.

Conclusion

The government might have supported FDI in retail to make a political point, to send a signal to investors, to bring in foreign capital and prevent rupee depreciation, or to avoid the rating downgrade looming over its head due to policy paralysis and dillydallying with the reforms. But whatever the reasons, this move takes India a step closer to increasing competition and achieving higher productivity in non-tradable services.

With 51% rather than 100% FDI being allowed in multi-brand retail, large Indian companies that are either already in the business or have planned to enter it, are likely beneficiaries. Chances are, in twenty years it will be Indian companies running retail stores in towns and cities all over the world.

Hot money

Participatory Notes

Haircut

Hedge Funds

Hot Money is a term that is most commonly

used in financial markets to refer to the flow

of funds (or capital) from one country to

another in order to earn a short-term profit

on interest rate differences and/or

anticipated exchange rate shifts. These

speculative capital flows are called "hot

money" because they can move very

quickly in and out of markets, potentially

leading to market instability.

Financial instruments used by investors or

hedge funds that are not registered with the

Securities and Exchange Board of India to

invest in Indian securities. Indian-based

brokerages buy India-based securities and

then issue participatory notes to foreign

investors. Any dividends or capital gains

collected from the underlying securities go

back to the investors.

Haircut is a percentage that is subtracted

from the market value of an asset that is

being used as collateral. The size of the

haircut reflects the perceived risk

associated with holding the asset.

However, the lender has a lien for the

entirety of the asset.

Hedge funds pool investors' money and

invest the money in an effort to make a

positive return. Hedge funds typically have

more flexible investment strategies than

mutual funds. Many hedge funds seek to

profit in all kinds of markets by using

leverage (in other words, borrowing to

increase investment exposure as well as

risk), short-selling and other speculative

investment practices that are not often

used by mutual funds.

Financial Jargon’s

Knowledge Bank

Mechanism of Foreign Direct Investment (FDI)

Reducing protection in the market for goods, cutting custom duties on imports, and removing quotas and other restrictions on trade raises few questions today. The case for trade liberalization in goods is well understood by now. Trade liberalization exposes local firms to global competition. Domestic firms have to innovate, produce better products, improve their technology, and reduce costs of production when imported products enter domestic markets. Under such pressures, these firms become more productive. These productive firms become exporters. The most productive firms invest abroad. Both face further competition in foreign markets and productivity growth continues. In contrast to the pre-trade liberalization regime, productivity in the economy is higher and keeps growing. This results in higher growth of incomes and standards of living in the country.

Foreign Direct Investment (FDI) complements and supplements domestic investment. Domestic companies are benefited through FDI, by way of enhanced access to supplementary capital and state-of-the-art technologies; exposure to global managerial practices and opportunities of integration into global markets.

Foreign Direct Investment in India (FDI)

Among the developing countries in Asia, India and China are the two major economies that have adopted market oriented economic policies designed to attract FDI inflows. A company that goes for Foreign Direct Investment could possibly enjoy many incentives in the new country. Some of the tax benefits or concessions like low corporate tax and income tax rates could invariably boost the company's profit.

Indian Companies are generally allowed to raise funds from abroad in following method:

I. Foreign Direct Investment in India (FDI)

ii. External Commercial Borrowings (ECB)

iii. Foreign Currency Convertible Bonds (FCCB)

iv.Foreign Currency Exchangeable Bonds (FCEB)

Under Foreign Exchange Management (Transfer or Issue of Security by Persons Resident outside India) Regulations, 2000 (notification No. FEMA 20/2000-RB dated May 3, 2000) the Indian Companies are allowed to raise funds from overseas investors. An Indian company which is not engaged in any activity or in manufacturing of item included the List A and List B appended may issue fresh shares subject to the condition and sectoral cap as indicated under Foreign Direct Scheme, subject to the terms and condition specified.

Foreign Direct Investment (FDI) is permitted as under the following forms of investments:

1.Through financial collaborations.

Restrictions

However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.

Forbidden Territories: FDI is not permitted in the following industrial sectors-

a. Arms and ammunition.

b. Atomic Energy.

c. Railway Transport.

d. Coal and lignite.

e. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Approval of FDI

Foreign direct investments in India are approved through two routes:

1. Automatic approval by RBI: The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases: FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

2.Through joint ventures and technical collaborations.

3.Through capital markets via Euro issues.

4.Through private placements or preferential allotments.

Foreign Investment through GDRs (Euro Issues)

Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year. A company engaged in the manufacture of items covered under the said policy of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

Use of GDRs

The proceeds of the GDRs can be used for financing capital goods imports, capital e x p e n d i t u r e i n c l u d i n g d o m e s t i c purchase/installation of plant, equipment and bui lding and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in Joint Ventures (JVs)/ Wholly Owned Subsidiaries (WOSs) in India.

Dynamics of FDI

Key Global Indicators

HSBC Purchasing Managers' Index

(PMI)

Foreign Exchange Reserves

External Debt

HSBC Purchasing Managers' Index (PMI)

a composite indicator designed to give a

single-figure snapshot of operating

conditions in the manufacturing economy –

posted 53.7 in November, up from 52.9 in

October. The latest reading indicated a

further improvement in the health of the

Indian manufacturing sector.

Foreign Exchange Reserves in India

increased to 14429.80 INR Billion in

December of 2012 from 14225.80 INR

Billion in November of 2012. Foreign

Exchange Reserves in India is reported by

the Reserve Bank of India. In India, Foreign

Exchange Reserves are the foreign assets

held or controlled by the country central

bank. The reserves are made of gold or a

specific currency. They can also be special

drawing rights and marketable securities

denominated in foreign currencies like

treasury bills, government bonds, corporate

bonds and equities and foreign currency

loans.

External Debt in India increased to 345819

USD Million in December of 2012 from

305931 USD Million in December of 2011.

External Debt in India is reported by the

Ministry of Finance, India. In India, external

debt is a part of the total debt that is owed to

creditors outside the country.

Market Overview January 2013

Equity market roundup- 2012

In the month of December Indian market rose by 0.4% to the previous month close, NSE index NIFTY close at the level of 5905.1 and BSE SENSEX close at 19426.7. Morgan Stanley raised India's growth forecast for the current financial year to 5.4% from 5.1% projected before the end of September quarter. Favorable data of IIP of the October month, better than the expected helps the market rally to upward direction but the widened of the trade deficit to $42.2 bn in October and rise in the India's consumer price inflation to 9.9% on an annual basis in November, after rising 9.75% in October change the momentum of the market. India's exports fell 4% to $22.3 bn in Nov, while imports jumped to $41.5 bn, leaving a trade deficit of $19.3 bn in Nov. RBI on the monetary policy review kept unchanged the key interest rates.US fiscal cliff concerns affects the market on the last trading day of the month. FIIs have pumped $23.3 bn into Indian stock markets in 2012, the Indian stock market has emerged as the third-best performer globally, yielding almost 25% returns so far despite slowing corporate investments and falling profit margins.

Forex market roundup-December 2012

In the month December Indian rupee remains almost same to the November close, rupee close at 54.99 to 55.01 of November. First two weeks of the month rupee appreciated on the hopes of strong fund flows. Signs of consistent capital inflows and sustained dollar selling by exporters also boosted the sentiment. After increase in the number of purchaser of dollar especially oil companies helps dollar to rise. Despite improved market sentiment, the rupee has depreciated 3.3% in 2012; strong FII flows have not helped. A widening current account deficit will keep pressure on the currency.

Bullion market roundup-December 2012

In the month of December gold price close at $ 1675.8 fell almost 2.15% to the November month of $ 1712.7, the main cause of price fall in gold was U.S. lawmakers may fail to reach a settlement in talks aimed at avoiding self-imposed tax increases and budget cuts known as the fiscal cliff. Appreciation in the value of dollar to the other currencies decreases the interest of investors towards gold. January contract of gold on last trading day of December closes at RS. 30,800 on MCX. Gold gained almost 7% in the year 2012.

December

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