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Jul, 01 2007

THE FDI IMBROGLIO

WITH the government planning to further liberalise the foreign direct investment (FDI) regime by exempting sectors like advertising, hospitality, franchise operations and several other services from the purview of Press Note 1 (PN 1), a major irritant is

WITH the government planning to further liberalise the foreign direct investment (FDI) regime by exempting sectors like advertising, hospitality, franchise operations and several other services from the purview of Press Note 1 (PN 1), a major irritant is expected to be removed.

Simultaneously, the government has identified six sectors that have good potential. These are automobiles and auto ancillaries, I-T and I-T-enabled services, pharmaceuticals, biotechnology, food processing and telecommunications. The Department of Industry Policy and Promotion intends to approach the cabinet to allow more foreign investments.

The commerce ministry, meanwhile, is trying to build consensus on its proposal to permit specialised retailers to set up stores in India that deal only with electronics or sports goods, and permit the foreign players to hold up to 51 per cent stake.

The government also seeks to double the FDI inflow to $ 30 billion this fiscal in order to maintain growth rate of 9 per cent per annum over the next five years.

Since 100 per cent FDI is not permitted in multi-brand retail, the franchise route has become attractive for foreign chains. Perturbed over the fact that companies that do not have subsidiaries or joint ventures in India, are resorting to retailing through franchisees, the government is formulating a new policy on franchisee arrangements between Indian companies and overseas partners with the aim to plug 'loopholes' in the country's FDI regime.

A note prepared for Foreign Investment Promotion Board (FIPB) states that the issue of franchise in activities not permitted under the automatic route should be debated and a conscientious decision taken by the FIPB.

While Gucci and FCUK are expected soon, brands like Chanel, Ferragamo, Valentino and Tiffany are already present in India through the franchise route. Starbucks too is eyeing India for entry through the franchise arrangement. In the retail space, major players like Tesco, Carrefour, Landmark and Argos are seeking a foothold in the Indian market in collaboration with Indian partners.

The proposed policy, if implemented, could potentially affect a host of franchisee arrangements between the two business partners in sectors that do not permit foreign investment through the automatic route. Wal-Mart's entry into the retail sector in collaboration with the Bharti Group, could bear the brunt.

However, on a positive note, the government's initiative on FDI in the retail sector is bound to affect a 100 per cent level at some point of time. Pressure exerted by political parties, which see it as a threat to neighbourhood stores, is bound to let up. Fears of absence of sales in neighbourhood stores are unfounded as major players in the retail sector will supply products at subsidised rates to these stores, given that they will be sourced from manufacturers directly and purchased in bulk. A step in this direction has already been initiated by Reliance Retail. Even though the government intends to plug loopholes in the FDI regime, international companies that enter India, whether though JV with an Indian partner or independently, will ultimately expand through franchising for that is the route accepted internationally for global expansion.

Simultaneously, franchising in the country is generating enough prospective franchisees given the generous number of entrepreneurs seeking to be their own boss but awaiting support from allied sources.

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