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DollyGoklaney [dolly@indiavca.org] Monday, August 02,201012:17 PM V Bhaskar;narain.d; S.Natarajan mahendra@indiavca.org DiscussionPaper on ForeignDirect Investment(FDI)inMUlti-Br.~ail IVeA - FDI inMulti-Brand Retail -3007201 O.docx ,
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Dear Sir, Indian Venture Capital and Private Equity Association (IVCA) is a member-based national organisation which represents most of the active venture capital and private equity firms in India. IVCA members provide capital for seed ventures, early stage companies, later stage expansion, and growth finance for management buy-outs / buy-ins of established companies. Majority of investment by these firms result in fresh infusion of capital into the undertakings thus facilitating growth of economic activity and employment. Further, investment by these firms is typically made with a medium to long-term outlook. Hence, private equity investors expect an enabling regulatory framework which is conducive for India being an attractive investment market. We refer to the Discussion Paper on Foreign Direct Investment (FDI) in Multi-Brand Retail Trading (discussion paper) issued by the Department of Industrial Policy and Promotion. It is commendable that the Government has sought inputs on the discussion paper from various sections. As a responsible industry association, we consider ourselves duty-bound to support the Government of India in this endeavour. Accordingly, we have availed the opportunity given to the general public to provide comments on the discussion paper. At the outset, we would like to point out that Private Equity (i.e. Fund-based businesses whose primary objective is to invest in growing businesses in order to sell their stake at a later period and make a financial return) should be differentiated from Strategic Investors. Private equity players have an active interest in supporting, growing, nurturing small Indian retailers because that activity is core to their reason for existence. The current ban on FDI in multi-brand retail, in fact, actively discriminates against Indian retail entrepreneurs and Mom & Pop stores. The ban on FDI in retail is not a cause for concern for large diversified conglomerates since they have adequate sources of capital and funding from their other businesses. However, the small entrepreneurs or Mom & Pop stores who want to scale up and increase their footprint are currently starved for capital because FDI from Private Equity (a large source of capital specifically oriented to funding these kinds of businesses) is out of bounds. There are innumerable examples of Indian retail entrepreneurs who have not been
1

able to access equity capital in order to invest in supply chain~ logistics~ and store operations in order to compete with well funded Indian corporate houses. Hence~ as a representative of venture capital and private equity firms in India~ we would like to see the multi-brand retail sector opened up to foreign investment. Our comments on the specific questions raised in the discussion paper are attached herewith. We thank you for presenting us with this opportunity suggestions on the discussion paper. to provide

We would be happy to meet and discuss this further in detail. Best Regards~

Mahendra Swarup President- IVeA www.indiavca.org

(See attached file: IVCA - FOI in Multi-Brand

Retail - 30072010.docx)

DISCUSSION PAPER ON FOREIGN DIRECT INVESTMENT ('FD!') IN MULTI BRAND RETAIL TRADING

1.

Should FDI in multi brand retail be permitted? be imposed? If so, what should this cap be? Our Comments:

If so, should a cap on investment

Yes, FDI in multi brand retail should be permitted since this will result in a number of macroeconomic benefits: R~_~~c~yvastage across lndla's supply chain. Increase quantum and quality of employment - Modern retailers devote a larger amount of investment towards training of manpower than do traditional retailers, resulting in a broad up-skilling of talent. Create global-quality home-grown retail entrepreneurs - As the current policy , restricts the ability of home-grown Indian entrepreneurs to scale up, the number and quality of Indian retail success stories is limited. The current policy favours big corporate houses at the expense of traditional retailers looking to modernize. S![~ngthenhldja'sp.o!)itioI1JlsCls.()lJrGing hub - As modern retailers (whether homegrown entrepreneur, Indian corporate or foreign) scale up and order in larger quantities, the Indian supplier! manufacturer will be able to drive cost and quality efficiencies, thereby strengthening India's position as a sourcing hub for domestic and global products.
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On an overall basis, FDI in multi brand retail would positively impact the major constituencies Le. Government, Consumers, unorganised trade participants. Specifically, permitting foreign private equity and venture capital investment in retail space would provide local Indian groups with the much needed capital, managerial expertise, sharing of best practices, etc to scale up to global standards and compete with foreign players. We would also like to point out that Private Equity (Le. Fund-based businesses whose primary objective is to invest in growing businesses in order to sell their stake at a later period and make a financial return) should be differentiated from Strategic Investors. Private equity players have an active interest in supporting, growing, nurturing small Indian retailers because that activity is core to their reason for existence. The current ban on FDI in multi-brand retail, in fact, actively discriminates against Indian retail entrepreneurs and Mom & Pop stores. The ban on FDI in retail is not a cause for concern for large diversified conglomerates since they have adequate sources of capital and funding from their other businesses. However, the small entrepreneurs or Mom & Pop stores who want to scale up and increase their footprint are currently starved for capital because FDI from Private Equity (a large source of capital specifically oriented to funding these kinds of businesses) is out of bounds. There are innumerable examples of Indian retail entrepreneurs who have not been able to access equity capital in order to

invest in supply chain, logistics, and store operations in order to compete with well funded Indian corporate houses. In view of the above, FOI in multi-brand retail should be permitted. Further, it is important to keep in mind that retail is not restricted only to food items and covers in its ambit, FMCG products, pharmaceutical products, sport goods, furnishings, electronics and electrical household goods, readymade garments, fashion jewellery, watches, toys, etc. FOI should be permitted in retail across sectors irrespective of the products. In the initial stage, FOI could be permitted, subject to the following caps: 51 % FOI under the approval route (in line with the cap prescribed in case of single brand retail); or 49% FOI under the automatic route.

This will open up the retail sector in a phased manner and will enable domestic players to enter into joint ventures with foreign companies, thereby ensuring that Indian companies have access to investment, technological know-how and best management practices, while retaining management control. A specific definition of retail trading should be introduced so that there is clarity vis-a-vis wholesale trading. Further, retail trading could be classified into two categories: Category I - Trading of agro products, fruits, vegetables, poultry, processed food items Category II - Trading of other than the above items

FOI in Category I could be subject to certain specified conditions. 2. To develop the retail trade in food grains, other essential commodities and multibrand retail in general; should FDI be leveraged for creating back-end infrastructure? To ensure that foreign investment makes a genuine contribution to the development of infrastructure and logistics, should it be stipulated that a percentage of the FDI coming in (say 50%) should be spent towards building up of back end infrastructure, logistics or agro processing? Our Comments: No. There should be no condition specifying that a percentage of the FOI should be spent towards bUilding up of back end infrastructure, logistics or agro processing, on account of the following reasons: Multi-brand retail would include FMCG products, pharmaceutical products, processed food items, sport goods, furnishings, electronics, etc. Back end

infrastructure for different products may vary and depending on the products there mayor may not be a need for the same. Hence, it is not a condition which has universal application to all forms of retail trade. Opening up of multi brand retail in agro products, etc, would automatically provide a stimulus for investment in back end infrastructure, logistics, etc, which in any case is permitted under the automatic route. Business model itself may warrant investment in back end infrastructure, logistics, etc and hence this may not be required as a pre-condition for FDI investment.

OR Such condition should be stipulated only for FDI in Category I. 3. It is necessary to encourage only genuine players in this sector and avoid a situation where retail outlets are run through working capital support from financial institutions. Should a minimum threshold limit for investment in backend infrastructure logistics be fixed? If so, what should this financial threshold be? Our Comments: There should be no minimum threshold limit on the amount of investment. This is for the reason that the amount of investment may vary from company to company depending on the size of operations of the company and the products being retailed. For instance, capital requirement of a company engaged in retailing of electronic goods would be very different from retailing of pharmaceuticals. 4. To develop our rural sector, should conditionalities be put on the FDI funded chains relating to employment? For example, should we stipulate that at least 50% of the jobs in the retail outlets should be reserved for the rural youth? Our Comments: No. There should be no such condition since; it would be difficult to monitor compliance. In any case, from a business perspective, it would be cost effective for the retail outlets to employ locals. Further, considering the different formats of retail - FMCG products, pharmaceutical products, processed food items, sport goods, furnishings, electronics, etc - the requirement of manpower would vary from one format to another, e.g. in pharmacy retailing, the personnel need to be qualified pharmacists. Thus, any such requirement would make it onerous for a pharmacy retail chain to find right manpower. Also, allowing FDI into the retail sector will usher in the entry of large global companies who will need to hire millions for their pan-India retail operations. It is estimated that for every 50,000 square feet (sq ft) developed, direct employment is created for 200 people. At a most basic level, every square feet of retail space developed in the city generates employment - both at the development stage and subsequently. More retail developments in a country mean more employment opportunities for the country.

Hence, no specific condition needs to be provided for, since employment generation would be automatic. 5. Similarly, to develop our SME sector through local sourcing, should we stipulate that a minimum percentage of manufactured products be sourced from the SME sector in India? No. It would be difficult to monitor compliance with this condition. In any case, the retail business model would promote local sourcing. Further, under certain formats of retail trade, like pharmacy retailing, sourcing would be done from certified drug manufacturers which mayor may not qualify as SME. 6. How best can small retailers be integrated into the upgraded value chain? Can they be provided access to the logisticsl supply chain set up by the FDI funded retailers? Should it be stipulated that a minimum percentage of the latter's sales should be made to retailers through special wholesale windows? Our Comments: No. It would not be practically feasible to impose any such conditions. In any case, in the global context, there is evidence to show that as modern trade expanded, both, organised retail players and unorganised retail players, have coexisted. It is important to consider that small retailers are an important and critical element of the retail ecosystem and enjoy the following features and attributes which will ensure their sustainability Knowledge intimacy is hard for modern retailers to replicate; Ingrained consumer behaviours where consumers frequent kiranas to fulfill their daily top-up needs for food and grocery items; Ability to partner with modern trade players (i.e., become a franchise partner, embark upon smart sourcing strategies, participate in brandingl marketing strategies through modernizing operations)

7.

As a part of a calibrated reform process, should foreign investment for such stores be initially allowed only in cities with population of more than 10 lakhs (2001 census)? As there may be difficulties faced with regard to availability of real-estate in such cities for setting up such ventures, should an area of 10 kms around the municipall urban agglomeration limits of such cities be included within the definition of the city? Our Comments: No. There should be no restriction on where stores should be permitted to be opened. FDI in retail would potentially offer a better product to the customer at a lower price, and

would create employment and future career prospects for large numbers of today's workforce; therefore, there is no reason why those benefits should be limited to large cities. 8. What additional steps should be taken to protect small retailers? Should an exclusive legal and regulatory framework be established to protect their interests? Is a Shopping Mall Regulation Act required? Does this require intervention at national level or should this be left to the States? Our Comments: No such regulation is required. 9. How should compliance be ensured with the above stipulations? Should a centralised agency, to be nominated by the State Governments concerned, be empowered to grant permissions to every outlet to be opened? The onus of proving compliance with these conditions could rest with the concerned retail chain. The chains could submit an annual statement to such State Government agency providing proof of compliance. Should this agency be empowered to monitor compliance of the present cash and carry outlets too? Our Comments: Compliance of the above conditions should be monitored through the DIPPI FIPB. 10. The penalty for non compliance could include cancellation of approvals as well as denial of future permissions for such activities. What additional penalties could be levied? Should civil penalties be imposed? Or criminal? Or both? Our Comments: Non-compliance of the specified conditions would amount to violation of exchange control regulations and the provisions of Foreign Exchange Management Act, 1999 should apply in that case.

deeeak narain
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Dushyant. Kumar@trilegal.com Monday, August 02, 2010 11:55 AM narain.d S.Natarajan DIPP Discussion Paper on Multi Brand retail I Comments and suggestions 100802 Multi Brand Retail_Comments and Suggestions. pdf

Dear Sir, A very good morning to you.

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We attach for your review and thoughts, our comments on the Multi Brand Retail Trading Discussion Paper. While we understand that the last day for submission of comments was 31 July, 2010, we would be extremely grateful if you could consider our submission since 31 July was a Saturday. Should you require any clarifications Warm regards, Dushyant
Dushyant Associate Trilegal Kumar

on any of the issues, please feel free to revert.

Trilegal A-38, Kailash Colony New Delhi - 110 048 Tel +91 1141639393 Dir +91 11 4259 9213 Fax +911141639292 CONFIDENTIALITY NOTE

The contents of this message may be legally privileged and confidential, for the use of the intended recipient(s) only. It should not be read, copied and used by anyone other than the intended recipient. If you have received this message in error, please immediately notify us at the above coordinates, preserve its confidentiality and delete it from your system. Thank you.

TRI LEGAL

To, Mr. Deepak Narain Director Department of Industrial Policy & Promotion Ministry of Commerce and Industry Government of India New Delhi - 110011 31 July, 2010 Subject: Comments and suggestions on the discussion paper on foreign direct investment in multi brand retail trading.

Dear Mr. Narain, The Department of Industri.al Policy and Promotion ("DIPP") has issued a discussion paper on foreign direct investment ("FDI") in multi brand retail trading ("Discussion Paper") and has invited views and suggestions on the "Issues For Resolution" (as provided under paragraph 7 of the Discussion Paper) to be submitted before 31 July, 2010. Our comments on the Issues For Resolution and on the Discussion Paper in general are provided below. 1.
I.

COMMENTS ON ISSUES FOR RESOLUTION Should FDI in multi brand retail be permitted? If so. should a cap on investment be imposed? If so, what should this cap be? As India has tremendous potential for foreign direct investment in retail trading sector, this sector should be opened up sooner than later. In the event the government decides to open up the retail trading sector in a calibrated manner, the initial cap on foreign investment should not be low. Further, in case the government decides to impose various obligations and/or conditions on the foreign investor (such as the obligation to invest in back end infrastructure, etc.), no cap on investment should be imposed.

2.

To develop the retail trade on food grains, other essential commodities and multi-brand retail in general,' should FDJ be leveraged for creating back-end infrastructure? To ensure that foreign investment makes a genuine contribution to the development of infrastructure and logistics, should it be stipulated that a percentage of the FDI coming in (say 50%) should be spent towards building up of back end infrastructure, logistics or agro processing?

Investment in back-end infrastructure may not be needed in all forms of retail trading (such as in case of retail trade of non-agricultural goods involving, inter alia, clothing, apparel, sports goods, etc., where the existing back end infrastructure is well developed). In cases where investment in back end infrastructure is required (such as in case of retail trading of agricultural goods, food grains, essential commodities, etc.), FOI should be leveraged for creating and/or strengthening the back-end infrastructure. However, to effectively develop the back end infrastructure, a stipulation that a 'fixed percentage of the FOr coming in should be invested in back end infrastructure may not be a sound policy decision. For instance, there may be cases where the FOI required in front end retail operations is substantially less than the FOI required to develop the back end infrastructure. Therefore, in such cases, a fixed percentage of the FOI (proposed in front end retail operations) may not be sufficient to effectively develop the back end infrastructure. Accordingly, such obligation should be based on some other quantitative criteria such as one based on the area proposed to be developed for front end retail trading operations, etc. Further, the foreign investor should be allowed to either discharge such obligation itself or partner with other entities for the same.

3.

It is necessary to encourage only genuine players in this sector and avoid a situation where retail outlets are run through working capital SUppOt1 from financial institutions. Should a minimum threshold limitfor investment in backend infrastructure logistics be fixed? If so, what should this financial threshold be?
Financial institutions should be allowed to invest in retail trading operations, especially in the development of back end infrastructure where huge amounts of investment is needed. This will benefit the retail trading sector in general. Historically it has been seen that financial institutions find ways (by way of complex structuring) to invest in sectors where there are restrictions on such investment. Accordingly, allowing financial institutions to invest in retail trading operations will ensure transparent structuring which will be beneficial for both foreign investment and the retail trading sector in general.

4.

To develop our rural sector, should conditionalities be put on the FD/ funded chains relating to employment? For example, should we stipulate that at least 50% of the jobs in the retail outlets should be reserved for rural youth?
Conditions relating to employment may be imposed on FOI in retail trading operations. However, it is imperative that prior to imposing such conditions, 'rural area' and 'rural youth' are clearly defined. Further. in the event the foreign investor is required to invest a certain portion of POI in developing the back end infrastructure, pursuant to such investment greater job opportunities may be created in such back end operations. Accordingly, conditions regarding reservation of jobs for rural youth may be imposed on both front end as well as back end retail trading operations. Also, reservation should not only be limited for rural youth but may also be extended to women.

5.

Similarly, to develop our SME sector through local sourcing, should we stipulate that a minimum percentage of manufactured products be sourced from the SME sector in India?

To develop the 5MB sector, local sourcing requirements may be imposed on the retai I trading entities. Local sourcing, in general, would help develop the domestic manufacturing sector. However, local sourcing requirements should not be limited to the 5MB sector but should cover the entire domestic manufacturing sector in India. 6.

How best can small retailers be integrated into the upgraded value chain? Can they be provided access to the logistics! supply chain set up by the FDI funded retailers? Should it be stipulated that a minimum percentage of the latter's sales should be made to retailers through special wholesale windows?
The Discussion Paper points out that the unorganized retail trading sector (comprising of small retail traders) can pose competitive challenges to organized retail trading sector. Imposing obligations on the FDI funded retail traders regarding minimum sale to such small retailer traders (through separate wholesale trading windows) may not be a sound policy decision. For instance, foreign investors would not be able to assess what percentage of sales they would be able to make to such small retailers as this would be largely dependent upon factors such as location of the FOI funded retail stores, number and buying capacity of small retail traders around such stores, etc. This would give rise to uncertainties and, consequently, foreign investors may become reluctant to invest. This is likely to affect investment in front end as well as back end infrastructure.

7.

As part of a calibrated reform process, should foreign investment for such stores be initially allowed only in cities with population of more than 10 lakhs (2001 census)? As there may be difficulties faced with regard to availability of real-estate in such cities for setting up such ventures. should an area of 10 kms around the municipal/ urban agglomeration limits of such cities be included within the definition of the city?
FDI funded retail trading stores should be allowed to be opened up in all areas without any stipulation regarding minimum population. T~~~"would lead to ~ill~1J?J an QP.P0l1ynuy_ofbeuer retail, experience to peopleJiving-insmaller places. Furt~r, if retail tr~dingstoresareopen_~_!!p .. lrismall~LPlac!:sJjt\Vill c~ate substantiate.J!Ij)U2),01~!g opportunities. H~J1ce! F'.Dlfunde(ixetail ~ t'raaing"entities should not be obligated to restrictoperations to cities having population above a. ceffiifnlevel, but should be allowed the flexibility to choose areas, which they deem commercially viable, for opening up of such stores. However, the government may impose 66TfiaiJonscm such retail traders regarding strict compliance with municipal and building byeI1lws. Further, such obligations should be imposed on all retail traders and not only on FDI funded ones.

8.

What additional steps should be token to protect small retailers? Should on exclusive legal and regulatory framework be established to protect their interests? Is a shopping Mall Regulation Act required? Does this require intervention at national level or should this be left to the States?

As stated earlier (point 6 above), small retail traders are in a position to meet the challenges posed by organized retail trading sector. Accordingly, no separate regulator or a legal framework is required to protect the interests of the small retail traders. Having a separate legal framework will only lead to duplication of the existing legal and regulatory framework and may lead to ambiguities which may affect foreign investment in retail trading sector in India. The mandate to monitor compliance with various laws, bye-laws, etc. should be given to the respective state governments rather than to a newly created central regulator. 9. The present public distribution system provides a valuable safety net to vulnerable sections of society. To ensure that the integrity of the PDS system is not weakened and buffer stock is maintained at the desired level, should Government reserve the right of first procurement for a part of the season or put in place a mechanism to collect a certain amount of levy from private traders in case the level of buffer stock falls below a certain level? While it is accepted that the public distribution system ("PDS") provides a valuable safety net for the vulnerable sections of society, reserving the right of first procurement for the government may not be a sound policy decision. Recent news reports suggest that it is not the quantity of food that is the major concern for the PDS, but lack of storage facilities. Investment by foreign investors in the back end infrastructure is likely to address the issues regarding lack of storage facilities. Further, the government may reserve the right of procurement only in cases of 'emergency'. In the event right of procurement is reserved only for cases involving 'emergency', it is imperative that (a) the term 'emergency' is clearly and unambiguously defined; and (b) such procurement is done at market rates (to make sure that FDI funded retail trading entities do not suffer loss). 10. How should compliance be ensured with the above stipulations? Should a centralized agency, to be nominated by the State Governments concerned, be empowered to grant permissions to every outlet to be opened? The onus of proving compliance with these conditions could rest with the concerned retail chain. The chains could submit an annual statement to such State Government agency providing proof of compliance. Should this agency be empowered to monitor compliance of the present cash and carry outlets also? There is no need to set up any centralized agency or a regulator to ensure compliance of FOI funded retail trading entities with various conditions and obligations imposed on them. Instead. the Reserve Bank of India ("RBI") and municipal bodies should be mandated to ensure such compliance. Further, retail trading entities should be required to submit a compliance certificate (preferably in form of an undertaking/affidavit) annually to either the RBI andlor the designated municipal body.
Il,

The penalty for non compliance could include. cancellation of approvals as well as denial of future permissions for such activities. What additional penalties could be levied? Should civil penalties be imposed? Or criminal? Or both?

The sanctions prescribed under the Foreign Exchange Management Act, 1999 are sufficient for addressing any violations of conditions andlor obligations by the FOI funded retail trading entities. Further, the likelihood of cancellation of approvals as well as denial of future permissions for retail trading activities could also prove to be an effective deterrence for such retail trading entities. II. GENERAL COMMENTS ON THE DISCUSSION PAPER Initiating a discussion on the opening up of the multi-brand retail trading sector is a laudable move by the government. However, the Discussion Paper does not address the issues relating to the single brand retail trading sector. Pursuant to Circular I of 2010, POI is allowed to the extent of 51 % in single brand retail trading under the approval route. The cap on investment in the single brand retail trading was imposed, mainly, to protect the interest of the small traders and to ensure that the technical know-how, etc. are passed on to the Indian partners in such entities. However, it is has been the experience that (a) the scale of operations of single brand retail trading has been limited to small shops, selling high end goods (catering mainly to brand conscious customers); and (b) sufficient technical knowhow (regarding management and running of large retail stores) has not been passed on to the Indian partners. It is also the case that many single brand retail trading stores are loss making operations. Also, owing to the restrictions on single brand retail trading, many foreign players have resorted to the 'franchising model' for retail operations in India, a model which has kept away a substantial amount of POI. Since the scale of operations of entities carrying out single brand retail trading has been limited to small shops (selling high end consumer goods), the interests of small retail traders (which mainly sell food based and essential consumer goods) have not been harmed. This goes to show that single brand retail trading does not pose any significant threat to the small retail traders. In light of the above, the government should consider increasing the FOI cap in single brand retail trading (to the extent of 100%). This will ensure that substantial FOI comes into India and the retail trading sector, in general, is benefited. We hope that the above comments and suggestions would help the DlPP and the government in reaching a more informed policy decision on opening up the retail trading sector for FDI. Thanking you, Yours sincerely, Dushyant Kumar

Associate, Trilegal A-38, Kailash Colony, New-Delhi I 10048 Dushyant.kumar@trilegal.com +91- 9971997793

~aknarain
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To:

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V Bhaskar [v.bhaskar@nic.in] Monday, August 02,201010:57 AM narain.d; S.Natarajan FW: Discussion Paper on FDI in Multi-brand Retail Retail FDl.pdf

***********************************************
V. Bhaskar Joint Secretary Department of Industrial Policy and Promotion Room No 236; Udyog Bhavan New Delhi - 110011 Phone: 011 23063571

9971695696

***********************************************
From: Divekar, Rajan (IN - Mumbai) [mailto:rdivekar@deloitte.com] Sent: Sunday, August 01, 20109:14 AM To: V Bhaskar Subject: Discussion Paper on FDI in Multi-brand Retail Department of Industrial Policy and Promotion Ministry of Commerce & Industry Udyog Bhavan New Delhi 110011

Dear Sir,

Re: Discussion Paper on FDI in Multi-brand Retail

This is with refernce to the discussion paper seeking views and feedback on Foreign Direct Investment in Multi Brand Retail Trade.

Enclosed please find a brief note on our views on the SUbject for your perusal.

Regards,

Rajan Divekar Senior Director Deloitte Touche- Tohmatsu India Pvt. Ltd. Direct: +91 (0) 22 66198591 Main: +91 (0) 22 66198600 Fax: +91 (0) 22 66198601 rdivekar@deloitte.com

264-265 Vaswani Chambers Dr. Annie Besant Road Worli Mumbai 400 030 India.

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Deloitte.

Foreign Direct Investment in Multi Brand Retail

July 2010 www.deloitte.com/in

Foreign Direct Investment in Multi Brand Retail

1.

At the outset, it should be borne in mind that organised retail (or 'modern trade' as it is commonly referred to) has been prevalent in India over the past decade and has witnessed significant growth in terms of store expansion, variety of retail formats and increasing customer acceptance. Hence the issue at hand is not so much related to the need for organised retail in India, per se, but rather the nature and drivers of such investment namely domestic (as at present) or foreign (i.e. permitting FDI in organised retail). Moreover, given that the penetration of organised players in the retail trade is still small, even a sizeable growth of organised retail will still have very limited penetration in India's overall retail trade, in the next 5 years. Traditional retail, with its high extent of fragmentation, has provided compliance challenges, from time to time. Organised retail (be it domestic or foreign) will definitely raise the level of statutory compliance, thus also indirectly adding to the exchequer. 3.

centric technology since the focus of most multi brand retailers in the last decade has been on quantitative factors (mainly achieving rapid network expansion and growth) rather than on the quality of this growth. Another consequence of this single-minded focus on store expansion has been that investments in the 'back end' of the business have been relatively modest with the result that the full potential that can be harnessed by the organised retail sector in this area (namely investing in supply chain/logistics upgradation) is yet to be realised. FDI in retail will help in bridging this gap. The investments and technology'fhatsuch Fbi will bring will help in creating tangible assets in the 'front end' as well as the 'back end' of the business. This would mean a truly international shopping experience for the customer and investments in supply chain and logistics upgradation for the sectors that supply to these retailers. Simultaneously, the heightened competition would ensure an increase in consumerism which in turn would fuel the growth of the economy. Also, unlike FDI in certain other sectors (eg. Defence, Port and Transport infrastructure, retail sector. 4. Since the fundamental objective of opening up FDI etc), there are limited security risk issues associated with FDI in most of the

2.

Whilst the new (Indian owned) multi brand retail formats have gained Widespread customer acceptance especially in urban India, the 'front end' shopping experience for the Indian consumer still lags international benchmarks in terms of store ambience, merchandising strategy and investment in customer

in multi brand retail would be to attract significant investments in tangible assets and technology, there should be no cap on the % of foreign shareholding if the sector is to be opened up to foreign investment. Foreign retailers will be enthused to make quantum investments in the sector only if they have the flexibility to make these investments as they deem fit in line with their global operating models. 5. However, to ensure that only serious players willing to invest across the value chain enter in the country, certain safeguards could be put in place, like specifying a minimum quantum of investment (to be decided based on the category/ format) that needs to be committed to gain entry.

For investments greater than or equal to the specified amount, a. b. Permission for upto say 51 % FDI would be through the automatic approval route For a higher %, applications would have to be routed through the FIPB.
2

For investments below the specified amount, applications would be through the FIPB route 6. Specifying a minimum quantum of investment will ensure significant investments are made in improving the back end infrastructure in Indian retail, either directly or indirectly:- this would perhaps be a better alternative to specifying a fixed % specified for investment In back end infrastructure (which will necesthe employment sarily have to differ across retail formats and hence will be cumbersome to monitor).On front, it should be borne in mind that investments in retail trade (whether FDI or not) is synonymous with local employment predominantly generation. Since retail is a highly owned), the small retailerslmom-n-pop stores have not faded away; in fact many have upgraded their stores, introduced self-service formats, etc. and have continued to grow given the unique shopping habits of Ind ian consumers that can be best met by small retailers (eg. telephonic ordering and home delivery, small but frequent shopping orders, unavailability of own transport to do bulk shopping, etc). It is unlikely that these consumer habits will change due to the 7. Similar is the case with the SME sector:-given the large number of SKU's that organised retailers stock, already a significant part of their merchandise is sourced from SME units and there is no reason to believe why this will change in the future with foreign FDI in retail. In fact, the growth of organised retail in the last decade has seen the emergence of a number of SME's who cater exclusively to the organised retailers, either to the retailers 'private labels' or through their own brands and their population will only increase with the growth in modern trade. Additionally, the international the quality standards of retailers would propel local SMEs to 10. There is however a need for protecting the PDS and ensuring that it receives adequate stocks of essential commodities to supply the basic needs of the poor. is discouraged. Although at Also, there is a need to ensure that hoarding of essential commodities present, given the low penetration of organised retail this is not an issue, the fear is that the growth of organised retail (whether FDI or domestic) will increase the power of large retailers in these commodity supply chains in the future. Hence as retail grows, looking at its maturity, the follOWing options may be required at that stage: 8. On the issue of limiting FDI investments in retail into select cities only, it is felt that such a regulation would limit the retailer's flexibility to operate and harness the massive investments that would have been made in the back end infrastructure:-also it would discriminate foreign investments vis-a-vis domestic investments in organised retail since the latter do not face any such restrictions today. 9. The experiences of the growth of organised retail in India over the past decade have shown that despite the growth of multi brand retail chains (albeit Indian c. b. a. Maintaining adequate buffer stocks for meeting the needs of the PDS Specifying, on a case to case basis, commodity specific limits for maximum direct purchases that can be permitted by the organised retail sector (whether Indian or foreign owned) for essential commodities. Using the more sophisticated back end system created by the large retailers to store products of the PDS system. Area hired would need to be paid for by the government subsidised rate.
Foreign Direct Investment In Multi Brand Retail 3

Foreign retailers will be enthused to make quantum investments in the sector only if they have the flexibility to make these investments as they deem fit in line with their global operating models.

localised business by its very nature, even today it employs local labour and staff for its outside operations, mainly local youth. Additionally,

location hires, for store operations, would have a cost impact, something that most retailers are averse to incurring. Hence, there appears to be no additional need for specifying a certain reservation for local youth.

entry of FDI in retail and both large and small retailers will co-exist as they do today.

improve those of their products, thus ensuring their overall development.

at a negotiated, though

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which ISa legally separate and independent entity. Please see www.deloitte.corrvabout for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. This material and the Information contained herein prepared by Deloitte Touche Tohmatsu India Private limited (DTTIPL)is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s) and accordingly is not intended to constitute professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you shouid consult a qualified professional adviser. None of DTTlPL, Deloitte Touche Tohmatsu, its member firms, or its and their affiliates shall be responsible for any loss whatsoever sustained by any person who relies on thts material. 102010 Deloitte Touche Tohmatsu India Private Limited

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.2!!pak narain
From:

Sent: To: Cc: Subject: Attachments:

Prof. Sukhpal Singh [sukhpal@iimahd.ernet.in] Monday, August 02,20105:09 PM V Bhaskar narain.d comments on the FDI in retail discussion paper retail FDI commentsDIPPsent.pdf

dear DIPP Please find attached my comments on the discussion paper. Please acknowledge receipt of the same. thanks Sukhpal Dr. Sukhpal Singh Centre for Management in Agriculture (CMA) Indian Institute of Management (lIM) Vastrapur Ahmedabad-380015 Gujarat, INDIA

FDI in multi-brand retail in India: Implications of foodsupermarkets Sukhpal Singh* 1. Introduction The discussion paper put up by the Department of Industrial Policy and Promotion (DIPP) for public discussion and comments describes the various aspects of the Indian retail sector like its size and nature, growth over the last few years, and its economic and social significance besides the limitations of the present setup before going into positive and negative implications of Foreign Direct Investment (FDI) in retail sector based on the recommendations of various committees, studies, and bodies- both academic and business, and official and non-official. It, then briefly summarises the experience of FDI in retail sector and the policy on FDI in developing countries like China, Thailand, Russia, Chile, and Indonesia. After that, it goes on to make an argument for FDI in retail trade in India before listing issues for discussion. 2. The Indian food supermarket experience The DIPP paper's concern about producer's share in consumer's rupee being lower in India than in other countries is really not so valid as, in value added products, it is not %age share, but the absolute net surplus which a producer gets which matters, because even after getting a higher share of consumer's price, s/he may still make a loss. The operations of fresh food retail chains in India have not made any difference to this producer's share in consumer's rupee so far, other than lowering the cost of marketing of the producers, as retail chains have collection centres in producing areas unlike the APMC markets (mandis) which are in distant cities. But, these retail chains buy only 'A 'grade produce and only a part ofthe farmers' output who end up going to the APMC mandi to dispose off the remaining or rejected produce. Recent studies across chains and states reveal that other than lower transaction costs, the farmers did not realize any major benefits from dealing with these chains. The chains were procuring from 'contact' farmers without any contract or commitment to buy regularly. Further, it was relatively large and/or resourceful farmers who were working with the chains, with the exception of just one or two retail chains (Singh and Singla, 2010; Pritchard et al, 2010). Thus, the involvement of supermarket chains with producers was low and there was no delivery of development or improvement in supply chain efficiency. This is also reflected in the performance of these perishable food chains which has been miserable in procurement and selling as most of them have either closed down or are scaling down their store and procurement operations. Subhiksha is not in the market anymore, Spencer's has moved out of Gujarat, ITC has shut shop in Chandigarh and Birla's More is also reported to have wound up its operations in Gujarat. Only in South India, many of them like Namdhari Fresh, Fresh@, Spencer's, Birla's More, and Reliance Fresh are still operating but, one does not know how long and how effectively they will be there.

* 11M,Ahmedabad, Email: sukhpal@iimahd.ernet.in

On the other hand, 33-60% of the traditional fruit and vegetable retailers reported 1530% decline in footfalls, 10-30% decline in sales and 20-30% decline in income across cities of Bangalore, Ahmedabad and Chandigarh, the largest impact being in Bangalore which is one of the most supermarket penetrated cities in India (Pritchard et al, 2010) and the least in Chandigarh. It was the roadside sellers who suffered the most followed by roadside-cum- home delivery retailers. The fixed shop sellers and home delivery retailers suffered the least. A majority of traditional retailers pointed to the modem supermarket chains as the major reason for this loss (Singh and Singla, 2010). So far as investments needed in the farm sector for improving supply chain efficiency are concerned, the case of fruits and vegetables is highlighted in the DIPP paper with estimates of wastages and value addition potential. But, it is important to remember that fruit and vegetable crops account for only 2% of gross cropped area in India and suffer from lack of production and/or market risk management at the farmer level as there is high cost of inputs, quality standards are crucial, there is no minimum support price, yield risk is high, and bargaining power low due to absence of collectivities of growers. Further, by and large, supermarket retail chains do not work with smallholders due to higher transaction costs of doing so. Therefore, the noise about smallholder benefit in high value crops due to retail chain linkage is exaggerated and the direct linkage is either absent or pretty weak. That was also the case in contract farming situations in general where smallholders were excluded (Singh, 2008). An important question in supermarket chain linkage is: Why do chains, in general, and those in India, in particular, have only informal arrangements with growers which have come to be known as 'contact farming' instead of contract farming? There are no formal contracts as the supermarkets do not want to share the risk of the growers. The system of no written contracts and consignments places the financial risks solely with the producers/suppliers and supermarkets/buyers do not run any financial risk as they need to maintain no stocks, carry no price risk, and have no commitment to buy. Besides, they have control over and traceability of production, reduced risk of low quality produce, can impose standards and production requirements anytime, and lower prices as there are no intermediaries. This puts farming businesses under pressure which is passed on to the workers on the farms, who are often women, which results in deteriorating work conditions, very low pay, and casual employment (Stichele et aI., 2006). The supermarket chains give market price based prices to their supplying 'contact farmers'. The question which should be asked is: Is it a fair practice, as in India, market prices fluctuate so widely during the season or across seasons? Why not work prices backward or forward based on market price of final products or cost of production as contract farming is based on that? The other question about this pricing practice which should be asked is: If market prices are efficient, why did the chains have to go to growers? This is a serious issue as even a significant premium over market price may not help a farmer if open market prices go down significantly which is not uncommon in India. Even in organic produce supply chains, this is the norm though organic prices are separately discovered at the consumer end. Thus, the issue of what is a fair price for the primary grower in a chain remains as there is little transparency in pricing and costing of operations when private players are the organisers of such projects (IFAD, 2005; Singh, 2009).

On the retailing end side, there have been some Corporate Social Responsibility (CSR) attempts by a few supermarket chains to rope in traditional vegetable and fruit sellers into their operations as partners which did not succeed. ITC Choupal Fresh tried it unsuccessfully in Hyderabad and abandoned as, when the vendors were given push carts free and also promised a minimum daily remuneration, they had no incentive to sell well. Similarly, Best Price Wholesale ofWalmart-Bharti has financed about a dozen pushcart vendors who sell under the banner of Best Price Wholsesale in Amritsar but the initiative does not seem to make a mark as these carts are not frequently seen in the city. On the other hand, a local initiative by a local businessperson in Ahmedabad - under the brand name of Harra Fresh- seems to be more promising as it involves former traditional F&V retailers in mobile van based sales of perishables which has computerised billing and weighing system and delivers almost at the door step as it visits identified housing colonies/areas on a fixed day and timing basis. 3. Global experiences of supermarket
practices

The first section of the DIPP paper only highlights the concerns expressed about the likely negative impact of FDI in retail on traditional food retailers including perishable produce retailers. So far as it is concerned with employment implications, it is understandable, but making an argument that the domestic investors in retail, and particularly in food, are at a nascent stage does not really cut much ice, as how are the domestic players any better than foreign players so far as benefits of investment in retail for poor producers/suppliers and losses for competing traditional retailers and vendors are concerned? Even if one considers the impacts of FDI on local firms and systems, it is important to realize that the diffusion of ideas from Trans-National Corporations (TNCs, read 'global supermarkets') to local firms is not automatic, and the growing competitive pressures may even negatively affect the productivity of local enterprises and destroy their ability to incorporate new ideas and systems. Owing to their specific advantages, global supermarkets may obtain distributional benefits from their market power or asymmetrical information structures at the expense of local actors (Durand, 2007). The experiences of various countries cited in the DIPP paper are sketchy and not really based on any analysis or insights. Therefore, they can not be used to make an argument for or against FDI in retail. In the case of Indonesia, zoning policy to restrict the impact of retail chains on local retailers is not even mentioned. Infact, the Mexican experience shows that though FDI may lead to acceleration of modernization of the retail sector and have positive effects like farm productivity spillovers, processing and retailing productivity spillovers and even lower consumer prices and better services, and higher wages for retail workers, but, at the same time, may also have negative impact on local firms' performance and market share as well as local producer and worker remuneration as a result of growing competitive pressure in the sector due to global sourcing (imports) which may eliminate local suppliers and farmers, productivity slowdown of local competitors due to competitive pressure by the global supermarkets and monopolistic and oligopolistic rent seeking by these TNCs/supermarkets resulting in lower wages for workers, and poor work conditions in modern retail sector as happened in Mexico. Modern retail workers suffered 18% wage decrease between 1994 and 2003 and the retail sector wages were 14% lower

than those in manufacturing sector. Wal Mart's imports into Mexico were 3.5% of consumption goods imports, 0.5% of global imports, and contributed negatively to the Mexican trade deficit in 2002 (Durand, 2007). Three I. 2. 3. major aspects of impact of supermarkets include: market concentration and, therefore, producer and consumer interest downward pressure on producer prices with higher costs and responsibilities exclusion of small producers and impact on small traditional retailers

If the supermarket concentration in the Western markets is any indication, a few players are likely to dominate the food sector overtime and then dictate the terms to the suppliers and the buyers. In 2007, five major chains accounted for more than 50% of retail sales in most of the EU countries; in some of them like Denmark, and Finland, even as much as 70-80% of the retail market. Further, consolidation was also indicated by the increasing size of stores and a decline in the number of stores per capita by 10-15% over 2002-07 in countries like the UK, Finland, and the Netherlands. Further, own brands of these supermarkets accounted for a major share of the total sales i.e. 43% in the UK, 40% in Denmark and 42% in Belgium (Bukeviciute et aI, 2009). Thus, rapid rise of supermarket chains would lead to concentration and market power, with upstream suppliers facing buyer power in terms of lower prices and higher private standards and the downstream buyers (consumers) facing higher prices due to lower competition. The implications of the rise of supermarkets for farmers do not come from the type of store but from the methods of procurement used and the quality standards applied (Chen et aI, 2005). Supermarkets have multiple channels through the system of category management, and suppliers range from spot markets, or traditional wholesalers to preferred suppliers and direct contracts with independent large growers, with the latter two increasing in importance. Carrefour, Malaysia's fresh fruit and vegetable supply chain was made up of wholesalers (4 I % of total supplies)), semi-direct suppliers (wholesalers and suppliers) (41%), and direct suppliers (18%). Similarly, GIANT, another supermarket in Malaysia, which in 2002, had 200 vegetable suppliers, reduced them to only 30 in 2004 which included specialized wholesalers, general wholesalers, farmers with oral contracts, and suppliers without contracts. In Thailand, similar changes have been seen following the introduction of the TOPS distribution centre which had 250 suppliers to begin with (Chen et aI, 2005). This is known as 'supplier rationalization' in supermarket terminology. Though supermarkets initially offered higher prices to producers than those offered by traditional channels, but farmers incurred extra costs like processing and packaging, marketing, transport, and other transaction costs unlike their counterparts in traditional channels (Cadilhon et al, 2006). Further, though a supermarket competing with local markets improves quality standards in local markets, but that creates problems for small producers who not only can't compete with large farmers as suppliers to these supermarkets due to lower volumes and lack of continuous supply, but also lose the traditional market due to failure to meet higher standards. On the other hand, those supplying to supermarkets do not have any benchmark to compare their prices as there is no wholesale market. Due to the sheer size of supermarkets and consequent buying power, the producer prices may be depressed. For example, in the UK, there was a negative relation

between relative market share of a supermarket and price paid to the suppliers in relation to the average price. The larger the market share of a supermarket, the lower was the price paid to the suppliers. The UK supermarket chain Tesco paid its suppliers 4% below the average price paid by retailers due to its buying power. This lower producer price does not necessarily result in lower consumer price (Wiggerthale, 2007; Durand, 2007). Due to the low prices paid, the producers can not attend to many investments which may be necessary for environmental and social reasons. There have been a large number of supermarket malpractices due to the buyer power they have. These included: in the UK and France

Payment to be on the supplier list (listing fees) Threats of delisting if supplier price is not low enough Payment from producers for various promotions and opening of new stores Rebate from producers as a percentage of their supermarket sales Minus margins whereby suppliers are not allowed to supply at prices higher than the competitor price (Chen et al, 2005; Stichele et al, 2006). Where they deal with growers directly, malpractices resorted to by supermarkets are: Delayed payments, despite regulations to pay within a week in countries like Malaysia Lowering prices at the last minute when supplier has no alternative Changing quantity and quality standards without notice and support Just-in-time systems to avoid storage and inventory costs Removing suppliers from list without good reason Charging high interest on credit, and Using contracts that can not be enforced by suppliers (Stichele et al, 2006). Even in Asian developing countries, supermarkets supplies suffer from the following: Supermarket orders can go up and down dramatically as there are no long term commitments or written contracts with supermarkets which specify quantities or prices. Purchase prices are often negotiated for a fixed period, such as a week, but are renegotiated down by supermarkets if market prices decline in that period. There is, however, no provision for renegotiation upwards if market prices rise. Sometimes, suppliers have to pay transportation charges from the distribution centre to the individual stores Promotion fees are charged from suppliers where a product or range of fresh produce is featured in an in-store promotion while the chain takes no risk Discounts are required when new stores are opened. Penalties are invariably levied for failing to supply agreed quantities (Chen et ai, 2005). These practices hamper upgrading of suppliers into better producers and into processing and marketing (Stichele et al, 2006). The practices of supermarkets (both horizontal and vertical) which give rise to competition concerns include cartels, joint purchasing agreements by competing buyers, resale price maintenance, single branding i.e. buying from a single supplier which restricts opportunity for others, private label products, tying of purchase of one

product to that of another product, exclusive supply agreements and certification schemes (Bukeviciute et al, 2009). The supermarket expansion also leads to employment loss in the value chain as compared to 18 jobs created by a street vendor, 10 by a traditional retailer and eight by a shop vendor in Vietnam, a supermarket like Big C needed just four persons for the same volume of produce handled (Wiggerthale, 2007). Another modern wholesaler, Metro Cash & Carry, employed 1.2 workers per tonne of tomatoes sold in Vietnam compared with 2.9 persons employed by traditional wholesale channel for the same quantity sold (Cadlihon et al, 2006). So far as impact on local traditional retailers (neighbourhood stores) is concerned, the spread of supermarkets led to 14% reduction in the share of 'mom and pop' stores in Thailand which was cornered by foreign supermarket chains within four years (Stichele et al, 2006). On the other hand, in supermarket stores, low wages, job cuts, long and irregular working hours, and non-contract workers are the abuses reported which are resorted to as strategies to cut labour costs. Thus, whereas supermarket chains can lead to new and better employment generation, improvement in food quality, and lower consumer prices and provide new avenues for agricultural development, the negative impacts include exclusion and squeezing out of small producers out of these chains due to high cost and risky investments needed, loss of jobs in the traditional markets, and decline of the traditional wholesale markets which may be important for small producers and workers (Cadilhon et al, 2006). Supermarket also resort to unfair and unethical practices. Carrefour was fined in South Korea for unfair business practices i.e. forcing suppliers to cut prices to save 1.737 billion won supply order for 10 months in 2005. It was also fined 1,70, 000 dollars by the Indonesian Business Competition Authority (KPPU) in 2005 for not sourcing goods from a listed supplier who then went bankrupt, which was considered an unfair competition practice. It was also asked to stop minus margin practices. Its agreement was found to include listing fees, fixed rebate, minus margin, terms of payment, regular discount, common assortment cost, opening cost/new store, fees for bi-weekly advertisements and penalties. Its listing fee was significantly higher than that of competitors and was applied before the suppliers could sell in its supermarkets (Stichele et al, 2006). 4. Regulation of supermarkets The biggest fear in India is not that the FDI per se is worse than domestic corporate investment for farmers or traditional retailers; it is that in India, there may not be adequate institutions and effective governance mechanisms to regulate and monitor the operations of the global retailers. If the monitoring of wholesale 'cash n carry' stores so far is anything to go by, there is no regulation and the norms are being flouted openly at the store level by the existing players who do retailing while being wholesalers. They are found to do retail sales in the grab of wholesale as the size of a single purchase (minimum ticket size) was just Rs. 500 in one store and Rs. 1000 in case of another store which is self imposed limit and does not seem to be governed by any regulation. How much %age of the total turnover of a wholesaler could come from sales to its subsidiary or joint venture companies is not clear as of now in India. This raises questions about the effectiveness of regulation of retail space in India. Also, the ID cards issued by these stores can be easily used by retail buyers because,

as long as you hold a card, no further questions are asked at the entry to the stores. Thus, individual buyers buy in group on one card, and as soon as they are out of the store, they share their purchases and settle mutual accounts. Thus, one sees more of families and women in these stores than business heads or their employees. Further, some of these wholesale stores also sell vegetables and fruits in retail where the minimum purchase requirement is only one kg. Thus, effectively, they are operating in retail space. Given the global and the Indian experiences so far, it is important to slow down food supermarket expansion by mechanisms like zoning, business licenses, and trading restrictions. There were many instances elsewhere where large stores were kept outside the city and far removed from traditional markets. Hypermarkets were not allowed within 3.5 km of housing estates or city centres in Malaysia. Indonesia prohibited hypermarkets within 500 metres of traditional markets, and large stores of more than 40,000 sq ft were to be at least 2.5 kilometres from traditional markets (Srivathsan, 2007). Further, there is need to limit buying power of the supermarkets by strengthening the competition laws. It is important to promote good business practices that optimize retailer-supplier relations, protecting both sides. This can be initiated by establishing or improving contract regulations as in the form of legal acts in the US and Argentina. Legal protection to contract growers as a group must be considered to protect them from ill effects of procurement practiced by supermarkets. There are cases of legal protection given to subcontracting industries in Japan in their relations with large firms. These laws specify the duties (to have a written and clear terms contract with the subcontractor) and forbidden acts for the large parent firm. The latter include refusal to receive delivery of commissioned goods, delaying the payment beyond agreed period, discounting of payment, returning commissioned goods without good reason, forced price reduction, compulsory purchase by subcontractors of parental firm's products, and forcing subcontractors to pay in advance for materials supplied by the parent firm. These provisions are monitored by the Fair Trade Commission. Interestingly, most of the violations by parent firms were on the written form and clear terms of the contracts (Sako, 1992). If contract farming is only an extension of the flexible production systems prevalent in industry to farm production, then it is only logical to extend such legal provisions with necessary modifications to farming contracts. In farming sector per se, there is the Model Producer Protection Act, 2000 of Iowa State in the USA which requires contracts to be in plain language and disclose material risks, provides a three days' cancellation period for the producer to review and discuss production contracts with their advisors, provides for producers to be first priority lien for payments due under a contract in case of contracting agency bankruptcy, protects against undue cancellation of contracts by companies and prohibits 'tournaments' (contracts where compensation to grower is determined by his/her performance relative to others) (www.flaginc.org/pubs/poultrv/poultrvpts.) The Indian model contract farming agreement under the amended Agricultural Produce Marketing Committee Act (APMC) 2003 is quite fair in terms of sharing of costs and risks between the contracting agency and the grower. But, it leaves out many aspects of farmer interest protection like delayed payments and deliveries, contract cancellation damages if producer made firm specific heavy investments, inducement/force/intimidation to enter into a contract, disclosure of material risks, 7

competitive performance based payments, and sharing of production risks. Further, it is not known how far the model contract agreement wi11be adopted by the agencies unless it is a conditionality to avail of certain other incentives or policies. In Thailand, even after three years of its notification, the standard agreement was used only by two companies (Singh, 2005). There is a need to reduce the vulnerability of the growers due to fluctuations in market prices by offering minimum purchase prices, not market based premiums as is being done by the chains and other contracting agencies now. The essence of contract farming, among other things, is a pre-agreed price which reduces farmer's market risk. But, market price based price no way reduces the farmer risk. Also, provisions for legal1y binding and clearly worded rules for fair treatment of suppliers, an independent authority like a retail commission to supervise and regulate supermarkets for supplier, consumer, and labour aspects and support to local retailers, are required. This kind of agency should ban buying of products below cost and selling below cost, improve local traditional markets for small growers, delay the pace of supermarket expansion, establish multi-stakeholder initiatives in the chains and provide support to small producers and traditional food retailers. On the other side, the farmers' organisations and the NGOs need to monitor and negotiate more equitable contracts with the supermarkets. Producers' organizations amplify the political voice of smal1holder producers, reduce the costs of marketing of inputs and outputs, and provide a forum for members to share information, coordinate activities, and make collective decisions. Producers' organizations create opportunities for producers to get more involved in value adding activities such as input supply, credit, processing, marketing and distribution. On the other hand, they also lower the transaction costs for the processing/marketing/retailing agencies working with growers. Collective action through cooperatives or associations is important not only to be able to buy and sell at a better price, but also to help small farmers adapt to new patterns and much greater levels of competition (Farina, 2002). Government should also play an enabling role by legal provisions and institutional mechanisms, like helping farmer co-operatives, producer companies and producer groups, to facilitate smooth functioning of the contract farming system, and not intervene in contracts directly. References Bukeviciute, L, A Dierx and F Ilzkovits (2009): The Functioning of the food supply chain and its effect on food prices in the European Union, European Commission, Directorate-General for Economic and Financial Affairs, Occasional Paper No. 47, European Communities (EC). Cadilhon J-J, P Moustier, N D Poole, P T G Tam and A P Fearne (2006): "Traditional vs. Modern Food Systems? Insights from Vegetable Supply Chains to Ho Chi Minh City (Vietnam)", Development Policy Review, 24(1), 31-49. Durand, C (2007): "Externalities from foreign direct investment in the Mexican retailing sector", Cambridge Journal of Economics, 31 (3), 393-411. Farina, E M M Q (2002): "Consolidation, Multinationalisation, and Competition in Brazil: Impacts on Horticulture and Dairy Products Systems", Development Policy Review, 20 (4), 441-457.

IFAD (International Fund for Agricultural Development) (2005): Organic Agriculture and Poverty Reduction in Asia: China and India Focus, Thematic Evaluation, IFAD Report No.I664, Rome, July. Pritchard, B., C. P. Gracy and M. Godwin (2010) "The Impacts of Supermarket Procurement on Farming Communities in India: Evidence from Rural Karnataka", Development Policy Review, 28(4): 435-456. Sako, M (1992): Prices, quality and trust - Inter-firm relations in Britain and Japan, Cambridge University Press, Cambridge. Chen K, A W Shepherd and C da Silva (2005): Changes in food retailing in Asiaimplications of supermarket procurement practices for farmer and traditional marketing systems, AMMF Occasional Paper 8, Food and Agriculture Organisation (FAO), Rome. Singh, S (2005): "Role of the State in Contract Farming in Thailand: Experience and Lessons", ASEAN Economic Bulletin, 22(2), August, 217-228. Singh, S (2008): 'Marketing Channels and their Implications for Smallholder Farmers in India', in McCullough, E.B., Pingali, P.L. and Stamoulis, K.G. (eds.): The Transformation of Agri-food Systems: Globalization, Supply Chains, and Smallholder Farmers, FAO, Rome and Earthscan, London, Chapter 14,279-310. Singh, S (2009): Organic Produce Supply Chains in India-organisation and governance, Allied. New Delhi. Singh Sand N Singla (2010): Fresh Food Retail Chains in India: Impacts on Small Primary Vegetable Producers and Traditional Fruit and Vegetable Retailers, Final Report, Centre for Management in Agriculture (CMA), Indian Institute of Management (11M),Ahmedabad, April. Srivathsan, A (2007): "Regulating space", Frontline, July 13, 25-27. Stichele, M V, S v Wal and J Oldenziel (2006): Who reaps thefruit? Critical Issues in the Fresh Fruit and Vegetable Chain, Centre for Research on multinational Corporations (SOMO), Amsterdam, June. Wiggerthale, M (2007): Expansion of supermarkets in the food sector: who reaps the benefits?, presented at the G8 Alternative Summit, June, Rostock., www.faireragrarhandel.de/mediapool/16/163463/ .../Supermarkets G8.pdf, accessed July 19, 2010.

.2!!J?ak narain
From: Sent: To: SUbject: Attachments: Paras Bothra [paras_acs@yahoo.co.in] Thursday, August 05,20106:38 PM V Bhaskar; narain.d; S.Natarajan SUGGESTION ON FDI IN MULTI BRAND RETAILING Comments_FDI_MBR. pdf

Did you receive my trailing email ?

--- On Wed, 28/7/10, Paras Bothra <Paras acs@yahoo.co.in> wrote: From: Paras Bothra <paras acs@yahoo.co.in> Subject: SUGGESTION ON FDI IN MULTI BRAND RETAILING To: v.bhaskar@nic.in, narain.d@nic.in, s.natarajan@nic.in Date: Wednesday, 28 July, 2010, 3:58 PM
Dear Sirs Please find attached My comments on the discussion paper on FDr in multi Best Wishes Paras Kumar Jain brand retailing.

SUGGESTIONS ON FOREIGN DIRECT INVESTMENT IN MULTI-BRAND RETAIL TRADING

Paras Kumar Jain, Secunderabad, India Introduction: There is a general misconception that market-seeking Foreign Direct Investment < <FDI> > in domestic sectors such as retail yields little development impact. The opposite has been true in many cases. FDI in retail has been a key driver of productivity growth in Brazil, Poland, and Thailand, resulting in lower prices and higher consumption. Large-scale foreign retailers are also forcing wholesalers and food processors to improve. And they are now becoming important sources of exports: Tesco in Thailand and Wal-Mart in Brazil are increasingly turning to local products to feed their global supply chains. Retail also happens to be a pillar of the tourism industry. The misconceptions about FDI are made worse by political economy factors: while attracting efficiency-seeking FDI does not affect incumbents, attracting marketseeking FDI usually does', It is a well know fact that since foreign retailers can enter India through some routes, the existing ban or cap on foreign direct investment in retail have not acted as outright entry restrictions. However these restrictions have made India lose some foreign investment while policies remain unclear, and for foreigners wanting a foothold, the entry process has become opaque and complicated. To date, franchising has been the preferred route through which foreign retailers have entered India. The big multinational supermarket chains to have done so are Metro Cash & Carry, Shoprite Checkers and most recently Wal-Mart. I would like to thank the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Govt. of India, for inviting comments on the critical subject of allowing FDI in multi brand retailing. My comments are detailed herein below. 1. Should FDI in multi brand retail be permitted? If so, should a cap on investment

be imposed? If so, what should this cap be? A possible generalisation from global experiences is that retailing can be thought of as

developing through two stages. In the first stage, modern retailing is necessary in order to achieve major efficiencies in distribution. The dilemma is that when this happens it inevitably moves to stage two/ a situation where an oligopoly, and quite possibly a duopoly, emerges.

In turn this implies substantial seller and buyer power, which may operate against the public interest", The lesson for developing country like India is that effective competition policy needs to be in place well before the second stage is reached, both to deter anticompetitive behaviour and to evaluate the extent to which retail power is being used to unfairly disadvantage smaller retailers and their customers. The sources of retail power need to be understood to ensure that abuses of power are curbed before they occur", The benefits brought by modern retailers must be acknowledged and not unduly hindered. While it is true that some dislocation of traditional retailers will be felt, time will prove that the hardship brought will not be substantial". Attention is also invited to the fact when China in 1992 permitted foreign investment in retailing on a trial basis in select few cities. At this time foreign investment in retail shops was only allowed in the form of a Joint Venture. The Chinese Govt. made regulations to give local companies a chance to copy the western big store model and thereby supported the domestic retailers to gain or maintain market share. It was only in 2004 that China made more concession on FDI in Retail. Chinese experience of allowing FDI in retail in the Joint Venture format was not all negative for the foreign companies as it provided them with a chance to work with a local partner in order to benefit from their distribution networks as well as obtain their local partner's knowledge in order to adapt their concepts to the consumer's requirements", Based on the foregoing, I suggest that India should adopt a phased approach towards liberalising the FDI in Multi brand retailing. To start with India may consider permitting FDI in Multi Brand retailing with a cap of 49%, together with following conditions: Hypermarket - Minimum Sales Floor area should be 5000m2 office. Superstore - Minimum Sales Floor area should be more than 1000 m2 and less than 5000 m2
2

Sales Floor area means

the floor area excluding the warehouse / backroom / storeroom, food court and

Departmental Store - Minimum Sales Floor area should be less than 1000m

The above Stores shall sell minimum 25% of goods manufactured by Indian SME's in their premises. It would be important to provide definition to the term 'Indian SME' in the regulations failing which loopholes may be devised to circumvent the real intention of protecting the domestic industry.

None of the Stores should be allowed to operate on 24 Hour basis. Hypermarket, Superstore, should not be allowed to operate within 10 km radius of residential areas and town centres.

Reasonable restriction on number of hypermarkets and supermarkets should be decided based on population. Eg: 1 hypermarket and 1 super market for every 10/00/000 residents. An Indicative plans of hypermarkets need to be submitted to designated authorities at least 1 years before an application is to be considered. An Impact study on existing retail businesses should be carried out by a designated Govt. Department before the permission for opening of a hypermarket / Superstore is given.

2. To develop the retail trade in food grains, other essential commodities and multi-brand retail in general; should FDI be leveraged for creating back-end infrastrocture? To ensure that foreign investment makes a genuine contribution to the development of infrastructure and logistics, should it be stipulated that a percentage of the FDI coming in (say 50%) should be spent towards building up of back end infrastructure, logistics or agro processing? 3. It is necessary to encourage only genuine players in this sector and avoid a situation where retail outlets are ron through working capital support from financial institutions. Should a minimum threshold limit for investment in backend infrastrocture logistics be fixed? If so, what should this financial threshold be?
No such stipulations should be provided. Such cap may not be of any use in real sense. Required infrastructure would anyways be developed by the retailer depending on the business requirement.

4. To develop our roral sector, should conditionalities be put on the FDI funded chains relating to employment? For example, should we stipulate that at least 50% of thejobs in the retail outlets should be reserved for the rural youth?
It is pertinent to note that one of the most difficult challenges in case of jobs reservation for the rural youth is the employment restructuring required to move from an agricultural base to a services based economy. Education and training in "soft" skills are essential in this process. But equally important is the value and status accorded to various types of jobs. In order to interest persons in (re)training for service jobs, these need to be positioned as important to communities and the whole economy. This would be possible only through a Public Private Partnership in opening the training institutes. The rural youths should enroll themselves in these institutes and those who are meritorious should be absorbed by the retailer. I would be against assigning any percentage to such job but yes preference may be given to trained rural youth.

5. Similarly, to develop our SMEsector through local sourcing, should we stipulate that a minimum percentage of manufactured products be sourced from the SMEsector in India?
I have already stated in point no. 1 above that minimum 25% of goods manufactured by Indian SME's in their premises. It would be important to provide definition to the term 'Indian SME' in the regulations failing which loopholes may be devised to circumvent the real intention of protecting the domestic industry.

6. As a part of a calibrated reform process, should foreign investment for such stores be initially allowed only in cities with population of more than 10 lakhs (2001 census)? As there may be difficulties faced with regard to availability of real-estate in such cities for setting up such ventures, should an area of 10 kms around the municipaVurban agglomeration limits of such cities be included within the definition

of the city?
I have already stated in point no. 1 above that there has to be reasonable restriction on number of hypermarkets and supermarkets and such restriction should be decided based on population. Eg: 1 hypermarket and 1 super market for every 10,00,000 residents.

7. Will any of the conditionalities mentioned above be inconsistent with our commitments under the agreement on TRIM at WTO? If not, to ensure national treatment, can such conditionalities be extended to all retail chains in India above a certain size? Will such extended conditionalities be consistent with Article 301 of the Constitution?
If the FDI is allowed in multi brand retailing without proper check and balance then it would have the most serious implications for India which for many valid reasons have found it necessary to regulate foreign investments and to promote the growth of local firms. It is pertinent to note that Trade and investment is therefore not a "technical trade issue" that can be left to trade officials on the negotiating field alone to handle. It is primarily an issue with great economic, social and political significance, as it will have such an important bearing on economic sovereignty; ownership patterns; the survival of local enterprises, businesses and farms; employment prospects; as well as social and cultural life. While it is known fact that the Indian is indeed trying its best to attract foreign investors. The issue however is not the desirability or otherwise of foreign investments. It is about the right of country and peoples to choose the pattern and ownership of investments they want for their country and in that context, the type of foreign investment they welcome, in which sector, and under what conditions. The power to regulate foreign investment, to obtain better terms and benefits from them, and the right to enact policies to aid the weaker local

firms is essential to any country that wants to have a critical minimal degree of control over its economy and social life. It should come as no surprise why the industrialised countries are putting great efforts and pressure on this issue. They would like their companies to be able to operate much more freely in India, and thus are asking that current restrictions and regulations be removed in multi brand retailing. Gaining access to the resources and markets of the India, and to the right to invest and operate in the Indian, has been a major strategic objective of the governments and companies of developed countries. It must be remembered that it was the need to recapture control over resources, and to have national policies in favour of domestic rather than foreign interests, that spurred the anticolonial struggles that finally led most colonies to win independence. It would thus be a great irony if the ex-colonial master countries were to succeed yet again to gain rights for their companies to establish themselves and dominate the economies of the former colonies, this time not through military conquest but through the device of WTO treaty. This would be the modern version of the "unequal treaties", with possibly the same disastrous effects", The 'national development' issue also highlights the fact that the ban on local content industrialization

policies means that developing countries are prevented from adopting

strategies used by the US, Japan, France, Germany the UK, etc, in the past. At present it is tactically important to support the call for revision of the TRIMs Agreement to allow the use of local content policies Article 301 of the Constitution allows a State legislature to "impose such reasonable

restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest". In (1998) 8

see

227 M.R.F.Ltd. -Vs- Inspector,

Kerala Government and Others, the Hon'ble Supreme Court after referring to important decisions on the subject laid down the following principles for testing the reasonableness of restrictions: 1. While considering the reasonableness of the restrictions, the Court has to keep in mind the Directive Principles of State Policy. 2. Restrictions must not be arbitrary or of an excessive nature so as to go beyond the requirement of the interest of the general public. 3. In order to judge the reasonableness of the restrictions, no abstract or general pattern or a fixed principle can be laid down so as to be of universal application and the same will vary from case to case as also with regard to changing conditions, values of human life, social philosophy of the Constitution, prevailing conditions and the surrounding circumstances.

4. A just balance has to be struck between the restrictions imposed and the sccial control envisaged. 5. Prevailing social values as also social needs which are intended to be satisfied by restrictions have to be borne in mind. 6. There must be a direct and proximate nexus or a reasonable connection between the restrictions imposed and the object sought to be achieved. If there is a direct nexus between the restrictions and the object of the Act, then a strong presumption in favour of the constitutionality of the Act will naturally arise. Given the colonial legacy of India, local firms and farms are still too weak in many sectors to compete with large foreign firms. Giving total accessto foreign investments would run many local enterprises out of business, leading to loss of jobs and livelihoods. To retain a meaningful measure of sovereignty over national resources and economic activity, India require the right to limit the degree of foreign ownership overall and particularly in crucial resources (such as land) and sectors (such as finance). In order to avoid a structural problem in the balance of payments, Indian Government and the State Governments hould have the ability to regulate foreign investments in such areas as equity share (so that some of the profits will be locally owned and retained), profit repatriation (so that there is sizable reinvestment of profit) and import limitation (to prevent excessive import of capital and intermediate goods). Similarly in order to develop local enterprises (including small farmers), Indian Government and the State Governments must have the right to promote their growth through subsidies or preferential policies, at least until such time when they can compete on more equal terms with the larger foreign firms. Removing the right to treat locals more favourably could well foreclose the possibility of Indian domestic enterprise development, and perpetuate or worsen dependence on foreign flrrns'", Based on the foregoing it appears that together with the State Govt. the aforesaid

reasonable restriction may be imposed on multi brand retailers having FDI without being violating the Article 301. The domestic multi brand retailers should not be made subject to the additional conditions.

8. What additional steps should be taken to protect small retailers? Should an exclusive legal and regulatol)' framework be established to protect their interests? Is a Shopping Mall Regulation Act required? Does this require intervention at national level or should this be left to the States?
I am in agreement with the suggestion of Ninetieth Report of the Standing Committee on Foreign and Domestic Investment on retail sector in so far as enactment of Shopping Mall Regulation Act is concerned.

9. The present public distribution system provides a valuable safety net to vulnerable sections of society. To ensure that the integrity of the PDS system is not weakened and buffer stock is maintained at the desired level, should Government reserve the right of first procurement for a part of the season or put in place a mechanism to collect a certain amount of levy from private traders in case the level of buffer stock falls below a certain level?
The Govt. should reserve the right of first procurement for a part of the season.

10. How should compliance be ensured with the above stipulations? Should a centralised agency, to be nominated by the State Governments concerned, be empowered to grant permissions to every outlet to be opened? The onus of proving compliance with these conditions could rest with the concerned retail chain. The chains could submit an annual statement to such State Government agency providing proof of compliance. Should this agency be empowered to monitor compliance of the present cash and carry outlets too?
There has to be a centralized agency which regulates the stipulations above in consultation with the relevant State Govt. State Govt. based on the agreed and approved framework should be allowed to grant the permission for Store opening. The chains should submit an annual statement to such a centralised agency providing present cash and carry outlets too. proof of compliance of the conditions. The centralised agency should be empowered to monitor compliance of the

11. The penalty for non compliance could include cancellation of approvals as well as denial of future permissions for such activities. What additional penalties could be levied? Should civil penalties be imposed? Or criminal? Or both?
Civil penalties must be imposed. The Govt. may consider imposing financial fine not exceeding ~ 1,00,00,000.

References
II iii lv

I htlp://rru.worldbank.orgfdocuments/publlcpollcyjournaI/273palmade_anaylotas.pdf www.in!ormaworld.com!lnd.>r/90845745lJ.pd/

www.asiancorrpetitionforum.or9/._/01~S5-01-AIJan..lOFeJs.doc
IMVW.QSian,orrpetlt;onfo,um.org/._/Ol-S5-01-Allan~OFels.doc ZOnls.doc

v www.asiancompetItJon!orumDrgj../Ol-SS-Dl-Allon vi htlp://www.twnslde.org~ll!t~le/pli-en.htm vii htlp://www.twnside.org~gftltle/p1Icn.htm

Disclaimer:

The views expressed herein are personal views of the Author and not those of the employer

of the Author.