DIPP may bypass cabinet on local sourcing clause

In a move that could fast-track Swedish furniture maker Ikea’s Rs. 10,500 crore investment proposal, the industry department will press for administrative notification of the time required to meet the 30% local sourcing requirement for foreign direct investors under the single-brand retail policy rather than seek Cabinet approval.

An official at the department of industrial policy and promotion (DIPP) said the time frame could be notified by the department, given that the Cabinet had set no deadline for the sourcing requirement to be met when it approved the proposal for 100% foreign investment in single-brand retail.
Foreign single-brand retailers need to source 30% of the value of their products from small and medium enterprises in India.

The industry department will press for notification of the time required to meet the 30% local sourcing requirement for single-brand retail FDI rather than seek Cabinet approval, which could fast-track Ikea’s entry. Mint’s Surabhi Agarwal tells us more.

“What has been approved by the cabinet can only be changed by the cabinet,” said the DIPP official under condition of anonymity. “This will be done administratively. We will do another round of inter-ministerial consultation after receiving Ikea’s response.”

Ikea has sought 10 years to comply with the norm. DIPP has sought further clarification from Ikea, including a review of this demand. The ministry of micro, small and medium enterprises (MSME) holds the view that the present cabinet decision, although it did not explicitly mention a timeframe, meant compliance with the sourcing requirement from day one. “It was part of our comments to the Cabinet which was accepted as such,” an MSME official said on condition of anonymity.

The DIPP official said the ministry may not have such issues if Ikea sought a shorter timeframe of, say three years, for compliance with the sourcing norm.

In reply to a questionnnaire sent by Mint, the Swedish retailer said it’s in the middle of the approval process with the government.

“Ikea firmly believes that entry in Indian market is a long term commitment when it comes to retail stores and development of the supply chain and sourcing. We have asked for some time as it takes time to develop long term sustainable business, to build capacities and build our sourcing base in India. This is applicable as well for other companies interested in investing in India,” it said, adding it is hopeful of starting retail operations in India.

According to experts, a softening of its stance by DIPP on the local sourcing norm could attract other foreign single-brand retailers. So far only Ikea and the British footwear retailer Pavers have submitted proposals under the policy allowing 100% foreign direct investment in single-brand retail.

The DIPP official said the department, however, has to move the cabinet to remove another clause requiring a firm applying for a venture with 100% overseas investment to be the owner of the brand, including its trademark.

The clause, which was specified in the cabinet approval, has restricted international retailers that are structured in such a way that their intellectual property is held by a separate firm while operations are conducted by holding firms in different countries. In Ikea’s case, an affiliate owns the brand.

Mint reported on 28 August that Pavers England, which was the first company to apply under the 100% single brand retail FDI policy, had transferred the brand name to the Mauritius-based company Pavers Foresight Smart Ventures Ltd that had made the application, to comply with this clause.

Other firms may find such an exercise difficult. In June, the Foreign Investment Promotion Board in the finance ministry rejected a proposal by Dutch firm Zara Holding BV on similar grounds. Zara had sought to set up a venture with 51% foreign equity participation for single-brand retail for its apparel brand Massimo Dutti, owned by one of its units.

DIPP is currently examining whether this provision in the retail policy needs to be changed. “By and large around the world, such (single brand retail) companies park their brand and intellectual property in one entity and their investments in a separate entitiy. If business is run in a particular fashion around the world, your policy has to be aligned to it,” the DIPP official said, signalling a likely softening of stance.

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