FDI (Foreign Direct Incestment) up to 100% is allowed for e-commerce activities, subject to the condition that such companies would divest 26% if their equity in favor of the Indian public in 5 years, if these companies are listed in other parts of the world. Further, these companies can engage only in business to business (B2B) e-commerce and not in retail trading, interalia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.
Some of the popular entry options for foreign players have been as follows:
1) Franchising of operations appears to be the most popular strategy followed by the international retailers for entry into India. Under franchising, the parent company lends its name and technology to a local partner, and gets royalty in return. In case a master franchisee is appointed at the national or regional level, the parent company gets the right to appoint local franchisees. Nike, Marks and Spencer, Pizza Hut and Mango are some of the best known foreign players who have adopted this setup of operations.
2) The other route or entry is a joint venture, whereby the international partner provides equity and support to the Indian investor. The Indian partner provides all local knowledge that is typically needed in such a venture. McDonalds and Reebok have adopted the joint venture route in India.
3) An international organization may also set up a manufacturing facility in India. Two key retailers who have adopted this strategy include Benetton and Bata.
4) On the other hand companies may also set up distribution in offices India and thereby trade in the country through local Indian retailers. Swrovski and Hugo Boss operate in India through distribution offices. Metro Cash has entered into the county by way of wholesale trading.
While it is obvious that the benefits of a large organized retail sector are many, investments into the country need to ensure that it is consumer who gets a better product. It is argued that FDI will increase volumes in sales, which would translate into more manufacturing, more jobs in industry, and more prosperity. International experience has demonstrated that the only way that farmers can get better prices for their products is through improvements in the value added food chain. An organized retail sector can provide the forward linkages for mass marketing of processed and packaged goods. Organized retailing would generate employment, both direct and indirect, not withstanding the capital intensity of modern retail business it continues to be labor intensive as well. It would also lead to creation of indirect employment in support activities throughout the supply chain, starting from producers to packaging storage, transport and other logistic services.
It is further believed that far from leading to an influx of imported goods, foreign companies would source most of their items domestically and would in fact, use quality Indian products to stock thousands of their outlets in foreign countries, thus giving a fillip to our manufacturing as well as export. Transfer of technology to ventures would ensure adherence of quality standards, good marketing production techniques and introduction of global best practices in management. This would result in the integration of Indian manufacturing with the global supply chain.
Those against the opening up of the retail sector to FDI argue that the global players come with deep pockets. This is believed to be unfair to the domestic retail industry. There are apprehensions in certain quarters that FDI in retailing would lead to unfair competition and ultimately, result in large scale exit of domestic retailers, especially small family managed outlets. There is also the fear that global retail chains would use India as a dumping ground for sub-standard or outdated products. The Indian advantage is that it is amongst the least saturated of all major global markets in terms of penetration of modern retailing formats.
The benefits from FDI do not accrue automatically and evenly across countries and sectors. In order to reap the maximum benefits from FDI, there is a need to establish a transparent, broad and effective enabling policy environment for investment and to put in place, an appropriate framework for its implementation.