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India - FDI in multi-brand retail okayed by Indian parliament – but how keen are brand owners?

By Jack Ellis
December 12 2012

Last week, the Indian parliament voted to approve foreign direct investment (FDI) in multi-brand retail in the country, almost one year on since the limit on FDI in single-brand retail was removed. This potentially opens up major opportunities for leading retail chains such as Tesco, Wal-Mart and Carrefour – but stringent limitations and a mixed political reaction to the changes may result in a cautious approach from brand owners.

The Indian government announced that it would push ahead with stalled plans to introduce limited FDI in multi-brand retail back in September. Strong dissent from opposition politicians and from within the Indian National Congress-led ruling coalition resulted in the initiative being put to a parliamentary vote last week, which passed by 253 votes to 218 with several abstentions.

Though the new rules present game-changing opportunities for foreign brands, they come with some big catches. Foreign companies will have to invest a minimum of $100 million in their local partner enterprise, and will only be able to open stores in cities with a population in excess of one million. Moreover, individual state governments have the power to approve or dismiss the new framework, meaning that significant Indian cities may remain closed to foreign multi-brand retailers. Furthermore, growing controversy over Wal-Mart’s lobbying activities in the lead up to last week’s vote may yet disrupt the transition.

At the start of this year, India decided to do away with the existing 51% FDI limit in single-brand retail. This move paved the way for foreign single-brand companies to open their own stores in the country without needing to partner with a local firm. As with the recent multi-brand reform, the allowance of 100% single-brand FDI came with certain provisos – including the requirement that foreign companies setting up shop in India should source at least 30% of their goods from local ‘cottage’ industries if they were to exceed the old limit of 51% ownership.

The 30% rule was relaxed after IKEA – which is looking to make a major entry into the Indian market – asked the government to review the sourcing requirements. However, the restrictions also give rise to brand owner concerns that lack of supply chain oversight could lead to quality control and reputational issues. Some foreign brand owners have therefore avoided expanded FDI and have opted for alternative strategies for escalating their India presence. French hypermarket chain Auchan, for instance, has entered into a franchise partnership with Indian counterpart Max Hypermarket while both companies wait for state governments to approve the FDI rules that have already been passed at the federal level.

Nevertheless, brand owners will welcome the massive opportunity presented by the possibility of entering into joint ventures with Indian retailers. When partnering with local companies, brand owners should carefully construct and review contracts to avoid potential misuse of their trademarks. As suggested to WTR readers by Ranjan Narula of Ranjan Narula Associates, counsel should obtain signed documentation from local partners acknowledging the foreign company’s IP rights and requiring that the brand’s trademarks, trade dress and designs cannot be used inappropriately by any third party for their own manufacturing and marketing activities. “Furthermore, trademark counsel must be watchful that local partners, in developing their own brands, don’t use elements of the foreign brand,” he added. “There should also be acknowledgements on the labels of products that the brand is owned by a foreign company, and contracts should put in place a reporting mechanism in case misuse of the foreign company’s brand is found.”

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