How global retail majors flout FDI ban

Foreign chains like Wal-Mart and Tesco are not allowed to do retailing in India. So how come Bharti Enterprises is partnering them? CNBC-TV18 finds out how foreign retail chains can skirt the FDI ban.

Telecom services leader Sunil Bharti Mittal is growing vegetables for exports — the kind of stuff that will also drive his privately owned retailing venture. For Mittal, it is a toss-up between Wal-Mart and Tesco, it is not clear which, but what is clear is that the tie-up will be with a foreign retail giant.

But FDI is allowed only in single brand retailing — the multi-brand multiple product retailers like Wal-Mart and Tesco cannot sell directly to consumers. This is where the Indian partner comes in. Sources who were until recently in the FIPB say that the Indian partner can be the front end… the consumer interface, while leaving the back end, that is the inventory management and the sourcing to foreign players.

This is a high technology and high skill business. The technologies and expertise that a giant like Wal-Mart allows it to offer low prices every day.

Through a combination of franchisee and wholesale cash and carry, the global retail majors can skirt around restrictions. There is no value or volume restriction on wholesale cash and carry, it is just that they cannot sell directly to consumers, but they can supply to retailers in small quantities.

This is the route that Shoprite, a South African retailing chain has taken in Mumbai. It is also likely to be the route that Sunil Bharti Mittal will follow, though there is no confirmation either from the company or the government. Foreign retailers will not mind, because they know that current FDI restrictions will not remain for long.

Parties across the political spectrum, the Left parties and the BJP are opposed to FDI and retailing. "What is permissible is laid down in the regulations. So long as they do not do retailing, whatever model they follow, investment in logistics, cold chain, is perfectly alright," says commerce minister, Kamal Nath.

It is not just countries like the US that are pushing for liberalisation, even the Indian government is keen on allowing FDI in retailing, so that an improved supply chain can get Indian products to perch on retail shelves the world over.