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Rasul Bailay & Shambhavi Anand, The Economic Times

New Delhi, 11 November 2015

In a major leg-up for global brands such as Apple and Rolex, India has relaxed a mandatory local procurement condition for high-tech companies and allowed mass brands including IKEA to comply with such sourcing norms from the day their first store opens rather than from when the first tranche of investment is made.

The government on Tuesday also allowed foreign single-brand entities to sell products through online channels provided they have permission to sell through brick-and-mortar stores.

The relaxation in foreign direct investment norms is set to cheer companies including Apple, which was earlier expected to source 30 per cent of its products locally. ET had reported earlier this month that Apple had sought relaxation of the sourcing norm to set up stores in India, while IKEA wanted more time to meet the requirement.

"It is seen that in certain high technology segments, it is not possible for retail entity to comply with the sourcing norms. To provide opportunity to such single brand entities, it has been decided that in case of 'state-of-art' and 'cutting-edge technology,' sourcing norms can be relaxed subject to government approval," according to an official notification on Tuesday.

"To start counting the time to comply with the 30 per cent local sourcing norm from store opening will support brands in building long-term sustainable supply chains that are good for India, good for the businesses and will enable better prices to the Indian customers," an IKEA India spokesperson said in an email. "Today's decision will allow the Indian IKEA customers to interact with the brand IKEA in the same way as all IKEA's global customers."

The policy changes will pave the way for single-brand retailers such as Swedish clothing company Hennes & Mauritz to tap India's growing ecommerce business.

"FDI policy on the SBRT (single brand retail trading) provides that retail trading, in any form, by means of e-commerce, would not be permissible. It has been decided that an entity which has been granted permission to undertake SBRT will be permitted to undertake ecommerce activities," the latest policy paper said.

Proposals of companies including Tommy Hilfiger and Furla were stuck with the Department of Industrial Policy & Promotion for years because they had planned to set up their own stores and sell products through franchisees, which wasn't allowed. Now, such companies can engage in both wholesale trading - which is needed for sales through franchisees - and retail trading as long as it follows the norms for both segments.

"Fantastic relaxation. Different companies have different business models. For south India, franchisee works and north India, may be you want to own your own stores and eastern side you wanted to do wholesaling because wholesalers were not good. Earlier, you could not do all that. Now the same entity can do all these activities and keep the business arms separate," said Baljit Singh Kalha, a partner with Titus, the law firm that assists IKEA, Furla and H&M.

Indian manufacturers with foreign investment that are controlled by Indians can now sell their products through online channels provided they make 70 per cent of the output and source the remainder from local companies.

This has been a long-standing demand of ethnic products retailer Fabindia, which has FDI and wanted to sell online. Earlier, such companies could sell online only if they manufactured 100 per cent of their products in-house.

"This is a great Diwali gift from the government to the retailers. What they have done is provided a major boost to 'Make in India' and also the ministry has recognised the fact that retail will operate across multiple channels. This will be a huge fillip to 'Make in India' as companies like ourselves manufacture 70 per cent of the products ourselves," said William Bissell, managing director of Fabindia.

"There are several changes for companies in the retail sector. For instance, the domestic sourcing requirement has to be reckoned from the opening of first store and not from the first day of operations. Technology-oriented products and high-end luxury brands may be able to skip the domestic sourcing norms completely, subject to case-to-case approvals. Another opening is for indigenous brands to receive foreign investments that can enable them to strengthen their operations," said Devangshu Dutta, chief executive officer of retail consultancy Third Eyesight.

(Published in The Economic Times.)