With the Foreign Investment Promotion Board clearance for Tesco’s $110-million joint venture with Trent Hypermarket making a critical concession in terms of allowing foreign retailers to buy brownfield retail ventures in India — as long as they also commit to investing in fresh greenfield stores within three years — the stage is set for several other foreign retailers to enter into tie-ups with existing Indian organised retail chains.
While this concession was not forthcoming at the time Wal-Mart was negotiating with the commerce ministry — this would have allowed the American retail giant to use Bharti’s Easyday retail stores in the initial years — the government appears to have changed its stance after no global retailer came forward to set up shop in India.
Tesco will be the first multi-brand global retailer to set shop in the country after the government in September 2012 allowed foreign retailers to invest in India in partnership with Indian firms subject to an equity cap of 51%. Wal-Mart was expected to be the first global retailer to set up front-end stores given it had a 50:50 joint venture with Sunil Mittal’s Bharti Enterprises in the cash-and-carry segment since 2007. However, in October the joint venture was called off.
On Monday, the FIPB cleared the UK retailer’s $110-million (Rs 684 crore) proposal, which includes picking up a 50% stake in Trent Hypermarket. The world’s third-largest retailer, Tesco already has a cash-and-carry venture in India. Since the investment is below Rs 1,200 crore, Tesco does not require any more regulatory approvals. Only foreign investments above Rs 1,200 crore require the approval of the Cabinet Committee on Economic Affairs after the FIPB nod.
Since the government’s policy for foreign retailers comes attached with a string of conditions relating to back-end investment and sourcing from local small and medium enterprises, Tesco’s experience will be keenly watched by other global retail majors. The development would be seen as a big boost for the UPA government, which has been trying to convince foreign multi-brand retailers to invest in India. While several investments have been made in the single-brand segment, multi-brand retailers had so far not found the conditions attractive.
Tesco will initially use Trent’s existing 16 Star Bazaar stores but will, within three years, invest another $50 million in creating new facilities in Maharashtra and Karnataka. The joint venture firm would retail 15 product lines, which includes cereals, vegetables, fruit, wine and liquor