BALANCING ACT: LOCAL SOURCING MANDATES IN INDIA'S EVOLVING RETAIL LANDSCAPE
As India continues to liberalize its FDI policies, maintaining a balance between global competitiveness and local economic development will be crucial for sustained growth and mutual benefit
The regime governing the Single Brand Retail Trading sector (‘SBRT’) in India includes the Foreign Exchange Management Act, 1999 and subordinate rules made under it such as the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’) and various Press Notes issued by the Government of India (‘Government’). SBRT refers to the business model wherein products are sold under a single brand name, both domestically and internationally. Brands such as Zara, Uniqlo, and Apple operate under this framework in India.
At the heart of these regulations lie local sourcing norms (‘LSN’), which are applicable to SBRT entities receiving foreign direct investment beyond 51%. The LSN are designed to integrate global brands into India’s economic fabric while bolstering local industries. This article explores the evolution, implications, and strategic considerations of local sourcing norms within India’s SBRT sector.
Evolution of Local Sourcing Norms
The journey of LSN in India’s SBRT sector has been marked by progressive amendments aimed at balancing the influx of foreign capital with support for local industries:
• Initial Conditions: Introduced in 20121, SBRT entities were required to mandatorily source 30% of the value of products sold from Indian small industries2 or village and cottage industries, etc. In 20133, SBRT entities were required to mandatorily source 30% of the value of products purchased (as opposed to the previous quantum being in respect of total value of goods sold) to be done preferably from Micro, Small and Medium Enterprises (‘MSME’s)4 or village/cottage industries, etc.
• Liberalization: In 20175, the LSN were relaxed for entities undertaking SBRT of products that have ‘state-of-art’ and ‘cutting-edge’ technology wherein local sourcing is not possible. Such companies were exempted from compliance with LSN for 3 years from commencement of the business (opening of its first store). This relaxation could be availed by a company by obtaining approval of a committee of the Secretary of DIPP, representatives from NITI Aayog, relevant sectoral administrative ministry and independent technical expert(s).
In 20186, the LSN were amended to be met by the SBRT entities by averaging their total purchases over 5 years from when they started their business (date of opening of the first store), and then on an annual basis. Further, the SBRT entity was permitted to ‘set off’ its incremental sourcing7 of goods for the purposes of meeting LSN from its global operations during the initial 5 years, against the mandatory sourcing requirement of 30% of purchases from India. After completion of this 5 year period, the entity was required to meet 30% sourcing norms directly towards its India operations on an annual basis.
In 20198, only a change in the ‘set off’ of LSN was made and all procurements made from India by the SBRT entity for that single brand would be counted towards local sourcing, irrespective of whether the goods procured are sold domestically or exported. The SBRT entity was required to continue to comply with the set-off norms after completion of the 5 year period.
• Current Framework: The current framework is basis the Consolidated FDI Policy of 2020 read with the NDI Rules, the salient features of the current framework are below:
o 30% sourcing requirement: The SBRT entity is required to ensure that 30% of the value of their goods is procured from India. Preference should be given to MSMEs, cottage industries and local artisans for this procurement. During the first five years of the SBRT business (whether through physical stores or e-commerce), this 30% procurement requirement is averaged over the five years starting from the beginning of the financial year in which the business commenced in India (i.e. opening of the first store or start of online retail, whichever is earlier).9 After this period, the 30% procurement requirement is applied annually. For calculation purposes, all procurements from India by the SBRT (for domestic sale or export) are considered.10
o Set-off of sourcing requirement: If the business sources goods from India for global operations11 (either directly, through group companies, or via third parties under an agreement), such sourcing can count towards meeting the 30% requirement.12
o Relaxation for ‘high tech’ products: The sourcing norms have been relaxed for entities undertaking SBRT of products that have ‘state-of-art’ and ‘cutting-edge’ technology wherein local sourcing is not possible. Such companies are exempted from compliance with the sourcing norms for 3 years from commencement of the business (i.e., opening of its first store). This relaxation could be availed by a company by obtaining approval of a committee of the Secretary of DIPP, representatives from NITI Aayog, relevant sectoral administrative ministry and independent technical expert(s). After the completion of the 3-year period, the sourcing norms will be applicable.
It is pertinent to note that the terms ‘state-of-art’ and ‘cutting-edge’ technology have not been defined by the extant foreign exchange regulations. The NDI Rules suggests that applications will be considered on a case-to-case basis. As per news reports, Apple India, Acer, Dyson, Lenovo (India) and OPPO Mobiles have previously sought this relaxation. However, Apple India’s application was rejected in 2016 on the grounds that the technology employed by it is not ‘cutting edge’.13 Subsequently, Xiaomi withdrew its application.14 There is no publicly available information on the status of the applications of any of the other brands that applied for this relaxation.
Conclusion
India’s SBRT sector presents a complex yet promising landscape for global brands. Navigating local sourcing norms requires strategic foresight, regulatory compliance, and proactive engagement with local stakeholders. As India continues to liberalize its FDI policies, maintaining a balance between global competitiveness and local economic development will be crucial for sustained growth and mutual benefit.
The current position of law is still riddled with ambiguities that hinder the overall purpose of the Government.15 Thus, while relaxations have been provided on paper, their practical benefit still sees challenges on account of lack of institutionalised framework and legislative ambiguity. Introducing clear-cut definitions of terms such as ‘single brand’ and ‘cutting-edge technology’ can go a long way in increasing ease of business. Further, currently the relaxation to the ‘state-of-the-art’ technology is provided on a case-to-case basis which is determined by an ad hoc committee. This further detracts from the purpose of the relaxation by increasing opacity.
As the regulatory landscape evolves, maintaining a balance between global competitiveness and local integration will be key to unlocking India’s vast retail potential. Ironically, the very norms intended to increase business for local industries from large corporates may cause international brands to establish operations elsewhere.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.
1. Vide Press Note 1 of 2012 and Press Note 4 of 2012, incorporated in the Consolidated FDI Policy of 2012
2. ‘Small industries’ here is defined an industry in which the total investment in plant and machinery does not exceed USD 1 million (without providing for depreciation) at the time of installation or at any point in the lifecycle of such industry.
3. Vide the Consolidated FDI Policy of 2013.
4. Section 7(9)(1) of the Micro, Small and Medium Enterprises Development Act, 2006 defines each of the distinct categories of industries as micro, small, and medium if: (i) the investment in plant, machinery, and equipment does not exceed INR 1 crore, INR 10 crore, and INR 50 crore, respectively; and additionally (ii) the turnover of these industries does not exceed INR 5 crore, INR 50 crore, and INR 250 crore, respectively.
5. Vide the Consolidated FDI Policy of 2017.
6. Vide Press Note 1 of 2018.
7. ‘Incremental sourcing’ is defined as the increase in terms of value of such global sourcing from India for that single brand (by value) in a particular financial year over the preceding financial year, by the non-resident entities undertaking SBRT entity, either directly or through their group companies.
8. Vide Press Note 1 of 2019.
9. Entry 15.3.1(e) of the Table, Schedule I, NDI Rules.
10. Entry 15.3.1(f) of the Table, Schedule I, NDI Rules.
11. In this context, ‘sourcing of goods from India for global operations’ is defined as the value of goods sourced from India in a particular financial year by the SBRT entity, either directly or through their group companies.
12. Supra. at footnote 9
13. Asit Ranjan Mishra, ‘Apple’s technology not cutting-edge for India govt’, Livemint, aaccessed at:
https://www.livemint.com/Companies/mdj84loYp7cE9p2dVAMCMK/Apple-said-to-hit-setback-in-push-to-open-retail-stores-in-I.html
14. ‘Xiaomi withdraws request seeking complete exemption from sourcing norms’, Indian Express, accessed at:
https://indianexpress.com/article/technology/tech-news-technology/xiaomi-withdraws-request-seeking-complete-exemption-from-sourcing-norms-2828562/
15. FDI in SBRT aims at attracting investments in marketing, production, encouraging increased sourcing of goods from India, improving the availability of goods for the consumers and enhancing the competitiveness of Indian enterprises through access to global technologies, designs and management practices.