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Brands take the franchise route to counter sourcing norms

Brands take the franchise route to counter sourcing norms 001Before January 2018, India allowed 49 per cent FDI in single brand retail trading (SBRT) under the automatic route. Funds beyond this limit, up to 100 per cent, required government approval. However, the government, with effect from January 2018, has allowed 100 per cent FDI in SBRT through the automatic route that does not require any approval. The FDI policy has laid down certain conditions that state that the sold products need to be of a single brand and they need to be sold under the same brand internationally.

SBRT covers products of non-resident entities only, be the owner of the brand or otherwise, either directly or through a legally tenable agreement executed between the Indian company adopting SBRT and the brand owner. For proposals involving foreign investment beyond 51 per cent, 30 per cent of the value of the goods needs to be sourced in India. Such an Indian entity is also allowed to sell through an e-commerce platform.

Brands prefer local franchise, distributors over SBRT

Although foreign investment in SBRT is permitted in India forBrands take the franchise route to counter sourcing norms 002 the last few years, most overseas brands are still sold through local franchises and distributors. For instance, Genesis Luxury Fashion, a marketing and distribution company of Reliance Group, has brought several global iconic brands, such as Bottega Veneta, Giorgio Armani, Hugo Boss, Emporio Armani, Jimmy Choo, Paul Smith, Tumi, Burberry and others, in India.

The restrictions and conditions for retail trading under the FDI policy are forcing foreign companies to opt for the franchise route to enter India. Under this route, a global retailer partners with an Indian company which pays a fee to the brand owner besides marketing and launching it in India. In the recent past, Gap, Aeropostale and Ipanema are few of the brands that have entered India through franchise agreements.

Dealing with challenge of local sourcing

Post-January 2018, Indian subsidiaries of global retailers such as Apple, that have an FDI of more than 51 per cent, do not require a history of local sourcing for upto three years if it is undertaking SBRT of products. This requirement of local sourcing was challenging for entities trading in high-technology products as few brand-owners manufacture and trade in products made with materials not sourced in India due to various factors and constraints. The government has formed a committee to determine if this product qualifies as having ‘state-of-the-art’ and ‘cutting-edge’ technology.

Another way of dealing with this standard requirement for mandatory sourcing is to permit up to 51 per cent and find a local partner for the remaining 49 per cent. This structure relieves the Indian brands from the burden of local sourcing as the majority investment comes from a foreign brand-owner. Overall, there are certain key areas such as sourcing norms in cases of high-tech products retailers, as well as the question of sub-brands, that need to be addressed. Until then, foreign brand owners prefer to sell their products through the franchise or distribution route.

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