By Bibhudatta Pradhan and Malavika Sharma
(Updates with comment from analyst in 10th paragraph.)
Nov. 25 (Bloomberg) — India approved allowing overseas companies to own as much as 51 percent of retailers selling more than one brand, paving the way for global companies such as Wal- Mart Stores Inc. and Tesco Plc to own stores.
Overseas companies must invest at least $100 million, half of which has to be spent on developing back-end infrastructure, Commerce Minister Anand Sharma said in a statement presented to parliament today. India’s cabinet yesterday eased retail ownership rules, including permitting 100 percent foreign holding in single brand stores.
India’s decision to allow overseas ownership in retail will create up to 10 million jobs and give farmers better prices, Sharma said. Wal-Mart, Carrefour SA and Tesco seek to step up their presence in the world’s second-most populous nation to tap a market estimated by Business Monitor International to double to $785 billion by 2015 from $396 billion this year.
“This is possibly the most exciting thing that has happened in retail in India,” said Hemant Kalbag, who heads the consumer and retail practice for Asia at A.T. Kearney in Mumbai. “This is probably the next big wave of change in organized retail in India.”
Overseas retailers will be required to purchase at least 30 percent of goods sold in the ventures from small industries, Sharma said. Stores will be permitted only in 53 cities with a population of 1 million or more, and the government will retain the first right to buy farm products, he said.
‘Important First Step’
The government’s move is “an important first step,” Wal- Mart Asia President Scott Price said in a statement. The retailer looks forward to “playing a key role” in India.
Asia’s third-biggest economy permitted foreign retailers to own wholesale stores in 1997. Policy makers have been debating ownership rules in retail for at least seven years.
Wal-Mart has set up 14 such stores through a joint venture with billionaire Sunil Bharti Mittal’s Bharti Enterprises to gain a foothold in India, while Metro AG operates six wholesale stores. Carrefour opened its first outlet in December.
“This legal evolution should contribute to modernize Indian food supply chain and to fight against food inflation for the benefit of Indian customers,” Carrefour said in an e-mailed statement. The Boulogne-Billancourt, France-based retailer will wait for final regulations, it said.
India’s decision may prompt expansion of existing joint ventures and trigger acquisitions, said Bryan Roberts, director of retail research at Kantar Retail in London. Still, the size of the opportunity may be “overstated,” he said.
“A lot of retailers have already expanded and found that there’s not enough middle-class shoppers around at the moment,” said Roberts.
‘Win for Consumers’
India’s retail industry will get $8 billion to $10 billion in fresh investments over the next five to 10 years, Kishore Biyani, managing director of Pantaloon Retail India Ltd., said in an e-mailed statement yesterday. Pantaloon, which operates more than 150 Big Bazaar supermarkets across 90 cities and towns, also has apparel and consumer-electronics outlets.
“It is a big win for consumers as they will have more choices,” said Biyani. “It’s a win for small industries as they will have more retailers creating markets for their products” and farmers will benefit from better prices, he said.
Pantaloon climbed 16 percent, the biggest gain since May 2009, to 233.95 rupees at the close in Mumbai trading. Shoppers Stop Ltd. rose 6.2 percent, and Trent Ltd., Tesco’s India partner, advanced 8.6 percent, the most since August 2010.
The decision to permit foreign retailers came as Prime Minister Manmohan Singh’s parliamentary ally the Trinamool Congress opposed the proposal. The main federal opposition Bharatiya Janata Party was also against the move.
“Small and medium retailers, which employ a large number of people, will be affected,” Arun Jaitley, a BJP leader, said in New Delhi yesterday. “We oppose it completely.”
Overseas investment in the retail industry may help slow the pace of price gains, Reserve Bank of India Governor Duvvuri Subbarao said in the northern city of Chandigarh today. “Its important not only for raising overall growth but also important for containing inflation,” said Subbarao.
India’s food inflation accelerated 9.01 percent in the week ended Nov. 12 from a year earlier, the commerce ministry said yesterday. The rate has stayed above 9 percent for 16 weeks.
‘Licking Their Lips’
Raj Jain, president of Wal-Mart India, said in April 2010 the company can help reduce prices by improving supply chain and infrastructure to cut waste. About 40 percent of fruit and vegetables in the country rot before they are sold because of a lack of cold-storage facilities and poor transport infrastructure, according to government estimates.
Bharti-Walmart, the local venture, buys fresh produce directly from about 1,200 farmers in Punjab, in northern India, Jain said in May.
“Foreign retailers must be licking their lips at this opportunity,” said Narayanan Ramaswamy, executive director at KPMG India, which advises retail companies. “It has to be one of the biggest opportunities in the world right now.”