The Sourcing Clause - Where there is a will, there is a way!

The Department of Industrial Policy and Promotion (DIPP) notified a few days ago the reviewed FDI policy allowing up to 100% in single brand retailing. There is a condition though. The policy is through the government approval route and not through the automatic route as in the case of cash and carry. The foreign investor ought to be the owner of the brand and the brand should be sold internationally. Now the catch is here. The policy states, “In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian ‘small industries / village and cottage industries, artisans and craftsmen’. 'Small industries' would be defined as industries, which have a total investment in plant & machinery not exceeding US $ 1 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. The compliance of this condition will be ensured through self-certification by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts, which the company will be required to maintain.”

Often we think of procurement as sourcing the whole merchandise and one may wonder how big brands will manage to procure to the extent of 30% from small industries when they operate as a single brand in India – especially when it comes to complying with the DIPP's clear definition of ‘small industries’ detailed by dint of its specified value of investment in plant and machinery! The question in many minds may center around the thought of how lifestyle garment retailers are going to fulfill the mandatory sourcing of 30% from small industries, artisans and craftsmen. Job work procurement and sourcing could be an easy solution to many single brand retailers intending to invest 100% in India. The services of established small industry artisans and skilled craftsmen could be availed to get the embellishments done, or get the trims finished, to think of an instance. The other form of outsourcing from such small industries could be the ironing and folding tasks in garments. A plethora of small activities in the manufacturing process could be sourced from small artisans and craftsmen. For, where there is a will, there is a way!

After this announcement, the DIPP secretary was quoted as saying that he will pay heed to concerns if any, when expressed by brands if they face any issue with the mandatory procurement of 30% merchandise from the small industries within the country. The Government of India has a large heart for retailing in India. Mandatory conditions may not be seen as hurdles by a few progressive retailers. It is also worthwhile to note that many existing joint ventures and franchise arrangements to retail foreign brands in India have expressed that they would continue to work with the same arrangements with their partners despite this revised FDI notification. Let’s wait and see how many new proposals are going to be received this year by the DIPP!

- Dr. Gibson G. Vedamani