‘FDI norms no quick fix for retail sector challenges’

Our Bureau Updated - September 18, 2012 at 01:16 PM.

The Centre’s announcement on foreign direct investment (FDI) in Indian retail could help existing retailers deleverage their balance sheets, according to India Ratings.

However, the complexities involved could delay this process, with benefits not expected to accrue in the next two to three years.

India Ratings currently has a negative outlook for the Indian retail sector, and the recent guidelines though positive in the longer term may not alleviate debt pressures in the short term.

India Ratings expects foreign investors to partner with established retailers in the Indian markets who have a footprint in the larger cities and towns given the complexity and dynamics of the Indian consumer markets.

However, these established retailers with their pan-India presence may have to explore options of re-organising their corporate structure along geographical lines and creating separate legal entities before attracting FDI investments.

There is unlikely to be a stable solution as the political will of the Indian States regarding the new policy may change. Besides, such splitting of retail business into separate legal entities to enable funding from foreign retailers may reduce the operational benefits of logistics and sourcing.

To the extent that the retailers are able to split businesses into legal entities, the benefit of deleveraging may accrue only to corporates who receive FDI funding.

According to the recent policy, foreign investors in retail JVs would be accountable for setting up back-end infrastructure in a time-bound fashion.

While certain aspects of this infrastructure, such as setting up and implementing the agricultural supply chain mechanism, may require approvals at the State level, procedural delays may prevent timely implementation. The time-bound implementation of guidelines and sole accountability for the foreign partner may increase the regulatory risks to such JVs.

Over a period of time, to the extent that such issues are addressed, the sector would benefit not only in terms of funding but also improved operational aspects.

Retailers with majority foreign holdings and having strong operational and legal ties with higher rated foreign partners (higher than the India Country Ceiling assigned by Fitch Ratings) could benefit in terms of ratings.

Priyanka.pani@thehindu.co.in

Published on September 18, 2012 07:46