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REPORT NO. 250 PARLIAMENT OF INDIA RAJYA SABHA DEPARTMENT-RELATED PARLIAMENTARY STANDING COMMITTEE ON INDUSTRY TWO HUNDRED AND FIFTIETH REPORT ON IMPACT OF FOREIGN DIRECT INVESTMENT (FDI) IN MULTI-BRAND RETAIL ON MSME SECTOR PERTAINING TO THE MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES (PRESENTED TO THE HON’BLE CHAIRMAN, RAJYA SABHA ON 23.07.2013) (FORWARDED TO THE HON’BLE SPEAKER, LOK SABHA ON 23.07.2013) (PRESENTED TO RAJYA SABHA ON 06.08.2013) (LAID ON THE TABLE OF LOK SABHA ON 06.08.2013 ) Rajya Sabha Secretariat, New Delhi July, 2013/Ashadha, 1935 (Saka) PARLIAMENT OF INDIA RAJYA SABHA DEPARTMENT-RELATED PARLIAMENTARY STANDING COMMITTEE ON INDUSTRY TWO HUNDRED AND FIFTIETH REPORT ON IMPACT OF FOREIGN DIRECT INVESTMENT (FDI) IN MULTI-BRAND RETAIL ON MSME SECTOR PERTAINING TO THE MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES (PRESENTED TO THE HON’BLE CHAIRMAN, RAJYA SABHA ON 23.07.2013) (FORWARDED TO THE HON’BLE SPEAKER, LOK SABHA ON 23.07.2013) (PRESENTED TO RAJYA SABHA ON 06.08.2013) (LAID ON THE TABLE OF LOK SABHA ON 06.08.2013 ) ) Rajya Sabha Secretariat, New Delhi July, 2013/Ashadha, 1935 (Saka) C O N T E N T S PAGES 1. COMPOSITION OF THE COMMITTEE ………………………………………… ( i ) 2. INTRODUCTION ………………………………………………………………… (ii) 3. REPORT …………………………………………………………………………… 4. RECOMMENDATIONS/OBSERVATIONS OF THE COMMITTEE – AT A GLANCE…………………………………………………………………………… 5. MINUTES………………………………………………………………………….. COMPOSITION OF THE COMMITTEE (CONSTITUTED W.E.F. 31 ST AUGUST, 2012) RAJYA SABHA 1. Shri Tiruchi Siva — Chairman 2. Shri Narendra Budania 3. Shri Ashk Ali Tak 4. Shri Ananda Bhaskar Rapolu 5. Shri Natuji Halaji Thakor 6. Shri Basawaraj Patil 7. Prof. S. P. Singh Baghel 8. Shri Vivek Gupta 9. Shri Nandamuri Harikrishna 10. Shri M.P. Achuthan LOK SABHA 11. Dr. Rattan Singh Ajnala 12. Shri Khiladi Lal Bairwa 13. Shri N.S.V. Chitthan 14. Smt. Poonamben Veljibhai Jat 15. Shri Ram Singh Kaswan 16. Shri Hassan Khan 17. Shri Kaushalendra Kumar 18. Shrimati Ingrid Mcleod 19. Shri Bharat Ram Meghwal 20. Shri Somen Mitra 21. Shri P.R. Natrajan 22. Shri Gorakhnath Pandey 23. Shri Jayaram Pangi 24. Shri R. K. Singh Patel 25. Shri B. Y. Raghavendra 26. Shri Gopal Singh Shekhawat 27. Shri Ijyaraj Singh 28. Ch. Lal Singh 29. Shri Kirit Premjibhai Solanki 30. Shri E.G. Sugavanam 31. Shri Ramsinh Rathwa SECRETARIAT 1. Shri S.N. Sahu, Joint Secretary 2. Smt. Sunita Sekaran, Director 3. Shri Roshan Lal, Joint Director 4. Shri Ranjan Chaturvedi, Assistant Director (i) INTRODUCTION I, the Chairman of the Department-related Parliamentary Standing Committee on Industry, having been authorized by the Committee, hereby present this Two Hundred and Fiftieth Report on impact of Foreign Direct Investment (FDI) in retail on MSME sector pertaining to Ministry of Micro, Small and Medium Enterprises. 2. The Committee heard the representatives of Ministry of Micro, Small and Medium Enterprises, Department of Industrial Policy & Promotion. The Committee also sought the views of public through Press-Release and heard representatives of select industry associations/experts on the issue. 3. The Committee in its meeting held on 22 nd July,2013 considered and adopted the report. TIRUCHI SIVA Chairman Department -related Parliamentary Standing Committee on Industry New Delhi, July, 2013 (ii) REPORT Foreign investment denotes investment made by a non-resident entity in an enterprise in the host country. This can happen through FDI (Foreign Direct Investment) and Foreign Portfolio Investment by FIIs (Foreign Institutional Investors) or private equity funds etc. The FDI denotes foreign capital with a longer term perspective and often invested in productive enterprise and may seek managerial control over enterprise. Of many other modes of getting external finance, FDI is preferred mode due to its long term stable nature. It is less volatile and does not generate or add to debt liabilities for the host country. 2. In order to discount unwarranted implications, in India the FDI flow is allowed either through Government route or automatic route. The sectors not included in automatic route need Government's approval and proposals are considered by inter-ministerial Foreign Investment Promotion Board under M/o Finance or Department of Industrial Policy and Promotion (DIPP). Sectors in which FDI is prohibited include lottery, chit fund, gambling/betting, agriculture and plantation. 3. In November, 2011 the Government of India decided to permit 51% foreign direct investment in the multi brand retail sector. The decision was deferred for want of broader consultation and discussion on the issue. Subsequently in September, 2012 the Government finally announced the decision through the press note no. 5 (2012 series). A minimum investment of US $ 100 million, is required to enter into multi-brand retail business, of which 50% will be in the back-end operations. The Back-end operations will not include investment in land, rental or front-end stores. Among other things the press note also mentioned: “At least 30% of the value of procurement of manufactured/processed products purchased shall be sourced from Indian ‘small industries’ which have a total investment in plant & machinery not exceeding US $ 1.00 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. This procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the manufactured/processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis.” The Policy further states: "Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Mater/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking. In States/Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The locations of such outlets will be restricted to conforming areas, as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking." 4. The Committee decided to examine the impact of recent decision to allow 51% FDI in multi-brand retail, on the MSMEs. The Committee held meetings on the issue on 28th December, 2012, 14thMay, 2013 and 11th June, 2013, during which it interacted with representatives of Ministry of MSME, Department of Industrial Policy and Promotion and representatives of select industry associations and experts on the subject. The Committee also invited the views and opinion from public at large through an advertisement published in prominent national and regional dailies. 5. Regarding definition of small industry with investment of US $ 1 million in Plant and Machinery, the Committee took note of Budget declaration (2013-14) to extend non tax benefits for next three years after a unit graduates out of its category. The Committee was informed by the Secretary, DIPP that process of taking approval from competent authority to amend existing policy provision to align it with budget declaration, was under process. 6. The Committee was informed about the gradual evolution of the policy on FDI. It was informed that 100% FDI, through Government approval route, in wholesale trading was allowed since 1997. In 2006, the condition of Government approval was removed and FDI in wholesale sector was allowed through automatic route. Also in 2006, 51% FDI with Government approval was permitted in single brand retail trading. As per the recent policy decision of 2011, 100% FDI has been permitted in the single brand retail trading and 51% in the multi-brand retail trading, both subject to certain conditions. 7. It has been informed to the Committee that the FDI policy is covered under schedule I of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulation 2000. And that the relevant provision under the recent policy decision has been notified under the said Regulation. Any violation of the condition prescribed in the extant policy will amount to violation of Foreign Exchange Management Act (FEMA) Regulation and the RBI and Enforcement Directorate could take necessary action. The Committee was also informed that any violation of FEMA provisions will involve penalties up to three times the sum involved in violation or up to Rs. 2 Lakh in case amount was the not quantifiable. 8. The Draft XII Plan document presents an optimistic scenario of FDI that “ Deeper pockets and technology, and the compulsions to invest in supply chain development which is not there for domestic modern retail may accelerate investment in logistics, quicken consolidation of retail trade and create new proprietary supply chains.” 9. Emphasizing the positive impact of FDI particularly multi-brand retail sector, the DIPP informed that the FDI will bring more investment in the economy that will benefit domestic companies. It will introduce new technologies, internationally accepted managerial practices and thereby facilitate gradual integration into global market. It was also informed that provision of 30% mandatory sourcing from small industries will encourage value addition in small scale manufacturing sector. This will link the domestic small industries with the global retail chains and will increase export from small scale sector.