India poised to relax laws on foreign direct investment

New guidelines could allow multi-brand Western firms to scale up operations

The Indian government could be poised to open the door to foreign direct investment (FDI) in the country, in a move that could have huge ramifications for the ambitions of companies, including Tesco and Wal-Mart, in the burgeoning Indian economy.

Speculation is mounting that a relaxation of FDI rules may be forthcoming after the Indian Ministry of Commerce issued revised guidance on what constitutes a foreign holding in an Indian company.

Under the new guidelines, as long as a company is more than 50 per cent-owned by Indians, the government would consider any investment into that company to be Indian equity, regardless of whether the sector is one in which FDI has been capped, such as multi-brand retail. Current FDI rules only allow single-brand retailers, such as Germany's Metro, to open stores, while multi-brand retailers, such as Tesco and Wal-Mart, are only allowed to deliver supply chain and back-office services.

David Roberts, partner and head of leisure and retail at Olswang, the law firm, said: "Effectively, provided the relevant company is an Indian company then FDI restrictions could fall away."

For example, if a Western retailer formed a joint venture with an Indian firm that company could potentially acquire an Indian-based store group and run all of its operations – including "front door" retailing services, such as store operations. It could also lead to the acquired company being rebranded using the Western retailer's branding.

Last year, Tesco signed an exclusive franchise agreement with Trent, Tata's retail arm, to provide extensive retail and technical services to support the development of its hypermarket business, Star Bazaar. But if the new guidance comes to fruition, it may seek to revise the terms of the deal, Mr Roberts said.

Tesco declined to comment. But it is understood that it and other UK companies have been seeking clarification over the new guidance issued by the government.

Kishore Biyani, the managing director of the retail giant Pantaloon Retail, said at the weekend: "This opens the way for front-door entry of foreign direct investment in organised retail."

However, industry sources remain sceptical that the Indian government is committed to liberalisation. It has been suggested that a simplification of FDI norms is largely aimed at rescuing some domestic companies in sectors, such as telecoms and civil aviation, that are facing a financial crunch. In particular, sources said that an easing of the entry restrictions for foreign retailers would be political dynamite and deeply unpopular among the hordes of Mom and Pop shops.

The uncertainty around the measures, which emerged last week, is compounded by the fact that the country is set to go to the polls. Elections are expected in April and May, with the ruling United Progressive Alliance government likely to face staunch opposition from left-leaning parties if there is a relaxation of the FDI rules. In yesterday's Budget, the Indian government said: "To provide an impetus to foreign investment in India, guidelines are being further simplified and made homogeneous and consistent across various sectors."