Sunday, 13 July 2014

ATTENTION PROSPECTIVE FOREIGN INVESTORS WILLING TO EXPLORE BOTTLING AND DISTRIBUTION OF BIO-GAS IN INDIA: In the Union Budget 2014-15, Government of India (“GOI”) has decided to allow manufacturing entities to sell their products through retail trading mechanism including through e-commerce platforms without any additional approval. This provision is a marked departure from the existing norms which prohibited single-brand FDI entities from undertaking e-commerce retail trading. India has already allowed 100% FDI (in automatic route) for entities engaged in manufacturing, except for manufacturing of items reserved for MSMEs and defence items. However, FDI entities engaged in manufacturing and distribution of products as “single brand”, are not allowed to have FDI beyond 49% under automatic route. Additionally, FDI entities are not permitted to undertake any B2C commerce through e-commerce platforms although 100% FDI is permitted (in automatic route) in e-commerce activities under B2B model.

Although the intent of the GOI is positive, however, the mechanism it should be clarified further. By way of example, under the extant FDI framework, a foreign entrepreneur (say FY Limited doing bio-energy business overseas under “FY” brand) intending to incorporate a single Indian company to be engaged in bottling and distribution of bio-gas cylinders for domestic and commercial use will encounter the following situations:

Bio-gas production the name of “FY” (not for retail distribution)
Manufacturing activity and 100% FDI is allowed. Produced gas to be sold only through wholesale/bulk method. Advantage: Possibility of incorporating WOS. Disadvantage: No direct consumer interface.
Bio-gas production in the name of “FY”  (for retail distribution)
Manufacturing activity for the purpose of retail sale. Only 49% FDI is allowed under automatic route. The foreign entrepreneur will have to look for an Indian partner. Raising FDI beyond 51% will require GOI approval plus sectoral of conditions like compulsory procurement from SMEs etc. Advantage: Creating brand value in India. Disadvantage: Greater dependability on Indian partner on operations and management.

In light of this, expect GOI to come out with a press release dealing comprehensively with production and distribution of single brand products. It is also expected that GOI will further relax bio-gas bottling sector from stringent conditions of single brand product retailing as successful bio-gas companies can contribute in big way towards rural & urban development, agriculture and saving of public expenditure. 

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