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Wednesday 3 August 2016
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FDI POLICY in Retail Sector

FDI POLICY  in   Retail Sector

New Delhi :- One of the significant but less talked about change is allowing 100 percent FDI in completed projects for operation and management of townships, malls shopping complexes and business centres.It is important to note that FDI is permitted in only construction projects (i.e.Greenfield projects) and not in completed buildings. In other words, foreign funds can be brought in only for construction activities and not for purchasing existing buildings (except for certain exceptions provided). The Press Note 10 of 2014 permits FDI in completed projects for operation and management of malls and shopping complexes. This relaxation could, in particular, have a greater positive impact on the retail industry.To understand what impact this change could have on the retail segment, it is important to understand the dynamics of the retail real estate space. Despite the unpredictable off take in the retail space, shops retail  spaces offer one of the highest rental yields. This makes investment in retail space one of the favored options for investors especially the High Net worth Individuals (HNIs). Developers have traditionally been open to selling each retail unit shop in a large shopping complex or a mall independently to investors. A sizeable portion of the stores in large malls in the country especially in the NCR are strata-sold. The DLF City Center in Delhi was sold on ‘strata sale’ model. The ‘strata sale’ model for selling malls is quite popular in other south Asian countries including Singapore. The ‘strata sale’ model has its own problems. The fate of any retail outlet is dependent on the mall or the shopping complex in which it is present. The success of a mall or a shopping complex depends on a number of factors such as the design, location, anchor tenant, tenant mix and mall management. The developer of the mall could lose control over the mall in a ‘strata sale’ model affecting various factors impacting the retailers business. For instance, presence of a luxury brand next to a low-end store or presence of two competitors next to each other could put off customers. If individual owners of stores take decisions about tenants these situations could very well exist.

Several malls that have strata titles have low occupancy. The most important bane of these malls is the absence of proper mall management. And the most significant fall out of this is established domestic and international retailers staying away from the malls all together. The participation of mall management companies streamlines mall operations to a great extent. With 100 percent FDI being permitted in complet ed projects for operation and management of malls shopping complexes, some of these ‘strata title malls’ could have a better future.

Importantly, with 100 percent FDI being permitted in completed projects for malls, some of the foreign funds could buy out the existing small investors or HNIs and get the malls out of strata titles. Interestingly, some of the developers, have in the past as a risk mitigation strategy, sold a portion of the mall to investors and retained majority of the mall space. Some of these developers could very well raise foreign funds to buy out the investors and regain ownership over the malls.