The Competition Commission of India (CCI) has cleared British retail major Tesco's purchase of a 50 per cent stake in Tata Group firm Trent Hypermarket, the first FDI transaction in multi-brand retail since the sector was opened up in 2012.
The approval by the fair trade regulator comes when a political debate over foreign direct investment (FDI) in multi-brand retail has been revived. The BJP, which has formed the new government at the Centre, has been vocal about its opposition to FDI in this sector.
Approving the purchase of stake in Trent Hypermarket Ltd (THL) by Tesco Overseas Investments Ltd, the CCI said Tesco was not earlier engaged in the retail business in India and the transaction "is not likely to have appreciable adverse effect on competition in India".
Soon after assuming charge on Tuesday, new Commerce Minister Nirmala Sitharaman said multi-brand retail is best not opened up now for FDI because medium and small-sized traders or small farmers have not been adequately empowered.
"...if you open up the floodgates of FDI in multi-brand retail, it may affect them," she said while responding to a question on whether the new government would rescind the current policy allowing foreign investment in the sector. (Read more)
While the central government has allowed FDI in this sector, some states have put a spanner in the plans of foreign retailers to set up shop here by deciding against implementing this FDI policy.
Recognising this scenario, the CCI said in its order that the "Government of India has allowed 51 per cent FDI in the multi-brand retail, subject to specified conditions and leaving its implementation upon the discretion of the state governments".
"As the FDI policy regarding multi-brand retailing has not been implemented in the states of Gujarat and Tamil Nadu, Trent Hypermarket Ltd has entered into a Stores Transfer Agreement on March 31, 2014, with Fiora Hypermarket Ltd (a wholly owned-subsidiary of Trent), to transfer its four stores operating in Gujarat and Tamil Nadu," the regulator said.
"It is observed that while THL is engaged in the business of multi-format retail trading in India, including hypermarkets, supermarkets and smaller convenience stores, TOIL (Tesco Overseas Investments Ltd) is not present in the retail market in India and therefore, there is no horizontal overlap between the business activities of THL and TOIL in the retail market in India."
On March 21, the British retail major announced an equal joint venture with Trent, picking up a 50 per cent stake in the Tata Group firm for about 85 million pounds. Later in the month, Tesco approached the CCI seeking its clearance.
Tesco Overseas Investments is the holding company for several of the Tesco Group's overseas retail businesses and is into retail trading of grocery and general merchandise through hypermarkets, supermarkets, convenience stores and franchised stores.
The entity currently operates 16 retail stores at various locations in India.
The fair trade watchdog observed that Trent Hypermarket's total revenue during 2012-13 was about Rs 785 crore, "which is insignificant as compared to the size of the overall retail market as well as the organised retail market in India".
It also noted that the retail market in India is dominated by unorganised retailers such as local kirana shops, self-owned general stores and hawkers.
The CCI said that as per details available in the public domain, the organised retail sector comprising hypermarkets and superstores accounted for an 8 per cent market share in the retail sector in 2012 and is estimated to have 20 per cent share by 2020.
"Additionally, due to increased Internet penetration and changing lifestyles, the Indian retail market has also witnessed a surge in online retailers, which has widened the choice for the consumers," the regulator said.
Earlier in 2008, the Tesco Group through one of its entities - Tesco Hindustan Wholesaling - had executed a 'wholesale supply agreement' (WSA) with Trent Hypermarket to supply merchandise for the latter's retail stores.
In addition, Tesco Group provided expertise and technical know-how to Trent Hypermarket pursuant to a 'Franchise and Technical Services Agreement'.
However, in March this year, Tesco Hindustan and Trent Hypermarket entered into an amended pact to terminate the WSA.
At the same time, Trent Hypermarket and Tesco Stores Ltd agreed to terminate the terms of the Franchise and Technical Services Agreement.