IndiaRetailBiz

Many Indian companies, particularly those requiring heavy dose of working capital in running their businesses, are exploring fresh avenues of bringing in fresh capital from foreign lands. Faced with the situation of ‘cash crunch’ following slower than expected growth and tight capital markets conditions, companies like Kshore Biyani-led Pantaloon Retail are now testing the validity of recent guidelines on FDI.

As per the fresh rules on calculation of FDI issued vide Press Notes 2, 3, and 4 of the Govt of India in February this year, the extent to which indirect foreign investment that can be brought by an Indian owned/ controlled company appears to have been effectively raised.

According to new rules, the indirect FDI will exclude foreign investments in Indian companies ‘owned’ and ‘controlled’ by resident Indian citizens and/or Indian companies which are owned and controlled by resident Indian citizens. As such, any company which has Indian holding of 50 per cent or more and has the power to appoint a majority of its directors, should be able to raise foreign funds through subsidiaries. These funds will then be not be treated as FDI for subsidiaries of such companies.

Pantaloon Retail, the country’s largest multi-product, multi-format retailer, has embarked on restructuring exercise of the group companies such that it takes advantage of new rules on the FDI, even though the FDI is presently not allowed in multi-brand retail in the country.

Instead of inducting the FDI in the proposed retailing company, Future Consumer Enterprise (FCE) Ltd., which is not permitted under the present guidelines on retail, the group is seeking to bring in the FDI via its parent company Future Fashion Merchandising Ltd (FFML). FFML, in turn, will be owned and controlled by Pentaloon Retail that will soon be rechristened as Future FMCG Limited. In order to meet the condition of majority Indian ownership and control, Pantaloon has also decided to raise the promoters equity in the company from 46 per cent at present to 51 per cent by issuing the preferential shares and warrants to the promoters.

This will be an interesting test case many Indian promoters operating in restricted FDI sectors to test the validity and applicability of the new rules on the FDI.