Foreign investments into India are governed by the Foreign Direct Investment (FDI) Policy of the Government of India and the Foreign Exchange Management Act, 1999 (FEMA). Foreign investment is permitted in virtually all sectors, except those falling under strategic concerns that are not eligible for automatic route investment. The FDI policy is framed by the Indian Government and is implemented by The Reserve Bank of India for cases falling under the automatic route (i.e., without requiring prior approval) and The Foreign Investment Promotion Board (FIPB) for all other cases.
The FIPB (which falls under the Ministry of Finance) is an empowered government board comprising members of various central government ministries and is the nodal agency for all FDI matters.
Prior to 1997, while the FDI policy recommended specific FIPB approval in trading, FIPB had also considered and approved, on a case-by-case basis, applications under the retail-trading segment. For instance, Food-world, which is a 51:49 joint venture between RPG group and Dairy Farm International of Hong Kong, was established during this period and is today one of the leading food retailers in India.
Since then, the policy has undergone change and the current FDI regime permits retail trading, subject to FIPB approval, only in the following cases:

• Social sector items
• Medical and diagnostic items
• Items sourced from the Indian small sector (manufactured with technology provided by the foreign collaborator)
• Two-year test marketing (simultaneous commencement of investment in manufacturing facility required)
  Foreign-owned Indian companies cannot own and operate retail outlets, other than for those items identified above. However, on a case-by-case approval basis, 100% FDI may be permitted in trading companies carrying out the following activities:
• Export trading
• Bulk imports with sales either through custom bonded warehouses or high seas sales
• Cash and carry wholesale trading
• Sales substantially to group companies
  Up to 100% FDI is allowed in e-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies were listed abroad. Further, these companies can engage only in business-to-business (B2B) e-commerce and not in retail trading, inter alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.
  The retail sector in India is presently dispersed, widespread, labor intensive and an overwhelming 97% of it is unorganized. The government has been deliberating on the issue of lifting the restrictions on FDI for some time. The Indian Prime Minister’s Office is directly monitoring an initiative to open up the retail sector to FDI soon. It is most likely there would be a calibrated opening (up to 51% equity permitted to the foreign partner), and collaterals/conditions of investment such as minimum investment, size of stores, locations, local sourcing etc.
  
   

Real estate for retail sector
The previously restricted real estate sector was opened for FDI in February 2005. Subject to certain minimum area and capitalization conditions, up to 100% FDI is now permitted under the automatic route in townships, housing, built-up infrastructure and construction development projects (including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure). Indian companies developing retail space can now be 100% foreign owned provided they have a minimum built up area of 50,000sq m.

Scarcity of quality real estate at affordable rentals has traditionally been a key challenge to growth in India. However, the retail boom that is being witnessed in India today is likely to have a significant impact on the commercial real estate sector. Presently, most of the major Indian cities have significant commercial projects under construction for retail purposes and, due to demand and supply interplays, there has been some rationalization in property prices across the country.

However, the majority of new shopping malls being developed remain fragmented and sub-optimally planned in terms of positioning infrastructure. In the near future, there is a likelihood of a shake out within the shopping malls business with the emergence of a few large dominant national/regional players that are relatively more professionally managed and a host of specialty/niche local players. With the expected globalization of the country’s retail sector, shopping malls of international scale and quality should also emerge soon. An increased alliance/partnership between large regional real estate developers and national retail companies on joint development/management of retail real estate catering to the pan-Indian or regional growth plans, and other synergies between specific retailer(s) and mall developer(s) can be expected.

It is difficult to find suitable properties in central and downtown locations for large-format retail stores in most metros, primarily due to fragmented private holdings and infrequent auctioning of large government-owned vacant lands. This has led to a shift in preference to the suburbs of metropolitan cities. There has been a spurt of shopping malls in these areas; some examples are Gurgaon and NOIDA near Delhi, and Bandra Kurla Complex and Navi Mumbai near Mumbai.
The key implication for retailers is that advance planning with respect to market expansion is necessary since, not only is identification  of optimal property challenging, the cycle time between identification and possession of ready-to-move-in retail property is rather long, typically between 18 and 24 months.
Property regulations

As discussed above, there has been a shortage of quality retail space in central and downtown locations, and rents are high for what is available. Compounding these shortages are the following problems:

• Very high stamp duties on transfer of property that vary state to state (12.5% in Gujarat and 8% in Delhi).
• Urban Land Ceiling Act and Rent Control Acts have distorted property markets in cities, leading to exceptionally high property prices.
• Presence of strong pro-tenancy laws makes it difficult to evict tenants; augmented by problems of clear titles to ownership.
• Land-use conversion is time consuming and complex.
• Time consuming legal process for property disputes.
• City urban planning projected smaller commercial plots and this, along with rigid building and zoning laws, makes it difficult to procure retail space.
• Occupancy cost may marginally increase for retail outlets at malls with the imposition of service tax on certain services connected with management of commercial real estate (as proposed in the Union Budget 2005-06).
  
   

Source: EIU, July 2005 (Exchange rate: December 31, 2004)