I had blogged earlier (Law and Other Things: The Continuing Controversy Over Retail Trade) that where franchisee arrangements are permitted by the existing policies, foreign parties should not be disallowed from entering into franchise arrangements in the retail sector. At that time, there was a fear that franchise arrangements would be disallowed altogether by the Government.

However, there appears to be a change in the stance of the Government. Today’s Business Standard reports that officials of the Finance Ministry are of the view that the restrictions on foreign direct investment in the retail sector may not apply to franchise agreements.

The report states:

“Franchise agreements are basically service agreements and in the case of services there can be no distinction between retail and wholesale, hence the present guidelines can only apply to retail in goods and not franchise agreements, hold ministry officials.

This view is significant as there have been speculations about the government banning franchise arrangements, which many consider a loophole that single-brand and multi-brand retail giants have been leveraging to enter India.”

The Government is reviewing its entire policy on foreign investment in the retail sector. We will have to wait and watch whether the Finance Ministry’s view will be accepted once the FDI policy is reviewed.