Mumbai, July 25: Inditex SA, Spain’s 13.8-billion-euro clothing retailer, has been stymied from launching its second brand — Massimo Dutti format stores — in India because of a pre-condition in the foreign investment rules that requires the entity applying for a licence to own the brand.
On Tuesday, the Foreign Investment Promotion Board (FIPB) rejected a proposal by Zara Holdings BV, a Dutch arm of Inditex, to market the brand in the country. The Massimo Dutti format stores were to be set up through a joint venture between Zara Holding and Trent, the retail chain of the Tata group.
Inditex launched its famed Zara brand in India in May 2010 through a joint venture with Trent. It currently has eight Zara stores in Mumbai, Delhi, Bangalore and Pune.
Last year, Trent had signed a memorandum of understanding with the Inditex group to bring the Massimo Dutti brand.
Although the government has allowed 100 per cent foreign direct investment (FDI) in single-brand retail, the rules now stipulate that the foreign investor making the proposal should be the owner of the brand.
The FIPB, which vets and clears proposals from foreign investors, did not state the reasons for the rejection of Zara Holding’s proposal, but it is believed to be on account of the brand ownership criteria.
Analysts tracking the industry pointed out that the development had again raised the issue of tough riders put by the Centre with regard to single brand product retailing which has deterred many from entering India.
Inditex is the owner of the Massimo Dutti brand.
“The issue of ownership of a brand has been raised by several foreign retailers. In many cases, a foreign investment is made by an arm of the parent and not the parent itself. Therefore, this rider must be dropped,’’ said an analyst. It is learnt that the Centre is planning to drop this condition over the coming months to attract more investments.
Another condition stipulates that a single brand retailer will be allowed to hold over 51 per cent in a joint venture only if it agrees to source at least 30 per cent of the value of the products it sells from small industries operating in India. The investment limit for a small unit is capped at $1 million in plant and machinery.