FDI in retail has failed - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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PRINTER FRIENDLY | ARCHIVES
27 DECEMBER 2011


There is a raging debate on FDI in retail but, guess what, it's already here - and it has failed big time.

FDI in financial services retail has been here since 1993 and it has been a disaster for the consumer.

Consider this: in 1992 the only mutual funds available to local Indians were run by the Unit Trust of India and a handful of other PSUs like SBI Mutual Fund and Canbank Mutual Fund. At that time UTI alone owned 10% of the value of all listed Indian shares. This means that local Indian investors, via their ownership of the units of UTI, owned 10% of the Indian stock market.

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Then, in 1993, we allowed FDI in the retail mutual funds business.

Under the FDI rules, if a foreign fund house wanted to own 100% of the mutual fund business in India, it needed to bring in USD 50 millionas equity in the company. If the foreign fund house wanted to own 76% (but less than 100%), it had to bring in USD 25 million as equity. And, if the foreign fund house wanted to own 51% (but less than 76%), it needed to bring in USD 5 million as equity in the mutual fund business.

Foreign mutual funds dominate, retail presence wilts

The policy was a success.

Today, out of the 42 active mutual fund houses managing Rs 712,742 crore worth assets in all their mutual funds (average assets for the quarter ended September 2011), about 56% of the assets are managed by the 19 mutual fund houses classified by AMFI as joint ventures or foreign owned.

So, FDI in the retail fund management business has been a "success". Foreign money and foreign technology have been imported into India. Most of the foreign companies have "successful" and profitable India businesses.

But, has the Indian retail investor benefitted?

My view: the entry of foreign fund houses has been a disaster for the Indian retail fund investor.

How many investors were there in mutual funds pre-1992? UTI alone had 40 million folios.

And how many are there today? Probably 10 million folios.

Furthermore, the Indian mutual funds - after 18 years of reforms in that sector - now own less than 3% of the Indian stock market. (Recall that UTI alone owned 10% of the Indian stock market in 1992.) By owning less of the Indian stock market over the past 18 years, Indian investors have lost out on the opportunity to see the value of their savings increase and participate in the long-term, wealth creation power of the Indian stock market. The BSE 30 Index was hovering around the 500 levels in July 1991, it is hovering around 15,000 today - a 30x increase in 20 years. Not a linear, guaranteed annual increase, but a good return all the same for patient, sensible long term fund managers - and their investors.

But FDI in the mutual fund business did not bring in any ethics or good practices. It did not "deepen" the market. In fact, one could argue - based on the scandals and exposes that continuously hit the global headlines - that foreign financial companiesgrew in their home countries because they resorted to illegal and unfair practices! And these financial giants have enjoyed the support of their home governments in the quest to maximise their profits at the cost of their clients.

In the mutual fund business, rather than fighting for the good of their clients, the foreign firms have sustained and supported an opaque distribution channel. Their objective was "growth at any cost". Even at the cost to their customers.

Does "foreign" equal "fair"?

Of course, you can't blame the failure of Indian retail presence solely on the failure of the FDI-run mutual fund houses to fight to create a better system. There were scandals in the Indian stock market and UTI - with some 40 million folios lying in good faith and trust - mismanaged the funds and dealt a body blow to the Indian psyche with its spectacular collapse in 2002. The best-selling Unit Scheme 1964 of UTI was a "guaranteed" return product investing in wildly swinging stock markets - a classic case of mis-selling.

SEBI - with or without pressures from governments and politicians - allowed many questionable companies to operate as financial intermediaries and even more questionable managements to access the capital markets. With a slow-moving punishment for fraud, investors have seen no justice. A global reality.

But did the mutual fund industry - dominated by the more experienced foreign-controlled partnerships or fully-owned enterprises - do anything with its power as a large owner of Indian shares? Did the fund managers with these FDI-compliant ventures make statements on lack of integrity in specific managements? Did fund managers bother to cast their votes - however small - at AGM's in a manner that would send a signal of good or bad corporate governance? And, if they did, to what extent did they do so? Could it have been better?

And the "success" of FDI in insurance is a question mark. Many of the same players in the mutual fund business also have the licenses to sell insurance policies. Well, guess what? Many resorted to the distribution-led opaque practices there, too. ULIPs were mis-sold and it took the then SEBI Chairman, Mr. Bhave, to fight this out with the IRDA last year and get the attention of the Finance Minister. Mr. Bhave was refused his extension partially for this high-profile fight. In an LIC and GIC world, you dealt with boring product and slow service. In an FDI-ruled insurance world, you are dealing with better service - but questionable practices and products. Choose your poison.

FDI in banks is also been in existence for a long time. The foreign banks are here and are owned by their global parents. On the banking side, they have not done as well as their domestic competitors but on the "selling product" side they match the local banks stride for stride. The Private Client Divisions of these large global banks have also been party to the mutual fund and ULIP distribution excesses.

The discussion over FDI in retail is being sold as a magic wand that will solve all of India's problems. The pitch is that FDI-compliant companies like Wal-Mart will come in, is the argument, and they will ensure that there is better infrastructure, better supply-side channels, and direct dealings with farmers. This will then ensure a stable and lower pricing regime for all of us end-consumers.

"Foreign is fair", is the unsaid claim.

Maybe - maybe not.

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Who will they partner with?

What if Wal-Mart partners the very politicians who control the supply side chain? It is an open secret that politicians or their well-connected friends can hoard at will and distort near term price movements.

The thought of a Wal-Mart tying up with farmers directly is being sold to us as a way to make the whole "FDI in retail" a win-win in our heads. But the big-box retail will probably tie up with those very groups who can make life in India easier. And that will lead them to the big and the mighty.

Those that can oil the system.(Hence, a Wal-Mart / Ajit Dayal partnership is not a likely scenario!J)

In November 2010 the price of onions surged to Rs 80 per kg. Yes, there was a bad crop but did that justify a 6x increase in prices? Government intervention brought the price down in the near term - governments tend to shed tears over onions because they have lost elections over them! Now, the price of onions has dropped to Rs 5 per kg because of a better crop and the government is setting a minimum price to save the onion growers!

Would FDI alone cure this problem or would better supply chain systems (even if Indian owned) solve this problem?

Or would a home-grown Amul, the architects of the milky white revolution, solve the problem?

Or is this wild movement in onions representative of the very nature of farm output? That it is unpredictable, that prices can swing wildly, and that farmers will react to price signals as they choose their next crop? So, when the price of onions or wheat surges; the farmers devote more acreage to the crop; there is better supply next season; the price drops.

Can FDI in the front-end store change this cyclical nature of prices and production? Would a big box foreign-owned retail firm with a nice ambience and some clean shopping aisles solve this problem?

Well, I don't know what FDI in retail will do. But did the foreign-owned mutual fund houses clean up the opaque distributions systems?

No, they partnered with them and made it worse!
The point is not that all foreign-owned entities are bad and crooked. Sure there are some good folks out there in every business - even in the wicked and evil world of financial services!

The point is that foreign-ownership by itself is no guarantee of better and transparent systems. FDI in retail is being sold as a "cure". This is a lazy policy that hopes that the foreigner will come in and improve India.

The real investment and policy-making has to be in supply chains - whether owned by locals or by foreigners.

The real discussion has to be in breaking the monopolies and barriers that presently allow fewer goods to perish at the farm and more quality food to reach our plates - at lower prices.

FDI in mutual funds has not achieved that.

FDI in insurance sounds like it went down the wrong path.

FDI in retail could also fail to deliver. Foreign may not be fair.


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19 Responses to "FDI in retail has failed"

Phani

Feb 25, 2012

An absolutely senseless and pointless article.

Like (1)

VENU

Feb 3, 2012

IN THE USA EXCEPT FOR STREET VENDORS, MANY LOCAL RESIDENTIAL AREAS DO NOT HAVE RETAILERS. AS A RESULT, EVERYONE HAS TO GO TO WALLMART LIKE MALLS AND STACK THEIR TROLLEYS WITH WANTED FOOD & BEVERAGE AND MOST-UNWANTED CHINESE STUFF. IN THE INDIAN CONTEXT EVERY STREET IN INDIA HAS AT LEAST 2-3 GROCERY STORES AND WE INDIANS VISIT THEM ONLY FOR MOST-WANTED ITEMS!! THIS HAS CREATED NOT ONLY ENORMOUS ENTREPRENEURS, BUT JOBS FOR THOSE DROP-OUTS TO BEGIN AN EMPLOYMENT. SO FDI IN RETAIL IS A STUPID IDEA LIKE ALLOWING FII TO OWN 100% OR 76% OR 51% WITHOUT A COMMITMENT CLAUSE TO INCREASE THEIR STAKE AT A FAIR MARKET VALUE (WHEREBY AN INDIAN PARTNER COULD GET OUT AT AN APPROPRIATE TIME AND TAKE UP NEW VENTURE(s)THUS CREATIN NEW ECONOMIC OPPORTUNITIES). UNFORTUNATELY, MAKING QUICK BUCK IS THE ONLY MOTIVE OF MANY OF THE POLITICIANS AND BUSINESSMEN IN INDIA AND WHEN THEY FAIL THEY RESORT TO ALL SORT OF CORRUPT TRADE AND PRACTICES. IT IS IRONIC THAT FIIs, ALSO BECOME DIIs & CERTAINLY MF-RETAIL INVESTORS HAVE BEEN TAKEN FOR A RIDE - NEVER RECOVERING FOR A VERY LONG PERIODS OF TIME. AND, SCHEMES, SCHEMES, SCHEMES, NEW SCHEMES, NEW ATTRACTIVE NAMES FOR THE SCHEMES, THAT'S WHAT WE SEE IN THE MUTUAL FUND INDUSTRY EVERYDAY, EVERY-YEAR WITH NO CONTROL OVER THESE FUND HOUSES' REPORTING ON A QUARTERLY BASIS LIKE THE EQUITIES. IF MF INDUSTRY HAS TO REVAMP, NO MORE NEW SCHEMES FROM ANY OF THE FUND HOUSES SHOULD BE ALLOWED FOR THE NEXT 5 YEARS, UNLESS EACH FUND SHOWS A REMARKABLE RECOVERY WITHIN TWO YEARS.

Like (1)

Sandesha Suresh Laad

Jan 21, 2012

Pls email me daily reports on the same.

Like (1)

kewal budhiraja

Jan 9, 2012

Mr. Sudhir Mathur has given very correct illustration, I can give similar examples, As one RF store is in my neighbour, fact is that most of the time vegetables are costlier by 10-20% than the market outside that store and then all companies items like biscuits, creams, butter sold at MRP whereas the big kiryana store sell that below MRP although only 3-5% , . Then quality of onion, apples, Louki and some other items are so bad that it is hard to purchase . Then clear middlemen or inexperience of sale officer show off . There is no one responsible officer to whom one can camplaint. Further computer billing is so pathetic, if one has to get one item cancel from shopping items, hell of time is taken by biller. It just remind me old Super Bazars in delhi.

Like (1)

Srini

Jan 1, 2012

Me think that this FDI will create a never ending need to export and earn foreign exchange. Its like this, Walmart will get 100 USD @ 53 i.e 5300 Rs. It does business in India and the amount after 1 year is around 6500. It wants to take back this amount. Now dollar is at 50 and it gets 130 USD for the amount, a tax free clean 30% return on the initial amount. Now to maintain this foreign reserve, country has to continously be an export machine or a 1991 like situation. I am not sure if i have missed the finer points.

Like (1)

Manimaran

Dec 29, 2011

Look at other way. What harm did it bring to the countries with open policy in retail? Not really much as I know. But it really enhanced the quality of things for the customers like us. It adds fair competition in the market and thus good for consumers. How long we are all going to bargain with street vendors? Why not go to the right shop and get your things at more sompetitive price? This will happen when you allow FDI in retail. One thing I know we are all always bound to oppose for any new initiatives. Is this the result of british colony we were under?. Please eradicate the probelm at the root level and welcome with open heart for new initiatives! After all we are all changed from stone age to the modern age by accepting the CHANGES. This opposing metality is one of the major hurdle to stop our economy growing. Be open!

Like (1)

shree

Dec 29, 2011

Do we need FDI or foreign help for the following? Can not t we, ourselves can do it? Are Indian individuals or companies are capable without aid of FDI? Definately yes, we are capable. No need of FDI. Recently, the NMart - one of the Indian company- is marching inthe field. Let us welcome NMart instead of FDI. Many of the readers may be aware of NMart. Those who need information, if any, may feel free to contact me at my email id.
"Retail Marketing or Retailing" is 'selling of merchandise directly to the consumer. Retailing began several thousand years ago with peddlers hawking their wares at the earliest marketplaces. It is extremely competitive, and the failure rate of retail establishments is relatively high. Price is the most important arena of competition, but other factors include convenience of location, selection and display of merchandise, attractiveness of the establishment, and reputation. The diversity of retailing is evident in the many forms it now takes, including vending machines, door-to-door and telephone sales, direct-mail marketing, the Internet, discount houses, specialty stores, department stores, supermarkets, and consumer cooperatives'.

Like (2)

d.subarwal

Dec 28, 2011

Nothing to beat the service Mr.Mehta of Mehta Store has given for last 20 years.A little technology and Mr.Mehta can be oinline.We are not a Mart oriented society, with 4 maids/help per house hold one does not need to go to a Mart. i am sure our village brothers or people in Jabalpur do not need a K-Mart. Todays super stores running out of local markets in 1000 sqft space more like Mehta Store with 20 employees and airconn. World has no money to invest in India, a dammed economy which missed the bus thanks to a spineless Govt run in a Sonia Corset. Online retail/Net buying is the way to the future in India retail.

Like (1)

Sameer S

Dec 27, 2011

The present retail chain is managed by the middlemen, who earn the bulk to margins and none of the price risks. Addition of Multinational is just going to institutionalize this.

If there is government will the idea way is for both the framer and consumer to get a fair deal. Enable framer to cover their crop risk through future. FDI can be used as tool to that end.

Like (1)

dinesh shah

Dec 27, 2011

dear ajit, more studies are required to check how much money the foreign entities transferred to their country by way of fees and other charges as compared to amounts they brought in. It will be enlightening.

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