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IKEA might pass Zara barrier

August 17, 2012 12:17 IST

Even as the Foreign Investment Promotion Board's (FIPB) rejection of Spanish fashion retailer Zara's proposal to bring a new brand into the country has made Swedish chain IKEA restless, it appears the government might not be overly concerned about the furniture giant having an investor company different from the brand owner.

The Zara proposal was rejected by the FIPB, a key wing in the finance ministry that vets foreign direct investment (FDI) proposals, on similar grounds.

An official at the department of industrial policy & promotion (DIPP) told Business Standard the brand ownership of IKEA was not likely to be a hurdle for the Swedish company.

The IKEA brand in India is owned by Inter IKEA Systems and the investor company is IKEA India BV (Netherlands), a company official clarified. Ingka Holding BV (Netherlands) is the parent for the the IKEA Group of companies.

Recently, FIPB had rejected the Zara proposal, citing breach of a rule framed by DIPP. According to this, the foreign investor must own the brand it is proposing to bring to India. Zara Holdings Netherlands sought to open the Massimo Dutti brand of stores in India. The application was made by Zara Holdings Netherlands but the brand is owned by Inditex, a euro 13.8-billion Spanish retail chain.

Since Zara's proposal was rejected, IKEA's top management had been working overtime to explain to the Indian authorities the connection between the brand owner and the investor company, a source close to the development told this newspaper.

The euro 25-bllion IKEA and DIPP have been in a to-and-fro dialogue on the India application, especially on issues related to the mandatory 30

per cent sourcing from small industries, thereby delaying the application to FIPB. The Swedish furniture company, with stores across the world, had raised many concerns related to this mandatory sourcing in its June 22 application.

Where it stands

DIPP has, to prevent further delay in sending the IKEA proposal to FIPB, asked the company to send a final and comprehensive reply by the end of this month. IKEA, it is learnt, has agreed to do so.

Once IKEA gives its final reply to DIPP, it appears that within a week or two, the application might reach FIPB. Once the application passes the FIPB test, it will be taken up by the Union cabinet, as the proposed investment amount is over Rs 10,000 crore (Rs 100 billion).

Replying to a questionnaire on the issue, the IKEA spokesperson said, "We will provide DIPP with any further information the government needs to go ahead with this process." Adding: "The process to evaluate everything from both parties takes time but this is not affecting our intention to establish stores in India."

The company did not respond to a specific question on whether IKEA faced issues involving the brand name and the applicant company, similar to the Zara case.

The government, meanwhile, is looking at easing the rule book on the issue related to brand owner and investing company, to attract foreign investment. The Centre has also been working on simplifying the single-brand retail policy, especially on the clause related to 30 per cent mandatory sourcing, after it received IKEA's investment proposal.

Nivedita Mookerji, Nayanima Basu in New Delhi