By Nandita Bose and Rajesh Kumar Singh
MUMBAI/NEW DELHI (Reuters) - Britain's Tesco Plc (LSE:TSCO.L - News) is set to become the first foreign supermarket to venture into India's $500 billion retail sector after announcing on Tuesday it had applied to buy a 50 percent stake in Tata Group's Trent Hypermarket Ltd (NSI:TRENT.NS - News).
The world's third-largest retailer, which already had a franchise agreement to provide support to Trent's Star Bazaar chain, has made an application to India's Foreign Investment Promotion Board and plans to invest $110 million, an official at the Indian trade ministry said.
The decision brings much-needed relief to the government, which had failed to attract a single application since September 2012 when it allowed foreign investors to own up to 51 percent of their operations in what some retail analysts have tipped as one of the last great untapped markets for supermarkets.
It is also a sign that Tesco remains ambitious to expand abroad, despite its decision to close loss-making businesses in Japan and the United States and a big investment drive to turnaround its underperforming stores in Britain.
"We hope that this will mark a new beginning in transforming India's retail industry. I am sure that the other global leaders will also look at investing in India," Trade Minister Anand Sharma said
While the proposed investment is not large, the move by Tesco will be seen as a vote of confidence in India's potential at a time when the economy is struggling and grew at its slowest pace in a decade last fiscal year due largely to a lack of corporate investment.
The ruling Congress party paid a high political price for opening the retail market, losing a key coalition partner over worries the policy will wipe out India's millions of family-owned grocery stores.
The government and global retailers say the policy will create jobs and help overcome chronic bottlenecks in food supply that means much farm produce rots and has made high food inflation a structural problem. Vegetable prices have risen 115 percent since March.
But unclear rules governing foreign participation and political opposition ensured no global retailer had applied to enter the country with retail stores until now.
Recently world No. 1 Wal-Mart Stores Inc (WMT.N) called off its Indian wholesale joint venture with Bharti Enterprises, citing unfriendly regulations.
Tesco plans to invest in Star Bazaar's stores in the western state of Maharashtra and neighbouring Karnataka. Star Bazaar currently runs 16 stores in southern and western India.
"We have been working with the Tata Group in India for over five years," said a Tesco spokesman. "We are submitting an application to the Government of India which, if successful, would allow us to enter into a joint venture with Trent Hypermarket Ltd."
Recently Star Bazaar, with Tesco's help, rolled out its first mini-supermarket in the western Indian state of Pune as the British retailer looked to figure out a retail format that will work in India, two sources with direct knowledge of the matter told Reuters.
Shares in Trent Hypermarket Ltd (NSI:TRENT.NS - News) were up 6 percent on Tuesday. Those in Tesco, which earlier this month reported a drop in underlying sales in both Britain and its foreign markets, were down 1.3 percent at 1330 GMT.
(Editing by Frank Jack Daniel and Mark Potter)