The commerce ministry has proposed a ban on test marketing of imported products by foreign investors in the country.

A senior commerce department official told Business Standard that several foreign companies that had been granted test marketing rights were in effect engaged in retail trading, where foreign investment is not allowed.

To check this, the ministry has proposed the ban. In its place, the government might consider putting the cash-and-carry wholesale trade up for the automatic foreign investment clearance.

Now, if a foreign company proposes to import and test market products, it is permitted to do so on the condition that the marketing rights will be valid for two years and that the company will bring in investment for setting up a manufacturing facility in India within that period.

The policy also does not take into account the fact that test marketing can fail and in such a scenario local manufacturing becomes unviable.

In the recent past, the FIPB has received proposals from several companies stating their test marketing had failed and they either be given more time or be allowed to undertake wholesale trade of their products. In most cases, the companies have not invested in setting up manufacturing units.

"The department of industrial policy and promotion (the nodal department formulating foreign investment policies) has recommended that such requests for extension of test marketing rights be rejected since the companies violated norms by not investing in manufacturing," the commerce ministry official said.

"But we feel that this is not conducive to business, given that test marketing may not always be successful," he said.

The government has freed imports of all products except those on a small negative list, but it does not permit foreign companies that receive approval for setting up joint ventures or subsidiaries in India to directly import their products and sell them in the retail market.

Foreign investment is allowed in the retail trade of only those products that cannot be made in India because of technology constraints or those that do not have a large Indian market but are essential to business or health.