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BW Businessworld

It’s All In The Details

The much awaited introduction of foreign direct investment (FDI) in the marketplace model of e-commerce retailing has more to offer than meets the eye

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The much awaited introduction of foreign direct investment (FDI) in the marketplace model of e-commerce retailing has more to offer than meets the eye.

Albeit, the government’s announcement to allow 100 per cent FDI in the sector through the automatic route late last month did bring relief to online retailers sitting atop large amounts of foreign money raised in the past.

So far, there was complete lack of clarity on whether FDI was permitted in online retail in the country. In that respect, the recent guidelines are hailed as one of the major reforms in the retail sector by the NDA government. But not everyone is convinced.

In a recent press note, the Department of Industrial Policy & Promotion (DIPP) clarified certain aspects regarding FDI in the sector. One, no FDI in e-commerce companies that own inventories of goods and services and sell directly to consumers using online platforms. Two, cap on total sales originating from a group company or one vendor at 25 per cent. And lastly, new rules that can potentially end the discount wars for an industry where players compete against each other on the basis on discounts they offered!

In fact, from here arises a few crucial questions: what are the implications going forward and how will they change the contours of the online retail market of India, which is pegged to grow over four-fold to touch $14.5 billion (more than Rs 88,000 crore) by 2018, as per research and consultancy firm RNCOS.

“The government should fully support 100 per cent FDI in retail, without any riders. An unfettered and unambiguous investment climate helps investors, entrepreneurs and ultimately, the customer. Excessive protectionism can act as a dampener on the whole economy,” says K. Ganesh, serial entrepreneur and partner at GrowthStory, a venture builder platform that has promoted a bevy of startups such as Portea Medical, BigBasket, CredR and FreshMenu, among others. “As of now, it appears the policy allowing 100 per cent FDI — including a cap on the maximum amount that can be sold by one entity on a marketplace and changes in pricing policy and discounts etc. — can create more uncertainty and ambiguity,” adds Ganesh, hoping these will be clarified soon.

Echoing the sentiment, UTV Group founder and media entrepreneur Ronnie Screwvala says: “The government must ensure clarity on all it has announced. The endeavour has to be black and white, with no loopholes.” He further adds that the current clarifications announced in the press note are open to interpretation.

Raining Funds
In 2015 alone, as many as 141 e-tailers raised money from a clutch of private equity and venture capital funds, as per data available with research firm Venture Intelligence. In terms of value, they raised a total of $3,190 million from the investor fraternity, of which $1394 million comprised foreign capital, while another $196 million was infused by India dedicated funds. The rest $1600 million was co-funded by both foreign and India-dedicated funds.

“The guidelines bring about significant clarity; earlier technology-powered marketplaces were categorised as IT service companies, but they are now identified as e-commerce marketplaces,” says Sudhanshu Gupta, vice-president of e-commerce shopping website Paytm.

Among the most prominent deals sealed last year were Flipkart’s $700-million fund raise from a slew of investors including Tiger Global and Steadview Capital, and Snapdeal’s two rounds of capital infusion from Temasek, PremjiInvest, SoftBank Corp, Sequoia Capital India and Valiant Capital. Other online retailers who grabbed headlines for raising funds include Quikr, Oyo Rooms and, among others. However, due tolack of clarity in terms of definition of online marketplace model,many came under the scanner of Enforcement Directorate for possible violation of FDI norms.

“While the guidelines seek to provide clarity on the current policy, the language seems to suggest that the policy will take immediate effect which creates some uncertainty on past transactions,” says Kalpesh Maroo, partner at consultancy firm BMR & Associates.

The Road Ahead

With the recent press note, online retailers certainly have some clarity. “If the government did not give sanctity to the marketplace based e-commerce model, the fate of foreign investments in India’s e-commerce would have remained uncertain. Furthermore, investor confidence would have rattled in the absence of a clarification. The government couldn’t have continued with such uncertainty as far as the marketplace model is concerned,” says Trisheet Chatterjee, partner at corporate law firm JSA. “The ongoing investigations by the Enforcement Directorate on certain players in this sector may now possibly come to rest.”

The new clauses in the recently issued press note may, however, prove to be a game changer for the industry and lead to restructuring for many ventures, especially those who source more than 25 per cent of their products from one vendor. Take for instance e-commerce giants such as Flipkart and Amazon which source most of their items from one vendor. They will have to kickstart a mammoth restructuring exercise to adhere to this guideline.

According to experts, there are certain positives that will change the contours of the sunrise sector, specially the clause that stresses on limitations on discounts. “In terms of pricing, there has been a classic malpractice carried out by e-commerce companies by way of significantly discounting the products sold by their captive or exclusively affiliated sellers,” says Gupta of Paytm. “This creates issues in the market as it cannibalises sales of offline retailers and creates problems for the brands as well.”

Amarjeet Singh, partner-Tax at KPMG, says this is a step in the positive direction as it will curtail deep, competitive discounts offered by some to woo customers. “Even as discounts help attract customers, they also result in mounting losses which breathe down heavily on investors. The introduction of this new clause will bring relief to the investor fraternity as their investee companies will make qualitative adjustments to their business models to attract and retain customers.”

Finally, it’s always a case of some hits and some misses. While riders on discounts and sourcing have been introduced, the guidelines also specify that entities in the e-commerce marketplace can now provide certain support services to sellers including warehousing, logistics, and call centre, among others. This means that online retailers may now have additional source of income by providing any or all of the services.

Online Vs. Offline
To put it simply, brick and mortar retailers are happy and the reason is the clause that restricts pricing. Kishore Biyani, CEO of Future Group was recently quoted as saying in one of the leading newspaper that “This could force online players to change their model as predatory pricing will no longer exist.”

It was in 2015 that the long-standing debate on policy relating to foreign investment in e-commerce came to the fore when Retailers Association of India (RAI) filed a petition in the Delhi high court pleading for a level playing field in FDI norms between e-tailers and organised retailers.

All in all, an explicit position from the government on where it stood with reference to e-commerce was long overdue. In that sense, it is good that some clarity has been provided. However, what will make it complete for all stakeholders is a finer print!

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