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Why Not Allow FDI In E-Commerce?

Following its decision to allow Foreign Direct Investment in multi brand retail upto 51%, the Indian government has clarified that the policy does not extend to e-commerce. In a press note issued yesterday, the government has clearly stated that “Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multibrand retail trading.”

What does this mean: This puts an end to ambiguity surrounding the government’s decision and it’s clear that foreign e-commerce companies and retail majors will not be able to set-up and control new ventures in India. Companies like Amazon will not be able to launch independent Indian operations, while retail majors such as Walmart and Tesco will not be able to open online shops, even if they launch physical retail operations.

The riders: Note that FDI in multi brand retail comes with several conditions such as requirement for companies to invest a minimum of $100 million, invest 50% of total FDI  in ‘backend infrastructure’ which includes processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure but excludes land cost and rentals, and that at least 30% of the value of procurement of manufactured processed products purchased need to be sourced from Indian small industries. Since the central government had left the final decision for implementing the policy on State governments, it would have been difficult to decide how this would affect e-commerce companies, but separate guidelines could have been laid out. Also, existing e-commerce ventures will not be able to raise funds from Private Equity firms and Venture Capitalists through the FDI route, though they do it via their Indian subsidiaries, at the moment.

Why discriminate against e-commerce: Although all these riders might make it unviable for international e-commerce players to set shop in India, we’re of the view that e-commerce should not have been discriminated, and that companies who want to set up businesses in the country and are ready to fulfil these conditions, should be allowed to do so. Investing $100 million is no big deal for bigger platers- Flipkart had reportedly raised $150 million from Naspers. Since e-commerce is still at a nascent stage, the entry of more players, offering a wider range of products would have led to increased competition, and more choice for the consumer, in turn resulting in better services.

Dual-company workaround will continue: The extension of FDI to e-commerce would have also allowed new ventures to keep operations under one entity instead of taking the dual company route to go around restrictions, there would be no other impact.  E-commerce companies usually work around FDI restrictions by setting up a B2B company where 100% FDI is allowed, and keeping inventory, technology and promoters’ ownership the in B2B company, while creating a B2C company which issues invoices and collects payments from customers; the B2B company billing B2C company at arms length. It’s an opportunity lost.

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