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#NAMApolicy: Preferential voting rights, how to better frame the e-commerce policy and more

This report is the fourth in our series covering the discussion on the different aspects of eCommerce policy and the impact it has on every aspect of the internet, including digital products and anti-competitive issues, privacy, protectionism. Read the firstsecond, and third here. The discussion was held on October 10, in Bengaluru.

Read all the reports in the series of discussions held at Delhi and Bangalore here.

What follows is a paraphrased and edited transcript of the session.

Preferential Voting Rights

  • Control and equity funding: Startup founders often want a higher degree of control because they want to protect their company. They want to safeguard against future funding rounds which might just be strategic investments, or guard against the interest of the funders. Second, Preferential Voting Rights (PVR) lets you retain control while having equity funding, which is favorable over debt funding. (Nehaa Chaudhari, Ikigai Law)
  • Larger problem of the tech environment: I think having preferential voting rights is a larger problem linked to the exit of financial institutions in India. Big tech companies have not arisen in India because we don’t have a good IPO process for tech companies; the rules are archaic and need refining and relook. Preferential rights should be dictated by the founders at their own negotiation level. The state should just stay off it, and instead ensure a better environment for startups to grow bigger. (Nikhil Narendran, Trilegal)
  • The moment an investor comes in and takes equity in your company, as management, you become a service provider to your shareholder. PVR should essentially be a matter of negotiation during fundraising, why that should be controlled by state action is bizarre. (Nikhil Pahwa, MediaNama)
  • You really cannot get emotionally invested in your company. Valuation determines the right price for the company. My investors have not asked for a board seat. I’m fully in control of the company, I‘ve also taken debt from the same founders, because I didn’t want to dilute the equity, and lose the semblance of that 50% plus control. (Raj Subramaniam, INBE)
  • Not the state’s mandate: The state has no business trying to protect promoter rights. State policy is only a device for stopping malpractices or market making. Many founders I know have burned equity funding, but there needs to be another forum to address this question of liquidity. (Thiyagarajan Maruthavanan, Upekkha)
  • Founders often feel like they’re crushed down to a 4-5% holding, with $500 million worth holding, when the total money in the company is $20 billion. The founder feels like ‘Man, I’m stuck at $500 million, and I was stuck at $500 million three rounds ago too.” (Ravi Gururaj, Qikpod)
  • However, the fundamental issue here is that there is so much scaffolding around e-commerce policy; everything is structured to get past that policy. For instance, Amazon’s legal bills in India in the last year are approximately Rs 700 crore. If a startup were to challenge them, it would have to create 4 entities owned by somebody who’s separated by fifteen degrees of separation, and each of them would have 24% each, and a 5th entity to rent. By the time I do all the setup, the legal fees would have eaten up my whole first round. Young companies can’t challenge the incumbents because of the legal scaffolding. (Ravi Gururaj, Qikpod)
    • I think we’re going to see some funky omni-channel. So I order online, I get the product from the local store, who owns the inventory. But I have the money from everyone in the world to run a portal that’s just a search engine. Am I doing FDI in retail, is it offline or online? There’s just too much chaos. Maybe there could be thresholds, once a company is transacting more than $500 million, these rules apply, another threshold that’s pretty high, so the big boys can duke it out. (Ravi Gururaj, Qikpod)

Regulating services under the e-commerce policy

  • We lawyers have a term called harmonious interpretation. If there are two conflicting provisions in a particular piece of legislation, then you try and give meaning to both. So if you try to give a meaning to the contradiction in the definition of e-commerce policy and thereby ban foreign investment in inventory-based e-commerce, and then read it along with the statement which says that FDI in services is not regulated, one can argue that online services and FDI there is allowed. The market is also relatively comfortable with the fact that in services, FDI is allowed in services. (Nikhil Narendran, Trilegal)
  • People are very comfortable that pureplay service providers, even those with inventory, get FDI. Something like UrbanClap, or online healthcare providers, block time. They block inventory in terms of someone’s time, which is actually a service, it is consumable. This is the reason why this controversy became all the more grave in terms of ‘is that really blocking of inventory and does that become an inventory of services and trading in services?’ There’s no concept of trading in services, there should be no concept of an inventory-based model of a service provider. (Winnie Shekhar, IndusLaw)

The inventory clause under the policy

  • Press Note 3 was brought in to regulate foreign investment and wasn’t supposed to be for the domestic guys. The domestic guys can import and sell whatever they want. But the policy says that an inventory-based e-commerce entity – which is basically a retailer, a B2C entity – can’t sell online till they’re ensuring that 100% of the goods being sold online are India-made. But the policy is vague about what that means, manufactured in India, or local support, or what? (Winnie Shekhar, IndusLaw)
  • If retail trading is where all this started, anybody who is selling goods manufactured in India in the offline (brick-and-mortar) stores should be allowed to sell them. As far as the inventory’s concerned, what are they really looking at? Are they looking at a marketplace which also owns inventory, or are they looking at a pure retailer who owns inventory? Then that is no different from a regular retailer. More importantly, if you’re looking at a new entity with foreign funding, that company/startup won’t be Indian owned and controlled for a very long time. (Winnie Shekhar, IndusLaw)
  • Once investors have the largest shareholding or control of the board, the FDI policy defines control in terms of how are the voting rights or equity held, or how you have the right to exercise over the majority of the board. Once that happens, the company will be foreign-owned or controlled. Then it has to restructure the entire business model. (Winnie Shekhar, IndusLaw)

How to improve the e-commerce policy

  • Regulate the trade effect on the market: The policy should regulate the effect the trade has on the market, instead of regulating the trade itself. The policy should move away from a foreign investment related e-commerce policy to a larger policy which looks at the e-commerce sector as a whole. (Nikhil Narendran, Trilegal)
  • What do you want to regulate? The ecommerce policy can move in the right direction if it focusses on what it wants to regulate. There’s just so many things jumbled up into that policy, the real intent has been buried. It is talking about FDI, localisation, consumer protection in the same breath. (Winnie Shekhar, IndusLaw)
  • Identify the problems: The first thing the ecommerce policy has to do is to  identify the problem, all the aspects mentioned in the policy are problems. For instance, FDI is self-regulating, the Companies Act is self-sufficient, the competition law needs a relook. The policy needs to focus on how well you regulate digital goods and services, from all perspectives including taxation and even cross-border sale of digital products. (Harshitha Thammaiah, Xiaomi)
  • First, setting up a Consumer Protection Authority will be a big, big step forward, because consumers at this point in time have very few places that they can go to. Consumers will get more choice if we open up for FDI in inventory-led B2C commerce. (Nikhil Pahwa, MediaNama)
  • We always seem to be forming policy reactively, and for a small set of stakeholders. We have 1.3 billion consumers, with a few hundred thousand e-commerce companies and maybe a few million MSMEs. To serve the 1.3 billion, you have to ensure digital efficiency. This chaos and convolution will slow us down, and impact every product company and the service industry. (Ravi Gururaj, Qikpod)
  • The general policy design should focus on consumer protection rather than trying to help or prevent promoters to do or not do certain things. (Thiyagarajan Maruthavanan, Upekkha)
  • Competition will always arise: Technology has taken away that asymmetry in price discovery. I think things like MRP should now be scrapped. The larger thing is we don’t want an e-commerce policy, instead remove some of the regulations that are already there, for instance Snapdeal is a good example of how markets correct themselves. If the fear is that these large companies will dominate the market to create a very monopolistic market, that’s very dystopian thinking. Markets will find newer players all the time, hyperlocal players, small traders. (Raj Subramaniam, INBE)
    • Things like MRP and other regulation come in because of clear instances of market dominance, predatory behaviour from dominant players is a serious concern and has to be addressed. If you just leave it to market forces, and allow a few players to become dominant, you’re leaving the consumer at the mercy of the significant market forces, without any ability to counter them. (Nikhil Pahwa, MediaNama)

Read all the reports in the series of discussions held at Delhi and Bangalore here.

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