The government’s decision to allow up to 51 per cent foreign direct investment (FDI) in multi-brand retail has been made with an eye on physical stores, but it would undoubtedly impact online retailers as well.
Of course, some prominent investors in Indian e-commerce space are cautious in commenting (after all, it is an open secret how almost every second e-commerce venture in India is funded by foreign investors), but when we bounced the question to experts in their field as to what the move actually means for India’s bustling e-commerce business, the reaction suggests ‘not much’, at least to begin with.
There are two niggling issues, to begin with. One is the clause that a state government can disallow multi-brand retailers with up to 51 per cent foreign investment to operate in the state. And the other is – foreign investors need to bring in $100 million in the retail entity, half of which is to be put in logistics to support the business.
While almost everyone has acknowledged that the move is positive, how much it would change the life of an e-commerce startup in the short term or how it would impact even relatively mature players is questionable.
We began by asking the largest player in the field. According to Flipkart CFO Karandeep Singh, even though it is a welcome move, it is too early to offer a perspective as the policy is still being worked out.
“However, we do believe that FDI in multi-brand retail could go a long way in improving efficiency in supply chain and could also invite investments in relevant areas. As for e-commerce in India, the industry is still at a nascent stage and the market needs players who can invest in the ecosystem and drive the growth of the industry itself. And entry of other players in the e-commerce space will create a competitive landscape for the e-commerce business, eventually leading to larger benefits for the Indian customers,” he added.
Some like K Vaitheeswaran, founder & CEO of Indiaplaza.com (it is one of the oldest surviving e-commerce firms), pointed out that the only challenge that he sees is the state approval clause.
He is referring to the rider the Indian government has put that allows state governments to opt out of the system, which in effect, would bar multi-brand retailers from opening physical stores in those states. But how far this clause is applicable to e-commerce business is not clear yet.
“E-commerce is a large sector now and it is time the government recognises the fact and issues specific guidelines and clauses for it,” said Vaitheeswaran. According to him, the government’s move is good for physical retail but for now, it will bear no immediate effect on e-commerce as a sector.
The sentiment is echoed by others. Alok Mittal of venture capital firm Cannan Partners said, “In the given form and shape, it won’t really affect e-commerce since nothing is clear.”
He has also raised a pertinent point saying just because 51 per cent FDI has been allowed, investors would not suddenly start investing $100 million in e-commerce.
“That kind of investment does not happen in e-commerce and for now, the stakeholders will stick to the present system of funding,” said Mittal.
As we have pointed out in our earlier report, most Indian e-commerce firms follow a dual corporate structure where the venture capital investors put in the money in the backend or the wholesale retail firm, which actually supplies to the Indian-owned frontend e-commerce site.
Mittal, who is also an active angel investor, reiterated the need to recognise e-commerce as a standalone sector and said that the government should come out with specific provisions. “Right now, everything is for physical retail and there is a lot of confusion for e-commerce players,” he said.
He added that just like any other e-commerce company, Amazon would face the same problem. “Will they invest $100 million at the first go? In my mind, this move does not open the floodgates for foreign e-commerce players to enter the Indian market,” summed up Mittal.
But what about the existing corporate structure that has been devised to circumvent the implicit ban on foreign investment in such ventures?
According to Prashant Kataria, principal at the law firm Lexygen, the fact that investors can now invest directly into the front end of the business will give them a lot of comfort but whether they will be more interested in investing in a single Indian company, as compared to one with the existing structure, will depend on investors alone.
“The investor’s comfort level will increase a hundredfold knowing that they are investing in a company that is complying with all the requirements set by the Cabinet and is following the letter of the law. From the company perspective, they will now be able to openly seek foreign investments from reputed key players and give a lot more comfort to investors making investments into them,” he said.
Vishal Mehta of Infibeam, one of the local firms which have not raised foreign capital yet, said a number of clarifications would be required still in the e-commerce context.
“E-commerce has always had a number of workarounds that have ensured that the FDI restrictions did not affect their growth (read fundraising was never a big problem). But moving forward, companies will have to be very careful of the fact whether they are complying with the regulations or not.”
Padmaja Ruparel, member of the Indian Angel Network, said that large companies would directly benefit from 51 per cent FDI in multi-brand retail as no startup would require $100 million in funding.
She also added that one impact in the ecosystem would be that with the FDI coming in, the companies would expand (with new services, products and commercial models) and the market would grow, directly leading to a lot of job creation.
(Edited by Sanghamitra Mandal)