DIPP officials cite regulatory issues,problems in checking inter-state transactions in e-commerce activities
The new rules that allow foreign retail chains to pick up to 51% stake in Indian supermarkets will not apply to e-commerce companies in the business-to-consumer (B2C) space. This means while the US-based retail firm Walmart can pick up a 51% stake in Bharti Retail,the JV firm cannot sell its products online through that entity. Similarly,domestic online retailer like Flipkart cannot have foreign direct investment in its B2C entity and US-based online retail firm Amazon cannot set shop in India.
However,if Amazon wants to set shop in the country it would have to change its format and do it in the brick and mortar form or be a part of some multi-layering corporate structure.
“E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in business-to-business (B2B) e-commerce and not in retail trading,inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well, the department of industrial policy and promotion (DIPP) clarified in a statement.
Explaining the reason for not allowing FDI in B2C e-commerce,DIPP officials said that it is due to problems in regulation as well as restrictions in the policy such as the states where it can be applicable. The multi-brand retail norms require that 50% of the investments be made in the back-end infrastructure. It would be difficult to monitor their investment break-up. Further,since the option to allow FDI in retail would lie with the state governments,it would be difficult to check inter-state transactions in e-commerce activities, a DIPP official said. Even the mandatory 30% local sourcing by the firms having FDI would be difficult for pure-play e-commerce firms,the official added.
However,analysts said that e-commerce firms can still find a way to have their operations in the country by creating a multi-tier corporate structure. For instance,if a foreign and an Indian retailer have a 51:49 JV,then the firm would be categorised as Indian-owned and managed.
If this firm creates another firm which sells products online then it would be permissible.
The matter gained significance after the government notified its September 14 decision,allowing up to 100% foreign direct investment (FDI) in single-brand retail and up to 51% FDI in multi-brand retail with a rider that “retail trading,in any form,by means of e-commerce,would not be permissible,for companies with FDI,engaged in the activity of single or multi-brand retail trading.
According to Pinakiranjan Mishra of Ernst & Young,the current business model for both home-grown or foreign e-Commerce retailers can continue. “The notified policy is not blocking that at all. Therefore,it is only the question of how such firms structure their business entities in India,” said Mishra.
Even DIPP echoes this point. “100% FDI is allowed in warehousing and technical support (back-end) and this is where the e-commerce firms can invest in, a DIPP official said. Explaining the reasons for blocking retail trading via e-commerce through the notification,DIPP official said: “We can’t apply the FDI norms to e-commerce firms because it is difficult to enforce them on these virtual stores.”
Certain home-grown e-commerce ventures though expect more clarity on this matter in the near future. According to Abhishek Goyal,CEO of Fashionandyou.com: “FDI would have given us a good opportunity by bringing in funds and expertise,but now we just have to wait for it. Right now we have a cushion and are a well financed company. But eventually we would expect the government to make the policy more flexible and open the markets for e-commerce. Especially if more states start adopting FDI.”