Endgame for E-Tail?

Vishal Krishna, Businessworld
Bangalore, April 21, 2012

On 10 April, the Department of Industrial Policy and Promotion (DIPP) under the commerce ministry issued a circular to clarify the grey areas in foreign direct investment (FDI). While the note titled ‘Consolidated FDI Policy’ answered some key questions around foreign investment in multi-brand retail, it also put a question mark over the e-tailing business in the country.

The note says: “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.”

So, e-tailing ventures should be business-to-business (B2B) to qualify for FDI. But in India, the bulk of the e-tailing business is centered around selling to the consumer, and not B2B. The foreign investments are also substantial. In 2011 alone, VCs invested close to $300 million in Indian e-tailing companies.

It is estimated that there are at least 220 such businesses, of which 50 per cent have received foreign funding from an angel or first round of VC investments. For example, Flipkart, which does multi-brand retailing of everything from books to mobiles, received $150 million from Accel and Tiger Global Management over three years. Companies such as Snapdeal and Myntra have also received foreign investment.

Interestingly, the 10 April circular per se is a reiteration of the 2010 circular. The government’s stand on the issue has remained the same, as is evident from its earlier notes. So how did India’s e-tailing companies manage to flout the norms? Since the nature of the back-end was not clearly defined, many of these companies attracted funding by creating a wholesale logistics or warehousing arm where 100 per cent FDI could be used. These logistics / warehousing companies would not have a website and they technically became the sourcing arm for the e-commerce business. But that too is a violation of the law because the e-commerce business is sourcing 100 per cent of the products from its trading arm, where only 25 per cent sourcing is allowed.

“There were investments made in the backend and that’s how the e-commerce business was structured,” says Devangshu Dutta, CEO of Third Eyesight.

However, some like Bharti-Walmart follow this rule. Bharti Retail’s 140 ‘easyday’ brick-and-mortar stores source only the stipulated percentage from Bharti-Walmart joint venture’s wholesale trading arm Best Price Cash and Carry. The same rule applies to e-tailing. Precisely the reason why Amazon entered India through a marketplace called junglee.com.

“One should read the press note before going and raising money from VCs,” says Amruto Basuray, CEO of babeezworld.com, a multi-brand baby products company.

K. Vaitheeswaran, founder and CEO of Indiaplaza.com, says that multi-brand retailing should be allowed to help the retail business. “Anybody who takes VC investment into the warehouse business and then supports a multi-brand e-tailing business has ignored the government note, which says that the website should itself be servicing B2B customers,” he says.

Analysts warn that if the government takes action against e-tailing companies that flout the FDI norms, many of them will close down. They can continue in business if they sell in the B2B category, but it is unlikely as the business models of these companies are streamlined to service individual customers and not small and medium enterprises.

(This article appeared in the Businessworld issue dated 30 April, 2012.)