TMT
By 21 September, 2012
Devil in the fineprint: India keeps out e-commerce from FDI in multi-brand retail

The government has specifically excluded e-commerce firms from its decision to allow up to 51 per cent foreign direct investment (FDI) in multi-brand retail, the fine print of the formal notification of the policy move reveals.

In simple terms, it means e-commerce firms or firms that run online retail business would continue to have to follow the existing corporate structuring, where the legal entity that runs the retail site is separate from the firm that has received or expects to bring in foreign capital through venture capital or private equity funds.

The government’s notification related to multi-brand retail which was issued late on Thursday says: “Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading.”

We had pointed out earlier how the policy move to allow foreign investment was crafted with an eye on physical stores. Although e-com industry experts acknowledged that the policy may not have immediate impact on e-com startups in India given some of the mandatory clauses, none of them expected to actually see e-commerce altogether excluded from the opening of the sector.

At best, the problems foreseen by e-commerce firms was the clause of $100 million investment of which half was to be brought in the backend logistics operations, which made it almost impossible for Indian e-com startups to get FDI as the startups require and therefore attract much less capital in the first 2-3 years of operations.

Another issue, which was seen to be a niggling factor, was the clause that state governments would be free to disallow retailers with FDI to operate in their regions. The applicability of this clause for e-commerce firms was unclear as the rider was made with an eye on physical retail stores.

But with the government’s notification excluding e-commerce from the purview of the new norms, it would be a while that we see the big daddy of global e-commerce, Amazon, selling products in India. On the one hand, this gives more time to domestic players such as Flipkart to further strengthen their position and scale up their business, it would mean some firms who were waiting for the policy to actually sell out to a foreign online retailer would have to wait for a while longer.

For investors, this means they would continue to follow an indirect route to build exposure in India's nascent but bustling e-commerce market.

It is to be seen if the government intends to come out with a separate note for e-commerce firms with different riders as there are no specific reasons to disallow FDI in e-commerce firms involved in multi-brand retail.

(Edited by Prem Udayabhanu)

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