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Devil in the fineprint: India keeps out e-commerce from FDI in multi-brand retail

21 September, 2012

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)


View Comments
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What do experts feel about e-commerce being kept out of FDI in multi-brand retail

Anand Rai 5 years ago
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13 Comments
Ankur . 5 years ago

Sorry to sound cynical but the FDI in retail was opened up mainly to increase the uptake of commercial properties (malls etc) in major cities in India, which are lying vacant at present. Many of the corrupt politicians have stake in commercial real estate. They have little stake in e-commerce ventures and those ventures do nothing to enhance the returns on physical stores. In fact, if anything, they compete against them. That is why e-commerce was excluded from FDI in retail.

Rob . 5 years ago

Ankur,

A very different way of looking at things but looks like a sound logic. Whenever i go to US or UK, i do all my pre shopping on-line and pick up or get the stuff delivered there. Its a shame that we are excluding e-commerce here for political expidiency

vivek.sinha . 5 years ago

@Ankur @Rob that’s indeed an interesting way to look at it. However, I would believe the reason why ecom was excluded was to takeout criticism that Walmart can anyway operate a store in Delhi/Haryana (states which have given no objection to FDI in retail) and send products ordered online to UP which is probably not allowing such stores. Though I may add, by trying to make the policy geo-platform agnostic in implementation, they have created an uneven playing field where Walmart can operate but Amazon cannot.

ak . 5 years ago

It is interesting to note that most of these e-commerce are already majority owned by venture capital funds and the limited partners in these vc funds are all non-Indian investors !!

Pranav . 5 years ago

Can the knowledgeable people clarify the doubts below.

1. If multibrand FDI is not allowed, then how come all the non-Indian VCs are investing more than 50% in Flipkart & Myntra?

2. I read that Flipkart has ‘Flipkart wholesale pvt ltd’ where the VCs have invested beyond 50% & ‘Flipkart Retail pvt ltd’ where VCs haven’t invested a dime.

3. ‘Flipkart wholesale’ supplies all goods to ‘Flipkart retail’ and this inturn sells goods to end customers

4. As per another law this ‘flipkart wholesale’ cannot sell more than 30% to ‘Flipkart retail’ ? if so is ‘flipkart wholesale’ complying to this? if so then to who else is it suppying 70%of its goods?

5. If ‘flipkart wholesale’ is violating this rule then why hasn’t the indian govt acted against flipkart (or the myntra / jabong) ?

6. If flipkart is not violating any of the above rules, then it is surely violating the rule in spirit.

Basically the whole opposition does not want to allow even 51% in multribrand FDI, but flipkart/jabong/myntra is happily taking in 70-90% FDI !!!!

vivek.sinha . 5 years ago

@Pranav, the company names you mentioned for Flipkart are incorrect but to clarify your queries..Flipkart among almost all ecom firms (some claim they are just marketplaces like eBay which is an online platform for individual retailers to sell online so not covered under FDI norms) in India follow two tiered corporate structure (as you mentioned correctly). The wholesale supply company which acts as logistics partner as well (at times) gets FDI as foreign investment is allowed in such firms. The firm which owns the ecom site is owned by local entrepreneurs or in some cases as representatives of international investors. So it’s perfectly legal to operate such a system (even as even 1% foreign investment in Indian ecom firm is not allowed, forget 49% or 50%). However, 2 years ago the government also put a rider of maximum 25% (not 30%) of business to be generated from group firms so technically the FDI (including VC)- backed firm cannot sell more than a quarter of total to the related group site. Whether and how the ecom firms are complying with this provision is a mystery. But, since foreign VC firms are involved who are responsible (and liable) to their own investors, my guess would be they have worked out a way to ensure these firms meet the norms, on the paper at least.

As far as ‘rule in spirit’ is concerned true it’s a debatable issue. But then it won’t be the first time, Vodafone did indirectly have control of around 74% of Indian biz much before that much FDI was allowed in telecom.

Pranav . 5 years ago

Hi Vivek,

Thanks for the detailed response. From the ministry of corporate affairs i could see that there are 5 companies with ‘flipkart’ name in it and by guess it looks like the wholesale company is ‘flipkart india pvt ltd’ and the retail ecomm is owned by ‘flipkart online services pvt ltd’.

My understanding is as follows based on your reponse.

1. The VCs must have invested in ‘flipkart india pvt ltd’.

2. ‘flipkart onlines services pvt ltd’ must be owned by some one other than VCs, bansals

3. By definition may be the ‘fk ind pvt ltd’ and ‘fk online services pvt ltd’ are not GROUP companies ! and the max 25% supply to group company does not arise as both are totally unrelated !!!!! (WoW)

4. If someone proves that ‘fk ind pvt ltd’ and ‘fk online services pvt ltd’ are related or group companies flipkart will have to be shutdown the next day.

5. I am sure the National law school graduates (rank holders) must be able to prove this in no time given their knowledge of the law.

6. I think it is a shame that as a country we are allowing this to happen.

Vivek thanks for your insight.

I would appreciate if someone who knows the corporate law well can help me know whey flipkart+smart VCs are making the indian corporate law look so pathetic.

Vodafone took indians for a ride, but i hope flipkart+foreignVCs will not take us for another ride.

vivek.sinha . 5 years ago

Pranav, on the contrary Flipkart Online Services is the B2B firm which has got VC money. Flipkart India is a more recently incorporated entity, and there is another entity WS Retail which has a license to operate the site from Flipkart India! If the promoters and VC investors have got into a deal (my conjecture) where an existing employee has been given ownership (on paper) of WS Retail, then the jigsaw puzzle makes sense (I am sure NLS grads would know better than me how the definition of Group is applied). I would guess this is something very similar to Vodafone case where the (then) India CEO was apparently ‘lent’ money by Vodafone to hold a stake in the business and thereby to comply with local holding norm.

Pranav . 5 years ago

Vivek, You have enough knowledge !!! So we have ‘Flipkart ind pvt ltd’, ‘Flipkart Online services pvt ltd’, ‘WS retail’…..So 3 companies in total have been setup by Flipkart+VC to take the indians for a ride. Vivek Thanks for bringing this to the viewers notice.

——-I hope there are some lawyers on this forum who can throw more light on this.

——–If not, Vivek can i request you to touchbase with a lawyer who can his views on this fantastic article that you have written.

vivek.sinha . 5 years ago

Pranav, rest assured, there are many more entities other than these 3, I know of at least one more Singapore incorporated firm besides 2-3 new entities set by Flipkart 🙂

Pranav . 5 years ago

Vivek, Oh so multiple entities, thanks for bringing this to the readers notice !!

—–So we can leave the new entities aside for the moment and we can just focus on how Flipkart is fooling the indians by utilizing the loop holes.

—–Flipkart is either violating the “wholesale company cannot supply more than 25% to a group retail company” or it has setup the “WS retail” as a benami company and making it look as if it is not a “group company” and supplies 100% to it.

—–Another possibility is “flipkart b2b” firm supplies to “WS retail” just about 24% goods, and does 76% transactions as just a ‘broker middle company’ in the existing retail chain. For example if Distributor-A supplies to 10retailers, “flipkart b2b” will buy from Distributor-A and bill the same goods to each of 10retailers !!!

—-Either ways the Indian government has to plug this loop holes and stop this blatant violation.

—-I am hoping that some of lawyers will pitch in shortly to reply to this post. (Hello NLS champs, please pitch in ! )

—-If Ms.Mamata Banerjee is reading this post, she can surely stop the Flipkart/Myntra/Jabong games quite quickly 🙂

vivek.sinha . 5 years ago

Can’t comment further on FK’s structure but I am sure there are loopholes in the norms which everybody is free to exploit! Just like many of the physical so called ‘wholesale cash and carry’ stores are a farce. I know of at least one of them which allows individuals to become ‘members’ and then buy stuff from such oulets. There was a brouhaha over such a practice few years ago but then it went quiet. So can’t just blame e-com firms 🙂

Pranav . 5 years ago

Vivek, Can I request you to write an article titled – “How Flipkart takes 70% FDI in its Multibrand retail exploiting the Legal Loopholes” ? I think this article with your insight and analysis would help people understand the situation a lot better than saying – “how flipkart operates is a mystery in multi brand retail with huge FDI”. Thanks.

Devil in the fineprint: India keeps out e-commerce from FDI in multi-brand retail

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