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Government may allow FDI in e-commerce as soon as April

02 January, 2014

The Indian government is planning to open the e-commerce sector to foreign direct investment (FDI) by the end of the current financial year or by end March in what could be its last big move before the general elections which could bring a new political force to the centre, according to a report by Business Standard.

The Department of Industrial Policy and Promotion (DIPP), under the commerce and industry ministry, is already discussing it with various stakeholders, the report said quoting unnamed sources.

The DIPP will share the discussion paper among the stakeholders who will give their feedback by January 28.

Earlier, the Prime Minister’s Office (PMO) was said to be keen to allow FDI in multi-brand e-commerce to bring it at par with foreign investment norms in offline retail. The government opened multi-brand offline retail to foreign investment last year but the conditions had stumped MNCs from rushing into the country. British retailer Tesco recently became the first foreign firm to announce a deal to buy a stake in a retail chain. It is buying stake in Tata group’s hypermarket chain Star Bazaar. 

The new move will be significant for the small but growing e-commerce sector in the country which has absorbed around $1.7 billion worth of venture capital and private equity investments to date as per VCCEdge, the financial research platform of VCCircle. 

Bulk of this is from foreign investors only routed through PE/VC funds. However, the existing norms which do not allow direct foreign investment in firms which run e-commerce sites and holds inventory of products on its own, have led a number of startups to devise innovative business structures to get around the ban on such investment in e-com.

A year ago when the Indian government opened up the retail sector to foreign players by allowing up to 51 per cent FDI in multi-brand retail, it had specifically excluded e-commerce firms. Early this year, S Jagathrakshakan, Minister of State for Commerce & Industry, had told the parliament that the government is not having a relook at the current ban on foreign investment in the Indian e-commerce sector. He replied in relation to some representations to remove the ban on retail trading through e-commerce. 

This had proved to be a big challenge for e-com firms to raise fresh cash. Soon thereafter, Info Edge (India) Pvt Ltd, which runs a string of consumer internet properties and has been investing in other tech startups in India, wrote off its entire investment in e-com firm Ninety Nine Labels Pvt Ltd. The firm was unable to get new investors on board and the government’s clarification that it is not looking at allowing FDI in e-com was the last straw which led the firm to write off its investments as without additional funding the asset became impaired, according to Info Edge. 

Many firms have either shut down over the last year or merged with other players and some have pivoted their business model to become online marketplaces. Marketplaces do not face a ban on foreign investment as they provide a platform to other sellers to sell to consumers with the marketplace being just a facilitator.

E-com giant Amazon recently launched its India marketplace and eBay has been present in the country for years.

A formal opening of the sector to FDI would raise hopes for other existing firms to raise fresh cash. In turn, if implemented, this could also provide for exit opportunities to existing investors. 

(Edited by Joby Puthuparampil Johnson)


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Government may allow FDI in e-commerce as soon as April

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