Mar 30, 2016

Why 100% FDI in e-commerce is a big deal for India

BYPankaj Mishra

This is huge. In a year when Flipkart, Snapdeal and Paytm are scrambling to gain market share against Amazon, amid all the talks about high cash burns and eroding valuations, the stage is being set for another exciting battle.
On Tuesday, a notification from the Indian government brought about the much needed clarity for the country’s fast growing e-commerce sector. India has just opened the doors for 100% foreign direct investments in the online marketplaces.
Until now, India allowed 100% foreign direct investment (FDI) in B2B transactions under the automatic route for retail trading. Now, the same has been extended for B2C transactions in the marketplace model for e-commerce.
For India’s e-commerce industry inching towards adulthood, the announcement means massive consolidation. Apart from potential deals between existing players, large e-commerce companies, acquirers including Walmart, Alibaba and Amazon are expected to start hunting for targets beyond Flipkart and Snapdeal. Some of these targets could include specialised e-commerce marketplaces.
However, like with every government notification, today’s announcement too will need a closer scrutiny. On the face of it, restricting sales by a vendor on marketplaces to 25% looks like a bummer, especially given the proportion of high-value goods being sold online. And that means trouble for both Amazon India and Flipkart. While, Amazon India’s reseller, Cloudtail, contributes nearly 40% of its total sales, WS Retail contributes nearly 25% of the sales on India’s largest e-commerce marketplace.
The devil is indeed in the details.
As per the note issued by India’s Department of Industrial Policy and Promotion (DIPP), Flipkart and Amazon will need to ensure that they “do not influence the sale price of the goods or services, and shall maintain level playing field.”
This kind of raises concerns about heavy discounts offered by both Flipkart and Amazon to gain market share. The sellers on these platforms are compensated for the discounts offered to the buyers.
Now, as Medianama’s Nikhil Pahwa argues, there may be nuances about the announcement that may not be really new. But for any large foreign retailer such as Walmart, this brings much-needed clarity in terms of regulatory environment. And sometimes (as the Vodafone tax case underscored), clear definitions help.
Also, it’s worth noting here that in December last year, India’s DIPP had said in an affidavit submitted with the Delhi High Court that the FDI policy neither permitted nor recognised the marketplace model in e-commerce. With that as a backdrop, the latest announcement is indeed a leap.
Even for the likes of Flipkart, the announcement nullifies the need to“invent” company structures in order to suit the complex (and often loosely defined) foreign investment rules in online retail.
As for the likes of Alibaba, Walmart and Amazon, this means taking more confident bets in pushing their India ambitions forward.
Essentially this announcement means:
Amazon can now put more firepower behind its India bets. Being a pure marketplace, Amazon will now aggressively chase M&A opportunities in the country.
Alibaba can now move beyond its existing equity footprints in Paytm and Snapdeal, and either acquire them fully or bring about a merger between them swiftly.
Flipkart will need to revisit its complex corporate structures created earlier to comply with complex and loosely-defined regulations.
For Walmart, this opens opportunities ranging anywhere from setting up its own e-commerce marketplace, to even considering picking equity in Flipkart, or even acquiring the likes of Shopclues, Bigbasket and other specialised e-commerce marketplaces.
Beyond the tier one Indian e-commerce companies, more foreign investment will help the likes of Bigbasket and Shopclues align with bigger, global retailers strategically.
Flipkart and Amazon will now have to figure out a way to deal with new regulations that restrict heavy discounting to online buyers. They will also need to look beyond their dominant resellers on the platforms (namely WS Retail and Cloudtail) to ensure that no single vendor accounts for more than 25% of overall sales.

FactorDaily’s journalism is produced by some of the best brains in the story-telling business. If you like our body of work – deep reportage, domain specialist write-ups, data stories, podcasts and the like – consider supporting the FactorDaily journey.

Support FactorDaily

Pankaj Mishra is a writer of FactorDaily.