Despite the Government throwing open multi-brand retail to foreign direct investment (FDI), the liberalisation is limited to traditional brick-and-mortar stores. The entry of foreign-owned virtual stores – online e-commerce platforms – continues to be restricted.

Foreign firms, which are merely a “listing platform for brands”, are welcome to operate in India. But, foreign firms that buy and sell any goods or services are still banned from conducting their activities.

These were the clarifications issued by Department of Industrial Policy and Promotions (DIPP).

Last week, DIPP said, “e-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform.”

Currently e-commerce companies have been able to circumvent FDI limits by some multi-tiered structuring.

Such companies engage only in B2B e-commerce and not in retail trading. While the service delivery model doesn’t need regulatory approvals, a trading model will have to toe the FDI regulatory norms. This technically means that though Walmart is welcome to invest in India, its online arm still would face regulatory hurdles.

Companies such as eBay operate out of India as they are merely a listing platform but Amazon will not be permitted to enter India as they are buyers and sellers.

Muralikrishnan B., eBay India’s Country Manager substantiates this point. “eBay India is a 100 per cent subsidiary of eBay Inc. We are a market place, which means that we do not hold or own inventory. We are a platform that enables trade between various sellers and buyers,” he said.

Such norms already existed earlier, said K. Vaitheeswaran, Founder and Chief Executive Officer, Indiaplaza.com. He said FDI in retail for e-commerce in any case cannot work because of the fact that FDI norms for multi-brand retail apply only to offline stores.

State-wise approval

Even if it is allowed, the rider on State-wise approval poses hurdles. “For e-commerce companies, where would they go … their corporate office is somewhere, sales office somewhere and inventory in some other location,” he said, adding that in such a scenario, e-commerce companies have to take permission on an ‘all-India basis’, which is not possible.

When asked about foreign private equity (PE) firms or venture capitalists (VCs) who have funded the growing e-commerce sector in India in a big way, he said if such funds came through foreign routes, it was unlawful and those companies were ‘flouting’ the laws.

However, he also said such funding is happening because there is no strict law mentioned by the Government.

Percival Billimoria, Senior partner and M&A expert, AZB Partners, said, “With the new notification, the Government had clarified that only brick and mortar companies can invest in India. Anyone who does online trading is banned.”

According to analysts, the Government’s prohibiting of FDI in e-commerce has been done with a clear social intent in mind.

“Indian e-commerce ventures are struggling but their valuations are high. While the Government has given a nod to FDI in multi-brand retail, it perhaps did not want to give the same leeway to online firms as e-commerce companies would not be developing any back end. The Government may have wanted to keep them out of the competition,” Paresh Parekh, Tax Partner, Retail and Consumer at E&Y, said.

Asked why this distinction was created, sources in DIPP said it was difficult to monitor inter-State transactions in e-commerce activities. They, however, said that e-commerce firms can invest in warehousing and back end infrastructure, which allows 100 per cent FDI.

E-commerce revenue

According to independent research firm Forrester, total e-commerce revenue in India is expected to increase by more than five times by 2016, from $1.6 billion in 2012 to $8.8 billion in 2016. In 2011, venture capitalists invested $ 177 million in eCommerce in India, it said.

“Flipkart has more than 49 per cent direct or indirect foreign investment, so does Jabong. Myntra and Policybazaar have a sizable investment through VC funding,” Yashish Dahiya, Chief Executive Officer, Policybazaar.com, said.

Analysts Business Line spoke to said that e-commerce companies, which have FDI infusion, have created corporate structures which technically enable them to receive FDI infusion even while sticking to the regulatory guidelines.

ronendrasingh.s

@thehindu.co.in

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