India opens up e-commerce industry to foreign investors

New foreign-investment regulations recently unveiled for India’s online shopping industry are set to shake up the sector. India’s government at the end of March announced its official position on foreign investment into the country’s rapidly growing e-commerce industry, stating that overseas investors could take stakes of up to 100 per cent in e-commerce marketplace companies. […]

New foreign-investment regulations recently unveiled for India’s online shopping industry are set to shake up the sector.

India’s government at the end of March announced its official position on foreign investment into the country’s rapidly growing e-commerce industry, stating that overseas investors could take stakes of up to 100 per cent in e-commerce marketplace companies.

Despite the earlier lack of clarity on the regulations governing the sector, foreign investment had already been flowing in, with home-grown online shopping majors such as Flipkart and Snapdeal heavily reliant on foreign funds, while Amazon has also been investing heavily in the country.

The clarification by the government of the regulations could help to drive a surge of foreign investment into the e-commerce sector, including capital and online retail groups from the UAE and the wider Arabian Gulf region, analysts say.

But the new guidelines have also brought with them potential challenges, including preventing online shopping websites from adding their own discounts to goods, a strategy very prevalent in India where e-commerce websites battle to win over customers by slashing prices. Also, the regulations prohibit foreign direct investment (FDI) into “inventory-based” e-commerce websites, those that own the goods they sell directly to customers. The marketplace model, into which 100 per cent FDI is permitted, by contrast is a platform through which products owned by various vendors are sold.

“There is definitely going to be significant increase in FDI in the e-commerce marketplace model,” says Bimal Raj, a partner at Singhi Advisors, a global investment banking firm based in Mumbai.

He says that more investment from the Gulf is likely to start coming into India’s e-commerce industry “once the FDI investment starts ticking in the sector surely”.

According to Morgan Stanley, the headline figures are attractive, suggesting enormous growth potential in India’s e-commerce market, which is expected to reach a size of US$119 million by 2020. It forecasts that India will have close to 320 million online shoppers in 2020, up from 50 million last year.

This is partly being driven by the rapid rise of smartphone use and internet penetration in the country. The demographics are also favourable. More than half the country’s population of more than 1.2 billion is under the age of 25 and wealth is increasing.

The number of internet users is estimated to have reached 402 million at the end of 2015, meaning that India has surpassed the United States to have the second-largest number of internet users in the world, with only China ahead, according to the Internet and Mobile Association of India and IMRB International.

Satish Modh, the director of the VES Institute of Management Studies and Research in Mumbai, says the relaxation of foreign investment rules “is a bold move and early investors from Gulf may reap rich dividends”.

He also believes that India’s e-commerce could get an enormous boost from foreign investment.

“After Alibaba’s success in China, India looks to be the most attractive destination where the market is expected to grow manifold in coming years.”

The new guidelines will smooth the way for Alibaba to enter the Indian market, amid reports that China’s e-commerce juggernaut is looking to enter the country.

But the regulations have also raised some questions.

Dubai’s Abraaj Group last month led an investment of $150m into India’s Bigbasket, an online grocery e-commerce company, just one week before the government announced its sector guidelines.

After the regulations were issued, Future Group’s billionaire chief executive Kishore Biyani, told the Times of India newspaper that he believed Bigbasket should be shut down because it is an inventory-based online retailer and is, therefore, prohibited from receiving FDI.

“As we speak, Bigbasket’s inventory-led model has become totally illegal as per latest government notifications,” says Mr Biyani.

Bigbasket, however, defended its position and argued that it had not breached any rules.

“Bigbasket has always been completely FDI compliant even before the announcement of these norms and continues to be so after these new norms have been announced,” Vipul Parekh, the co-founder of Bigbasket, tells The National.

“As far as we are concerned we welcome the new norms announced by the government for 100 per cent FDI in e-commerce marketplaces,” he says. “This is a progressive step and will bring clarity and regulatory certainty to the industry.”

But, analysts say, there is unlikely to be a flood of foreign investment coming into the sector overnight. Many companies will need to overhaul their businesses first.

“Most of the business models of the marketplace operators need to go through major changes to be in compliance with the new directives, like stopping of discounting,” says Mr Singh. “These changes may take some time before it gets implemented.”

The Indian government has also stated that one e-commerce group would not be permitted to have more than a quarter of its sales accounted for by one vendor.

The move to regulate FDI “offers much needed clarity on government’s position on the e-commerce industry in India”, according to Khaitan & Co, a law firm in India.

“Pure-play marketplaces will likely construe the move as an impetus for further growth in the sector,” it says.

“However, traditional retailers are likely to view the move as a policy level decision to provide global retailers with a back-door entry to the Indian market.”

Overall, the impact should be positive on the sector, but it highlights areas of concern.

“The express permission for FDI in marketplaces should definitely increase the investor confidence in the sector, and thereby result in increased FDI flows,” Khaitan & Co says.

“However, there are quite a few aspects that the industry needs to be worried about. We are likely to witness several e-commerce ventures restructuring their business models to fall under the purview of a marketplace model.”

Ujjwal Trikha, the founder and chief executive of FurnitureDekho.com, an online start-up of furniture marketplace in India, believes the new norms will be positive for the industry.

“The move will help companies in multiple ways as opening doors for foreign investments will enable them to focus on core business proposition and further access to funds,” according to Mr Trikha.

“The clear definition for market place and inventory based models of e-commerce will help in structuring the industry.”

Amit Singh, the founder and chief executive of Allsupermart.com, an online marketplace for local vendors to sell their products and services, says that his business could be in a good position to benefit from the guidelines.

“The government’s announcement on allowing 100 per cent FDI in e-commerce market place model will be beneficial to players like us as it will enable in focusing more on the innovation and business aspect,” he says.

“The clear definition by DIPP [the department of industrial policy and promotion] for e-commerce, marketplace model and inventory based model will help in organising the ecosystem. Allsupermart being a marketplace player welcomes the government’s announcement as it will help us grow in many ways.”

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