1. Embracing e-commerce

Embracing e-commerce

There is an immediate need to lay out a specific policy around foreign investment in e-commerce

Published: November 5, 2014 1:16 AM

The number of instances that India has seen a single cheque of close to a billion dollars being infused as a minority investment in the private sector could perhaps be counted on one hand. Most investments in the past of this order would be intended only for sectors that have a linkage to natural resources—coal, power, infrastructure, telecom and the like. Now, for the first time, we are seeing this kind of revolution occurring in an “intangible sector”—e-commerce, a sector that has meaningfully emerged only in the last half decade and has already received more than $3 billion of foreign investment in just its two leading players, with a foreign strategic incrementally pledging $2 billion of its own, making it a sector that will perhaps soon top the $10 billion foreign investment mark. This, without counting the investments that are occurring in the ancillary businesses that have boomed around e-commerce.

This is what gets me to the irony of the situation and our response to it as a society—even as this kind of dramatic foreign capital flow finds its way into a specific sector, unleashing fundamental changes to the hopes, aspirations and behaviours of our consumers as well as building out a completely new set of entrepreneurs, we seem to be vacillating in terms of an appropriately detailed regulatory response. Successive governments—both the UPA and now the NDA—have seen this capital flow. They have taken some positions around investment in retail, and those positions have been debated and approved both in the Union Parliament and in the Supreme Court—yet, in so far as e-commerce and its various business models are concerned, our response is perhaps a generic and an inadequate one. Without the details that are necessary to create an environment of certainty. Let me give you an example. On the one hand, Japan’s richest man meets our Prime Minister, pledges $10 billion into the economy and announces $1 billion of immediate investment. On the other hand, our policy pronouncement merely states the generic principle that e-commerce cannot be seen to be a back-door entry into multi-brand retail.

In the past, various policy matters have been dealt with by governments merely by laying out an overarching principle (in this case, that B2C e-commerce and multi-brand retail is not permissible) and then, leaving it to market practice, executive action, judicial interpretation, or a mix of these three to evolve a more detailed policy, with the passage of time. This, in fact, is the policy definition style that we, as inheritors of the classical generalist bureaucracy, are accustomed to. However, insofar as the current regulatory situation of the-commerce sector is concerned, this mode of policy definition will be an inappropriate one. In fact, not only inappropriate but a highly dangerous one.

We have seen the impact of how foreign investors have looked at “retrospectivity” or “changing the rules of the game” in our legal and business framework in the past. One single action (still not undone)—the Vodafone amendment—was responsible for significantly impacting business sentiment towards India. Consider the fact that huge investments by renowned strategic and institutional players have already been made in the Indian e-commerce market. In a manner and in structures that meet the requirements of the present policy pronouncements. If—applying some strict hyper-technical benchmark—however, either an executive body (like the Enforcement Directorate which we are told is currently “examining” the corporate structures of e-commerce players) or a judicial forum (High Court/Supreme Court in response to a PIL) were to incorrectly view e-commerce even under the marketplace model, as “retail in disguise”, imagine the impact. This is just one example.

There could be many such situations that could unfairly call into question structures set up legitimately under the current legal provisions, in the absence of a detailed policy guideline.

There is, therefore, an immediate need to lay out a specific policy around foreign investment in e-commerce. This could be done intelligently through an expert group, without necessarily diluting this government’s apprehension and political position on foreign capital controlling multi-brand retail. In a manner that takes cognisance of the fundamental distinctions between physical retail and online retail. This policy framework would have the advantage of being finalised in a situation where we already have seen parts of this ecosystem work. Where the government will have live data in its hands and on ground experience of how the current industry has impacted various stakeholders—consumers, jobseekers, existing physical retailers, entrepreneurs, rural and urban areas, ancillary industries, etc. We have also had the advantage of seeing various models (marketplace, B2B wholesale formats, etc) work—and this policy pronouncement could lay out specific details on the ambit of activities that could be permissible under each of those models. An action such as this will give the government an opportunity to address concerns expressed by trader industry associations around the substance of these operations.

The policy could focus on ensuring safeguards to protect the sensitive retail sector, while at the same time providing a certain environment to investors and entrepreneurs to develop their business and realise the potential of this sector for our economy. Safeguards around sourcing, for example, could help further existing governmental initiatives such as the “Make in India” programme. Certain sensitive categories such as food items could be defined, where the level of e-commerce play allowed could be restricted. Minimum capitalisation thresholds could be laid out, which will ensure a basic level of scale, sophistication and productive spending in the Indian economy. Apart from these three, a number of other effective safeguards could similarly be prescribed.

In summary, it is our duty as a society to respond clearly and unequivocally to a discernible economic trend and the vote of confidence that foreign players are demonstrating in one of India’s fastest growing consumer sectors. It is possible to do this without materially diluting the government’s reservations around foreign capital controlling multi-brand retail, through the institution of necessary safeguards in the specific context of the e-commerce industry.

By Vivek Gupta
The author is partner, BMR Advisors

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