Editorial: Have loophole, will exploit

May 06 2014, 20:42 IST
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SummaryClean up the laws, don’t leave grey areas

Yet another leading e-commerce firm, going by media reports, has come under the Enforcement Directorate’s (ED) lens for breach of FDI guidelines. While the details of the case are sketchy, the ED likely wants to know why the firms have foreign investment when it is banned in e-commerce. But that’s the whole point, the law is so ambiguous, it is not surprising that enterprising lawyers have advised firms of the loopholes there are to exploit. FDI, it turns out, is allowed in B2B e-commerce ventures since, presumably, there is some technology that foreign investors bring which is useful for setting up, for instance, large storage facilities—or perhaps the amounts of money required are so large, the government thinks FDI will be a useful addition. Why the same logic doesn’t apply to B2C e-commerce is as unclear as why FDI is allowed in cash-n-carry but not at the retail level. Anyway, since FDI is allowed in B2B, some e-commerce players have ventures which have FDI in them. They also have B2C ventures where there is no FDI. And since the law doesn’t prevent B2B ventures from dealing with B2C ventures, each time you order a CD from a B2C website, it simply places an order on the B2B one which has the FDI. How bizarre the law is can best be seen from the marketplace model that allows an Amazon to sell to

Indian consumers while, technically, B2C is not allowed.

The law gets even more bizarre when it comes to Press Note 2, something that legitimises actions that other sections of the law deem illegal. Under Press Note 2, if a foreign company invests 49% in a joint venture controlled by an Indian company, any downstream investment by the JV—in setting up retail shops for instance—will be considered Indian. Even if the JV takes a very large loan from the foreign firm, its investments will still be viewed as Indian investments. So, here’s the rub. Foreigners cannot invest in the retail business under normal circumstances. But, through Press Note 2, they can, and will still not be in breach of the letter of the law. Why was Press Note 2 even put out if it wasn’t to find a way to allow Indian firms to get more foreign money while not technically being in breach of the law? One of the first things the new government needs to do is to

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