Analyst say that the proposed amendment could threaten inflows of foreign direct investment in trading including via e-commerce.
The recommendations of a task force on e-commerce to make suitable policy changes to enable founders of such companies to have control even if their shareholding is small, will potentially discourage foreign investment in the sector and make fund-raising, especially by start-ups, harder, according to analysts.
It is like “going back in time” and would be counter productive when many start-ups in India are starved of capital and hungry for foreign funds, they said.
This could also threaten inflows of foreign direct investment in trading (including via e-commerce), which jumped 86% to $4.35 billion in FY18.
Although Flipkart will be the only large player where a foreign investor (Walmart) will have control, all established Indian start-ups — from Paytm Mall to Ola — have received sizeable chunk in foreign funding. Some of the fund-raising by domestic start-ups was possible as foreign investors were certain of exercising their control in these ventures at some point in future by raising their stake on prospect of a booming Indian e-tail market, said analysts.
Now, fund-raising from even existing foreign shareholders could be difficult, if the government approves the recommendations, they said.
The task-force has suggested “the need to amend the relevant provisions in the Companies Act so as to facilitate founders to have control over their e-commerce companies, despite having small shareholding, would be examined in the light of the experience of their utilisation by e-commerce companies.”
E-commerce firm in India is defined as one where foreign investment doesn’t cross 49%, the founder/promoter is a resident Indian and the platform company is controlled by the Indian management.
The recommendations come at a time when foreign players are rapidly investing in India’s e-commerce market, which Morgan Stanley estimates may be worth $200 billion in 10 years.
Bharat Anand, partner at Khaitan and Co, said: “This step may increase the risk premium on investment in India. If companies perform, founders retain value. If companies fail, shares are issued cheaply.” He said the central bank, in any case, has valuation norms to ensure the stake of Indian promoters is not unfairly diluted and performing Indian companies are permitted to freely raise capital.
Amarjeet Singh, partner (tax, regulatory and internet business) at KPMG India, said: “If such a policy is enforced, any discussion between promoters of Indian start-ups and foreign investors is going to be difficult and their ability to raise funds will be a bit less effective.”
Manoj Kumar, partner and head (M&A and insolvency resolution services) at consultancy firm Corporate Professionals Capital, said: “It will be difficult to assume a situation where major shareholding is held by foreign investors and control is with the Indian owner with minority shareholding, because in such case the risk element is on a higher side.”