VC funds including IvyCap Ventures, India Quotient, and Ventureast have called the move to be unfair and questioned the need of the policy that seems to be favouring large corporates.
The revised rules issued last month prohibits online marketplaces, funded by foreign investment, to sell goods of vendors in which they have equity stakes and to have exclusive marketing tie-ups.
It also said that the goods of a vendor will be “deemed to be controlled by an e-commerce marketplace if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.”
This would push marketplaces into an inventory-led model or multi-brand retail where FDI is barred.
“The marketplaces should be given more time. The rules are particularly designed to favour large Indian corporates or investors who have Indian money,” said Anand Lunia, founding partner at India Quotient told FE Online.
Businesses who have got FDI cannot favour their sellers but the likes of self-funded Mukesh Ambani (who are into e-commerce) can. This is basically about FDI and anti-FDI regulation, Lunia added.
Ivyvap’s Vikram Gupta said that the regulations are driven for businesses that have “substantial local interest already and Reliance would definitely be a part of that.” The timing, said Gupta, is also interesting since elections are around the corner and this is the time when one can push for favourable things.
However, retailers’ body Retailers Association of India (RAI) refuted the investors’ argument saying that it is because they are finding themselves in a tight spot.
“What extension? The government had cleared its intention from the beginning of not allowing FDI in multi-brand retail at all,” said RAI’s CEO Kumar Rajagopalan. The e-commerce companies were able to sidestep these rules earlier due to which the government revised them so that the spirit of the law is not broken, he added.
The revised guidelines would mean vendors such as Cloudtail and RetailNet that are backed by Amazon and Flipkart respectively would not be able to retail their products on these marketplaces. Consequently, digital e-tailers would have to restructure their operations and reportedly bear the loss over inventories bought from vendors.
“Small e-commerce companies might manage to switch to revised guidelines but for large e-commerce ventures it would be extremely hard as the government wants to end the wholesale arm of e-commerce companies and as they think the e-commerce companies favour select vendors,” said Gupta.
While e-commerce companies may not create as much valuation, said Rajagopalan, but instead of having huge losses they will make money faster than others because their burn rate will come down as they will operate as true marketplaces.
Foreign vs domestic capital
Traders’ body like Confederation of All India Traders has said that the preferential treatment given by e-commerce companies have been impacting other vendors that are small businesses.
“In reality, e-commerce platforms in the country have been indulging in exclusivity, predatory pricing, deep discounting, loss funding, preferential treatment because of which small traders have been facing difficulties and an uneven level-playing field has been created,” its secretary general Praveen Khandelwal told reporters earlier.
However, PE, VC body IVCA’s president Rajat Tandon argues about any possible impact on small businesses. “There is hardly any data to back that small businesses are being impacted. The ban on foreign investments (which still contribute 85% of the PE/VC investments) will impact the Startup India movement and penalize the entrepreneurs demonstrating innovation and inclusion. FDI restrictions in e-commerce its equivalent to cutting off funding for startups.”
While e-commerce companies should not have FDI to acquire stakes in sellers on its platform but investors argue that the revised rules indirectly is barring investments from the likes of SoftBank that have poured billions in Indian startups through FDI.
“The entire revolution of e-commerce has happened not because of the likes of Reliance, Future Group, Birla. The sector would have grown insignificantly if foreign money was not invested in it,” said Lunia.
“It is not good to jump into the policy,” said Ventureast’s founder and managing partner Sarath Naru. Whether the policy will actually help small sellers on the platform has to be examined, he said.
RAI’s Rajagopalan, however, said that the latest guidelines don’t favour any particular company or type. “Asking who will fund startups if not through FDI route is a rhetorical question. If you cannot get money globally, the funds will come in locally.”
The level-playing field would be achieved, said investors, if the distinction between foreign and domestic funded businesses is removed, something which CAIT has also asked for earlier.
If the government says that nobody should favour sellers then I am happy about it. Right now there is one set of rules for companies with FDI and another for likes of Reliance, Biyani, Birla etc., said Lunia.