Can’t want foreign investment in e-tail and then want to change rules

By: |
Updated: December 21, 2018 7:07:32 AM

With the general elections around the corner, the government is once again making the right noises about looking into the steep discounts being offered by e-commerce players.

Can’t want e-tail FDI and then want to change rules

With the general elections around the corner, the government is once again making the right noises about looking into the steep discounts being offered by e-commerce players. This is not surprising since small brick-and-mortar retailers are a big constituency for the BJP, and have been litigating for a level-playing field for several years; they have argued that while the law does not allow FDI in e-tail that sells to consumers (B2C), in reality, most of the big players are doing precisely this, and that they are using free PE money to give deep discounts to kill the competition. In its August draft policy, the government sought to assuage the concerns of small retailers, saying it wanted to tighten controls over the e-commerce space, noting that in some jurisdictions, the competition authorities have found substantial evidence of anti-competitive practices in the e-commerce sector.

The problem is, the government wants to have its cake and eat it too. It cannot, after a decade of Flipkart and the billions of dollars that have come into the e-commerce sector—and continue to pour in—suddenly decide it wants to clamp down on discounts. After all, it looked the other way all these years when it was evident that Amazon and Flipkart were not merely the marketplaces—in the manner a shopping mall is, with no control over the pricing strategies of shops located there—they claimed to be. It also allowed these players to source products from sellers like Cloudtail or WS Retail which were being funded by the same financiers and PE firms. So, while Flipkart and Amazon may not have technically held inventories, it was clear, the ‘sellers’ from whom they were sourcing stocks were sister concerns and had a lot of PE money to undercut the competition.

While the levels to which e-retailers can source products from such sellers have been capped, they continue to procure these at attractive prices and are, therefore, able to offer consumers big discounts. Having allowed this for years now—and having accepted Walmart’s purchase of Flipkart—the government would look silly if it does an about-turn. What it should do, instead, is to open up FDI in the multi-brand sector since, once this is done, e-tailers will automatically be allowed to get FDI while operating in the B2C space, and there would be no reason for them to claim to be marketplaces while they, in fact, held inventory, etc. This would then allow all retailers to take advantage of cheap foreign money and offer discounts to attract customers. It would also bring in some chunky FDI. Brick-and-mortar retailers are right when they say Walmart’s is a back-door entry into the multi-brand retailing space. Indeed, had the government not been so adamant about not allowing 100% FDI for multi-brand retailing, it could have legitimately batted for Walmart. Instead, it must now pretend to be strict with e-commerce.

Because of this need to, as it were, level the playing field, the draft policy makes several suggestions that are downright hypocritical, perhaps even illegal. One instance is the proposal to amend the Companies Act to help Indian founders retain control even if their stake is small after selling a controlling stake to a foreign player like, say, Walmart. Another is the policy which says that, while foreign e-tailers can’t hold inventory if they are in the B2C space, a “limited inventory” model will be allowed for goods produced in the country but only if the promoter/founder is a resident Indian, the management is Indian and FDI is less than 49%. How is this rule to be implemented since most websites will have a combination of Indian and foreign-made goods? Such rules may seem helpful to the locals but, since more often than not, foreign e-tailers will find a way around them, they don’t amount to much. Indeed, once FDI in multi-brand retail is allowed, these complex rules can be avoided since, more than anything else, they just encourage corruption and are designed to help those companies who know how to circumvent the law.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.