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FDI will bring transparency in e-commerce funding, say experts

06-January-2014
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FDI will bring transparency in e-commerce funding, say experts

When it comes to FDI in e-commerce, players in the sector are welcoming the idea of new investments, improvement in business infrastructure, transportation, back operations, and the overall growth of the industry. According to a report by IAMAI, the e-commerce industry in India must have reached Rs 62,697 crore by December 2013.

But reportedly, start-up companies in the e-commerce sector were starved for cash in 2013. Established players such as Flipkart and Snapdeal took a huge chunk of the PE and VC funding in the e-commerce sector. “Private equity players pumped in $620 million through 34 deals, with just eight deals raking in $523 million. The fattest pay-checks went to India’s largest e-commerce player Flipkart, followed by Snapdeal,” reports moneycontrol.com.

Talking about big players, global giant Amazon is working closely with the Commerce Ministry to open up FDI in India. Although citing ambiguity in the business environment and alleged violations of FDI rules in the sector, most e-commerce players that exchange4media spoke to either refused to comment on the issue of FDI in e-commerce space or gave only politically correct answers.

In an email response, Amazon conveyed, “We cannot comment on any future events. However, we believe opening up this sector to FDI will be good for consumers and Indian businesses as it would allow us to partner with local manufacturers to source products not carried by other sellers, giving Indian consumers unique and wider choices at lower prices. Allowing FDI positively impacts infrastructure development in the country.”

Amazon attributed the above comment to a spokesperson. However, when we asked to name the spokesperson there was no reply. On the other hand, Mukesh Bansal, CEO and Co-Founder, Myntra urged differentiation of physical and online retail, and said, “E-commerce should not be governed by the same set of rules that apply to FDI in multi-brand retail as there are different parameters for online and brick-and-mortar stores. We want the Government to treat e-commerce companies as technology companies and base policies accordingly.”

Sandip Shah, Co-Founder and Managing Director, ShopYourWorld, supported FDI in e-commerce and said, “This would allow the large players such as eBay, Amazon and others to unleash in India, which would imply higher competition and fewer margins for the sellers, but it would be a complete boon for the consumers. The price wars would end up in giving the people best deals and the vast catalogue of these companies would provide the consumers a variety of products and brands. There are millions of just-tech products and accessories which are easily accessible through various sites in the US but not available anywhere in India. With FDI, consumers could buy stuff from India directly instead of getting it imported.”

The Foreign Investment Promotion Board (FIPB) is considering FDI in e-commerce to ensure robust business in the sector. Although currently there have been some violations reported, most e-commerce players are cautious over the issue. Many sources in the Government had conveyed that e-commerce players are routing FDI through illegal means. Flipkart was investigated by the Enforcement Directorate recently for alleged violation of FDI. Flipkart is under the scanner for allegedly flouting FDI rules, which allow e-commerce companies with foreign investment to carry out only business-to-business (B2B) transactions and not business to consumer (B2C) transactions. Allegedly Filpkart created complex structures that may not be permissible.

In physical retail, the Government allows 100 per cent FDI in single brand retail and 51 per cent FDI in multi brand retail. Violation of FDI in e-commerce is also governed by the penal provision of the Foreign Exchange Management Act, 1999.

Although analysts believe that some e-commerce companies are engaging in activities that are prohibited under law, there is also mystery over the funding aspects of the companies as almost all of them refused to divulge the details of their funding partners. Almost all the players and analysts we spoke to mentioned that funding routes are still very unorganised in the sector. Allowing FDI will ensure transparency in the funding aspect of the business.

The e-commerce sector in India is burgeoning. The sector in past few years has seen many small and medium players getting into the market. Apart from the mainline e-commerce players, there has been a surge in the number of start-up companies which are developing robust transaction models and can be rightly called as supporting infrastructure companies. Therefore, allowing FDI in e-commerce will also be seen as a business friendly initiative from the Government.

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