The Govt. of India has recently affirmed through a circular through DIPP that Foreign Direct Investments in E-Commerce companies is allowed upto 100%. There is cheer among a few although there are clauses and causes for worry for many. The notification says that 100% FDI is allowed only in companies that operate as a Marketplace and not on those who operate with their own Inventory.
Let me clarify this with some examples;
Amazon, Flipkart, Snapdeal and PayTM are the big Four Marketplaces in India and so is my own startup Oyethere.com. In these models, the company doesn’t own any inventory and merely facilitates the sale of products between Retailers/Sellers and Customers. Marketplaces bring together the above-mentioned two parties and complete the transaction. There are several variations here too. For instance, some marketplaces merely connect the buyer and seller (OLX) and the money is paid by the buyer to the seller directly. A majority of them including Flipkart and Oyethere.com collect the money from the customer while the Retailer provides a Bill/Invoice to the customer. The Marketplaces then repays the Retailer with its Sales value after deducting commission, if any. However, there is a catch for the big two companies, Flipkart & Amazon. Flipkart has a subsidiary company by the name WS Retail which is the largest seller on its own marketplace. Similarly, Amazon has a 49:51 JV with Cloudtail which is owned by Catamaran ventures, which is in turned owned by the family office of NR Narayanamurthy, Chairman, Infosys. These two companies could face issues because the DIPP Notification on FDI states that no more than 25% of Sales can be derived from one seller in the marketplace. This could be a potential spanner in the scheme of things until these large companies find a legal way out.
The most affected ones would include the likes of ZivaMe (lingerie), Urban Ladder (Furniture), Hopscotch (Baby Care) YepMe (Fashion) which has Shah Rukh Khan as Brand Ambassador and is also an Investor, Myntra (Fashion) owned by Flipkart and many other small and budding Ecommerce players who have already received foreign funding or are in the process of raising one. These companies are legally not allowed to receive FDI more than 49% which would never be possible.
Having said the above, the biggest beneficiaries would be the offline Retailers like Viveks Ltd. (Consumer Durables) who have already been selling online through Marketplaces. Oyethere.com also enables offline retailers like Café Coffee Day, India’s largest café chain with over 1,500 cafes across the country, Brown Tree (Organic Food), CeeDeeYes Supermarket, Smiling Baby (baby shop) and many others to sell their products online through its portal thereby facilitating the sale between the Retailer and consumer. I am personally meeting several Retailers to convince them to come on board our startup Oyethere.com and benefit from the incremental business opportunity without spending a dime on Marketing or Business Development.
There is a deterrent to Marketplaces as well – they are not allowed predatory pricing, meaning they cannot unduly discount the prices of products and ensure that the prices are merely competitive. This brings a lot of trust on marketplaces like Oyethere to Retailers because they are sure that they, and not the marketplaces, have a final say on the final pricing of products.
One of the promises of the Narendra Modi Government in their election mandate was that they would not allow 100% FDI in Multibrand Retail. And they have stuck to their guns. However, Ecommerce is seen by the Government as an enabler of trade and not a threat and hence this move which is expected to benefit very large marketplaces like Amazon and Flipkart and newbie startups like Oyethere.com.
Look forward to some interesting days ahead in this space.