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.
