Govt allows FDI in retail; Will Amazon start selling in India soon and what does it mean for e-com startups?

14 Sep, 2012

The government has given the nod on Friday, allowing up to 51 per cent foreign direct investment (FDI) in multi-brand retail in a big economic reform that could see a flood of foreign investments into the country. The move also provides a window for Amazon, the big daddy of online retail, to start retailing in the country.

Even as the government has played it safe and added a rider that individual state governments can opt out of it when it comes to stores being set up in their respective states, it is not immediately clear if that would affect a foreign online retailer who wants to start selling in India.

If some of the states, indeed, put a spanner in the plans of large offline retailers like Wal-Mart who might be looking to set up physical multi-brand retail stores, e-commerce giants like Amazon may get an advantage. Earlier, we had hinted at such a scenario.

After all, Amazon has already set up its backend logistics operations for an eventual launch of full-fledged services (as there is no cap on FDI in logistics).

Moreover, it has been pretty active over the past one year, making its e-commerce search service live and recently opening its e-book store to Indian consumers.

The latest comScore report for July shows that Amazon, as a group (including its sites IMDb and Junglee), already has far wider reach in India, compared to other retail sites, in spite of the fact that Amazon doesn't run its online retail operations in India. Amazon was ranked much higher than Flipkart, Snapdeal and Jabong and other large local e-commerce players.

The big question is – will Amazon be keen to enter India with 51 per cent ownership? This would mean bringing in an Indian partner or forming a large consortium of employees who would together hold 49 per cent stake in the venture through employee share plans. This is not impossible, but undoubtedly a tricky affair.

What does it mean for e-com startups?

The major fallout of the easing of FDI norms for multi-brand retail is the impact on e-commerce startups. Many of these firms have already attracted foreign capital through VC and PE investors. Till date, these firms used a two-tier corporate structure where a separate (overseas incorporated or domestic) firm gets the foreign capital with entrepreneurs also owning some stake, which brings in the money to power the backend logistics of the e-com venture. On the other hand, the e-commerce venture, by itself, is owned by local promoters or entrepreneurs.

As the FDI norms are eased, startups can have a single corporate entity which attracts VC money for up to 51 per cent stake with the entrepreneurs owning the rest as they set up or run their e-commerce ventures. Although this could still face hurdles in the medium term if further FDI in retail is not allowed and the e-commerce venture requires more capital, it may not be able to raise funding unless VC firms come in with minority stakes at higher valuation.

(Edited by Sanghamitra Mandal)