PMO in favour of FDI in e-commerce

26 Aug, 2013

VCCircle_amazon_eBayThe Prime Minister's Office (PMO) is keen to allow foreign direct investment (FDI) in multi-brand e-commerce to bring it at par with foreign investment norms in offline retail, according to a The Hindu Business Line report citing sources.

The report said that in an official communication to the industry department National Security Adviser Shivshankar Menon has suggested FDI be allowed in e-commerce. Prime Minister Manmohan Singh is to discuss the matter when he meets US President Barack Obama in Washington DC on September 27.

The move will be significant for the small but growing e-commerce sector in the country. The industry has already absorbed around $1.5 billion worth of venture capital and private equity investments to date spread across over 230 transactions as per VCCEdge, the financial research platform of VCCircle.

Bulk of this is from foreign investors only routed through PE/VC funds. However, the existing norms which do not allow direct foreign investment in firms which run e-commerce sites and holds inventory of products on its own, have led a number of startups to devise innovative business structures to get around the ban on such investment in e-com.

A year ago when the Indian government opened up the retail sector to foreign players by allowing up to 51 per cent FDI in multi-brand retail, it had specifically excluded e-commerce firms. Early this year, S Jagathrakshakan, Minister of State for Commerce & Industry, had told the parliament that the government is not having a relook at the current ban on foreign investment in the Indian e-commerce sector. He replied in relation to some representations to remove the ban on retail trading through e-commerce.

This had proved to be a big challenge for e-com firms to raise fresh cash. Soon thereafter, Info Edge (India) Pvt Ltd, which runs a string of consumer internet properties and has been investing in other tech startups in India, wrote off its entire investment in e-com firm Ninety Nine Labels Pvt Ltd.

The firm was unable to get new investors on board and the government's clarification that it is not looking at allowing FDI in e-com was the last straw which led the firm to write off its investments as without additional funding the asset became impaired, according to Info Edge.

Many firms have either shut down over the last year or merged with other players and some have pivoted their business model to become online marketplaces. Marketplaces do not face a ban on foreign investment as they provide a platform to other sellers to sell to consumers with the marketplace being just a facilitator.

An exception is Flipkart, the largest consumer e-commerce venture in the country. The firm recently announced fresh fundraising of $200 million to add to its previous four rounds of funding.

The firm, which had restructured its business last year separating ownership of the firm managing the front end portal and the firm which ran the actual operations, was earlier reportedly under the scanner of the Enforcement Directorate over possible violation of the ban on foreign investment in the sector.

E-com giant Amazon recently launched its India marketplace and eBay has been present in the country for years. However, an opening of the sector to FDI would raise hopes for other existing firms to raise fresh cash. In turn, if implemented, this could also provide for exit opportunities to existing investors.

(Edited by Joby Puthuparampil Johnson)