New government may allow FDI in e-commerce as soon as July

4 Jun, 2014

e-com-logoIn a game changing move for e-commerce space in India, the new government under the leadership of Prime Minister Narendra Modi is planning to open the e-commerce sector to foreign direct investment (FDI) as soon as next month, according to a report by Reuters.

"Most stakeholders support FDI," a senior government official told Reuters, referring to e-commerce. "We have pitched for opening it up completely," he added.

In December last year, reports were doing the rounds that the Department of Industrial Policy and Promotion (DIPP), under the commerce and industry ministry of the previous government, was already discussing allowing FDI in e-commerce with various stakeholders.

World's largest e-commerce company Inc. that had forayed into India last year with a country-specific online marketplace has also been lobbying hard with the US government on a range of issues, including FDI in India.

The decision could be announced in the upcoming budget, and will allow the government to get round political opposition to opening up the country's $500 billion retail sector to global retail giants such as Wal-Mart Stores Inc. It would also mean that Inc. would finally be able to sell their products of their own in the market. As of now, the company has to content with simply being a marketplace that aggregates products from various merchants around the country.

Interestingly, Modi's Bharatiya Janata Party (BJP) has always opposed FDI in multi-brand retail, maintaining that allowing it will compromise the long-term national interest and will impact millions of small traders who will lose their jobs.

If FDI in multi-brand e-commerce is allowed, it will bring it at par with foreign investment norms in offline retail. The previous government had opened multi-brand offline retail to foreign investment last year but the conditions had stumped MNCs from rushing into the country. The new move will be significant for the small but growing e-commerce sector in the country which has absorbed over $2 billion worth of venture capital and private equity investments to date. Bulk of this is from foreign investors only routed through PE/VC funds.

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. This had proved to be a big challenge for e-com firms to raise fresh cash and many firms have either shut down or merged with other players and some have pivoted their business model to become online marketplaces.

A formal 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.

It would also be interesting to see what implications the move will have on Enforcement Directorate's on-going probe for possible violations of FDI norms of home-grown e-commerce giant and online fashion apparel and accessories retailer (which was acquired by Flipkart).

(Edited by Joby Puthuparampil Johnson)