FDI For Etailers: What It Means To Them

Much has been talked about the opening of 100 per cent FDI in the marketplace format of e-commerce retailing which sure has brought in some relief to online retailers or etailers who have raised capital from foreign investors over the past few years.

But, what is the implication going forward? Experts say that while the current guidelines specifically permit FDI under the automatic route will help attract further foreign investments in the burgeoning e-commerce sector, there are still certain issues that are posing to be a dampener for both investors and entrepreneurs alike.

"While the guidelines seek to provide clarity on the current policy, the language seems to suggest that the policy will take immediate effect, perhaps creating some uncertainty on past transactions," said Kalpesh Maroo, Partner, BMR & Associates.

"Some of the restrictive conditions prescribed under the guidelines could also pose significant challenges and would therefore need to be evaluated closely," he added.

A bevy of online retailers had come under the ambit of government scrutiny for possible violation of FDI norms since so far there was no clarity in terms of definition of foreign capital inflow in the ecommerce sector. In fact, what had made matters worse for them was the fact that DIPP had also said that the marketplace model used by ecommerce companies was not recognised under country's FDI policy. The names of companies which were under the scrutiny of the investigative agency include almost all biggies such as Flipkart, Snapdeal, Myntra, Jabong, Yepme, among others.

Raining Funds
In 2015 alone - categorised as the year of risk capital bonanza for startups and early stage investors - as many as 141 etailers made headlines for raising money from a clutch of private equity and venture capital funds, data available with research firm Venture Intelligence shows. In terms of value, they raised a total of $3,190 million from the investor fraternity, of which, as much as $1,394 million comprised foreign capital, while another $196 million was infused by India dedicated funds.

The rest of the amount that translates to $1,600 million was co-funded by both foreign and India dedicated funds. Among the most prominent deals sealed last year include Flipkart $700 million fund infusion from a slew of investors including Tiger Global and Steadview Capital, and Snapdeal's two rounds of capital infusion from investors including Temasek, PremjiInvest, SoftBank Corp, Sequoia Capital India and Valiant Capital. Other online retailers who grabbed headlines for raising funds include Quikr, Oyo Rooms, Pepperfry.com, among others.

In 2014, as many as 82 online retailers had raised $3490 million, while the number of transactions in 2013 stood at 45 worth $597 million. While this initially seemed to be a dream run for budding entrepreneurs, little had they anticipated that they would soon land face the heat.

As per sources, most of the firms that raised money in the past were being investigated by the Enforcement Directorate and the probe under the stringent FEMA norms.

Road Ahead
With the recent press note issued earlier this week, online retail giants certainly have some clarity. "If the Government would not have given sanctity to the marketplace based e-commerce model, the fate of the already pumped in foreign investment would be uncertain. Furthermore, investor confidence would have rattled in the absence of a clarification. Hence, the Government had no leg-room to continue with such uncertainty as far as the marketplace model is concerned," said Trisheet Chatterjee, partner at corporate law firm JSA.

Citing the advantages of the recent guidelines, he also said: "The ongoing investigations by the Enforcement Directorate on certain players in this sector may now possibly come to rest."

However, what's posing to be a challenge is the fact that the government has said that FDI is not permitted in inventory based model of e-commerce, which refers to activity in the online space where inventory of goods and services is owned by e-commerce venture and is directly sold to consumers. This is one change that Amazon has been lobbying for a long while.

This apart, what could possibly be a game changer emerges from the fact the guidelines state that e-commerce entities providing marketplace will not be directly or indirectly be able to influence the sale price of goods and services and shall maintain level playing field. In such a scenario, various e-commerce companies that were earlier offering huge discounts may not be able to provide such discounts going forward.

Further, the guidelines definitely have more than that meets the eye.

The fact that it specifies that entities in the e-commerce marketplace may now provide certain support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, among other services, means that such entities may have additional source of income by providing any or all of the aforesaid services.
However, such entities will have to comply with certain regulations and also obtain necessary licenses/registrations that are specific for providing such services.

Restructuring On Cards?
Industry analysts say startups operating in this sector may soon need to adopt a restructuring exercise. Since the recent guidelines provide that an e-commerce entity will not be able to permit more than 25% of the sales through its marketplace from one vendor, many who have been exceeding the limit will now need to restructure their existing models to be in compliance with this condition.

All in all, there are some hits and some misses still. A finer print is still awaited!