E-retail in India is booming, partly because online retailers there have been circumventing laws that prohibit companies with foreign direct investment (FDI) from retail trading via e-commerce. The Indian government, which had already banned single-brand e-retailing, recently announced a policy that applies to multibrand retailing. Foreign companies that buy and sell goods and services online are banned from operating in India.
The new policy is not a big change, but online retailers in India had already been circumventing FDI rules. The policy on trading allows 100 percent FDI in business-to-business trading platforms. Under this policy, an online retailer can set up one company to seek foreign investment and a second to offer online business-to-consumer retailing services. The B2B wholesale cash-and-carry company cannot sell to consumers, obviously, but it does hold the inventory. The B2C online retail company cannot hold inventory, but it can sell, pack, and ship goods to consumers. In this model, the retailer makes a flash sale from the B2B entity to the B2C entity, which bills the B2C entity at arm's length. Thus the spirit of the FDI law is flouted.
Flipkart.com, Snapdeal.com, Jabong.com, and Myntra.com are often cited as examples of Indian online retailers that have adopted these workarounds. Thanks to loopholes, most of them have benefited from global investors, venture capitalists, and private equity funds. A recent circular from the Ministry of Commerce and Industry spells out the patterns and norms for various related activities and shows how they may be illegal. (A clearer explanation of the rules may be found here.)
Under the new law, 51 percent FDI is permitted in multi-brand retail. Companies like Wal-Mart, Carrefour, and Tesco can set up shop with an Indian partner, but they will not be allowed to have an online operation where products and services can be sold. Listing sites like eBay, functioning through a subsidiary, can continue doing business, according to the rules, because they are marketplaces "enabling" trade between buyers and sellers without maintaining their own inventory.
However, the doors may be shut for Amazon, which had been making preparations to enter the Indian market in a big way. In February, it got approval to set up courier services, which are central to e-retailing operations. Earlier, it had launched a comparison-shopping site through Junglee.com (a domain name it had been retaining for a long time), and it was waiting to see what shape the FDI policy would take. The Junglee site is still in beta testing. Amazon has also launched a Kindle Store (amazon.com/kindlestoreindia) through a sourcing agreement with Tata Croma.
There are lessons for CIOs of global e-commerce companies here. It is wise to wait for clarity on policy direction before launching projects, no matter how promising the market may be. In addition to the needless time, energy, effort, and expenditure, there is the risk of succumbing to the temptation of workarounds, which are best avoided if you value your company's reputation.
If you are the CIO of an e-retailing company, you are best advised to tread the path of stringent compliance. There are many more vexatious issues that the FDI policy has brought in its wake. For instance, political opponents of FDI in multibrand retail have called the policy an "enabler." Also, state governments are free to make their own decisions on its implementation, because only 12 states and union territories have given their consent to implement it so far.
This is being cited as the main reason for the government to refrain from allowing FDI in e-commerce at this stage. The legal administration and monitoring of an e-commerce model that exists only in some states is a challenge not only for the government, but also for an e-retailer. How can access to an online entity be blocked if a state opts out of a multibrand retail policy? How can the delivery of products sold online take place in a state where multibrand retailing is not allowed? The online medium knows no borders, and a policy that is subject to state jurisdictions cannot regulate it.
The writing is on the wall -- a standalone policy for FDI in e-commerce.
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