Retail firms with FDI won’t get to do e-commerce

Firms have to meet 30% local sourcing norm at aggregate level in their first five years in India
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First Published: Thu, Sep 20 2012. 08 47 PM IST
The move effectively shuts the door on Amazon and other foreign e-commerce companies. Photo: AFP
The move effectively shuts the door on Amazon and other foreign e-commerce companies. Photo: AFP
Updated: Fri, Sep 21 2012. 08 28 PM IST
New Delhi: The government on Thursday decided not to allow companies with foreign direct investment (FDI) to sell their products through the Internet in India.
The move, which effectively shuts the door on Amazon and other foreign e-commerce firms, will also prevent foreign retail companies that enter India from selling online.
The provisions are part of the notification by the industry department on the FDI policies for retail announced on Friday.
Apart from hitting foreign e-commerce and retail firms hard, the provision on e-commerce may also crimp the plans of local e-commerce companies seeking strategic investment from foreign companies through the FDI route.
The provision also applies to investments by foreign venture capital and private equity (PE) funds in such ventures.
“It is status quo for e-commerce,” said Harish Bahl, founder and chairman of Smile Group, which owns e-commerce portals such as fashionandyou.com, zoomtra.com and bestylish.com. “We are as good or as bad as we were a week before.”
The formal notification from the department of industrial policy and promotion (DIPP) came on a day when opposition parties had called for a nationwide stir, and sent a clear signal to them as well as to the government’s estranged ally Trinamool Congress (TMC) that New Delhi was in no mood to roll back measures announced on Friday.
The industry department has also clarified that both single-brand and multi-brand retail companies have to meet the 30% local sourcing norm at an aggregate level in their first five years in India (which means it can be lower at the beginning, but that the average over five years should be 30%) and that they subsequently have to do so on an annual basis. Earlier, the cabinet had made it optional for foreign single-brand retail companies to source 30% from small firms, while keeping it mandatory for foreign multi-brand retail firms.
On 14 September, the United Progressive Alliance (UPA) allowed 51% FDI in multi-brand retail and relaxed key conditions on 100% FDI in single-brand retail.
Allowing e-commerce would have raised several issues related to cross-border transactions, said Arpita Mukherjee, professor, Indian Council for Research on International Economic Relations.
“Once there is more regulation and structure to this format...they will wait and see the implications before opening up this space,” she said.
An executive at a PE firm said that even if the government had allowed FDI in e-commerce, the investment barrier of at least $100 million (around Rs.540 crore) would have been too high for most firms.
“I expect big players like Amazon to wait till the market grows to a bigger size before they enter India either through an acquisition of an existing player or from scratch,” added this person, who didn’t want to be identified.
Amazon did not respond to queries sent on Thursday.
With states being allowed to take the final call on foreign investments in retail, allowing FDI in e-commerce would have complicated things, this executive said.
E-commerce is a capital-intensive business in India on account of the high cost of logistics and customer acquisition. However, it has found favour with both entrepreneurs and investors. Total PE investment in the business thus far this year (January-August) has more than doubled to $537.30 million from $253.22 million in the same period last year.
Kishore Biyani, chief executive, Future Group, which also operates e-commerce websites such as Futurebazaar.com, said that though nothing changes for the industry, it would have been easier for companies like his (which are likely to get foreign investment) to also expand into e-commerce. “As it is, 90% of the investment in the e-commerce companies is foreign as it is by private equity or venture capital firms, so this changes nothing,” he said.
A DIPP official also clarified that foreign PE or venture capitals funds are not allowed to directly invest in e-commerce companies.
Most e-commerce firms operate in a structure where FDI is made in a company that runs the wholesale part of the business or holds the subsidiary that maintains and manages the storefront.
The decision to allow 51% FDI in multi-brand retail was initially taken in November. However, with resistance from allies such as the TMC and opposition parties, the government deferred its implementation. Unlike the last time, this time it has left the implementation of the move to open up retail to individual state governments.
The UPA government has said that the states of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana, Manipur, Jammu and Kashmir, and the Union territories of Daman and Diu and Dadra and Nagar Haveli, have expressed support for the policy, while states such as Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Orissa have expressed their reservations.
It also eased the clause on sourcing of 30% of the value of products sold through single-brand outlets from the small-scale sector by making it optional. It also amended the clause mandating that a foreign investor should be the owner of the brand.
While this will help Swedish retail giant Ikea, which has applied to set up shops in India with an investment of €1.5 billion (Rs.10,600 crore), it may also lead to the revival of a proposal by Spanish apparel retailer Zara that was rejected by the Foreign Investment Promotion Board (FIPB) for not abiding by the ownership clause.
The onus of ensuring compliance with the brand ownership condition is on the local entity carrying out single-brand retail trading in India.
On Friday, the government also diluted its earlier restriction of limiting multi-brand outlets to 53 cities with a population in excess of one million. It said states would have the flexibility to implement the policy even if they do not have any city with a population exceeding that number.

Aviation

The government also issued the notification on FDI in aviation, allowing investment of up to 49% by foreign airlines.
Apart from investing in existing airline companies, foreign carriers can also partner with Indian firms to launch an airline in India. The Indian partner will need to have a 51% stake in this company, and the chairman and two-thirds of the board need to be citizens of India.
“Foreign airlines can’t have their own company,” said a government official who didn’t want to be identified, adding that the applications need to go to FIPB, which will then seek the views of the home, aviation and finance ministries.
“The above decision will take immediate effect,” said Anjali Prasad, joint secretary, government of India.
She added that the measure doesn’t apply to state-run Air India Ltd.
Air Asia chief executive Tony Fernandes, whose father is from Goa, said in a 14 September email to Mint that he was keenly awaiting the policy change. “Fantastic news that India has opened up investment to foreign airlines. With Malaysia opening up, this is fantastic news for airlines like Air Asia,” he tweeted on 15 September. “Great that Indian government has put people first. Will we be in India? Well let’s see.”
Kingfisher Airlines Ltd’s Vijay Mallya had also welcomed the move when it was announced. “Bold decisions taken by government. Fantastic to restore confidence and kick-start economic growth opportunities,” he had tweeted.
Tarun Shukla contributed to this story.
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First Published: Thu, Sep 20 2012. 08 47 PM IST
More Topics: FDI | e-commerce | retail | Amazon | UPA |
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