India May Relax E-Commerce Rules, Opening The Door Further For Amazon And Other Global Giants

As India prepares to reconsider the ban on foreign investments in the country’s e-commerce sector, two of the world’s biggest e-commerce companies — Amazon and eBay — are anxiously hoping to conquer what they refer to as their last frontier.

India’s Department of Industrial Policy and Promotion (DIPP) has put out a note inviting various stakeholders to share feedback on the existing regulations restricting foreign direct investment (FDI) in retail e-commerce. Sources at Amazon India and eBay’s operations in the country have told us that both the companies are aggressively preparing their pitches urging the policymakers to revoke the e-commerce ban.

So far, both Amazon and eBay have had no choice but to operate as online marketplaces in India, limiting their ability to compete effectively with local rivals such as Flipkart. In the marketplace model, companies such as eBay do not own any inventory, or sell any of their own merchandise to Indian shoppers. They are only allowed to offer products from third-party sellers.

In February 2013, Amazon’s global vice president, Paul Misener, had also met with an Indian trade minister, seeking amendments in the laws restricting e-commerce.

This is what the Indian laws say on foreign investment in e-commerce:

E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well.

India’s nearly $3.1 billion e-commerce market (excluding online travel industry) is dwarfed in size by China’s nearly $200 billion market for online sales, but it’s expected to grow by over seven times to $22 billion in five years, according to a CLSA report published in November 2013.

While existing regulations don’t allow foreign companies to run full e-commerce businesses in India, companies like eBay have become active investors in local startups that can.

EBay beat Amazon and Wal-Mart in April 2013 to lead a $50 million funding round in Snapdeal. Meanwhile, Amazon started its India site in June 2013: it is based on marketplace model that does not engage in any kind of direct sales to comply with the local regulations.

Up to now, the Indian government has kept companies like Amazon at bay as a kind of protectionist move, to encourage local business development. In September 2012, the Indian government allowed 100% foreign investment in single-brand retail, and up to 51% in multi-brand retail. However, the new policy excluded foreign investment norms in the country’s e-commerce sector.

But today, India is struggling to cope with its slowest economic growth since 2005, and is increasingly seeking ways to attract more foreign investment. Wooing offline companies like Tesco — the world’s biggest retailer — was a part of this strategy; and now it appears that the state is ready to give online companies the same freedom to trade.

However, in a bizarre move, the country has yet not okayed foreign investment in e-commerce despite allowing the same for offline retail operations of Wal-Mart and Tesco.

The Business Standard newspaper reported on December 31 that India could actually allow FDI in e-commerce by April this year.

To be sure, it’s not just Amazon and eBay praying anxiously for the current e-commerce ban to be lifted. Even Flipkart, India’s biggest e-commerce company, had to establish a separate subsidiary, Flipkart Holdings Singapore, to get around the Indian regulations. Flipkart also created WS Retail, a separate entity that owns and delivers over 90% of the products sold on its site.

It’s not just US e-commerce giants that could stand to benefit if at all India allows foreign investment in the sector. China’s biggest e-commerce company Alibaba could benefit too. However, Alibaba has kept a low profile in India, and it intends to keep it that way.

Since the beginning of 2010, venture capital worth $1.3 billion has been invested in Indian e-commerce startups. However, not every e-commerce startup in India has benefited from these investments. In 2013 alone, nearly 150 e-commerce startups in the country had to shut shop, with some 70-80% of those still around being in dire need of funds.

By allowing foreign investments in e-commerce, India could trigger a fresh wave of excitement among the e-commerce startups and their investors waiting nervously for the exits. The question mark will be whether the government will manage to take such a bold decision ahead of the upcoming general elections later this year.

UPDATE: India’s Department of Industrial Policy & Promotion on Tuesday published a discussion paper on allowing foreign investments in the country’s e-commerce sector, and said despite its advantages, any such move could lead to job losses and monopolies in the retail sector. The department has asked all e-commerce companies, potential investors and other stakeholders to submit their views by January 30.